China and global imbalances

It’s China’s world and the rest of us are living in it.

One of the persistent stories of the last decade has been the relentless rise in Chinese exports and what that’s done to everyone else. Arvind Subramanian, the former chief economic adviser, has been making a version of this argument at the Peterson Institute. His claim is that by dominating industries across the whole spectrum, from the low-sophistication end to the high, China is foreclosing the opportunities developing economies have historically used to create jobs and climb the ladder. Pulling the ladder up behind it.

Which brings me to a good exchange this week.

In The Economist, Gita Gopinath, Pierre-Olivier Gourinchas, and Hélène Rey argue that focusing on China’s undervalued currency is a distraction. Those are the last two IMF chief economists, plus Rey at London Business School. They’re clear that the yuan is undervalued. Their point is that it’s a symptom rather than the cause.

A country that suppresses household consumption while simultaneously facing a collapse of property investment will run persistent current-account surpluses and will, other things equal, have a weak currency. A country with insufficient private savings and unsustainably large fiscal deficits will run persistent current-account deficits and will, other things equal, have a strong real exchange rate against other other currencies. The currency is misaligned because the underlying policy mix produces too much or too little saving. The exchange rate is a symptom, not the disease.

On their telling, China suppresses household consumption while property investment collapses, so it runs a persistent surplus and a weak currency. America has the mirror problem: too little private saving, deficits that are too large, and, so, a strong real exchange rate. The misalignment is what a particular policy mix produces. Fix the policy mix, and the currency follows.

And they don’t let China off the hook. They say the surpluses are real, large, and a legitimate concern and that Europe can’t be the absorber of last resort. They want China to raise the household share of GDP, expand social insurance so families actually feel able to spend, and stop financing tradable-sector expansion at the expense of consumption. Their objection to the currency demand is partly political too. A headline revaluation is extremely unlikely to be accepted, and they read the Plaza Accord as having worked because Japan co-operated and real macroeconomic adjustment came with it. Push for growth-supporting reforms and you have a chance. Push for an exchange-rate adjustment, and you ask for conflict.

Brad Setser at CFR, one of the smartest voices on this, wrote a long thread pushing back. His core claim is that the yuan isn’t an outcome at all. The currency goes where the PBOC sets the fix and how it chooses to intervene, so the depreciation was a choice. He points to settlement data showing appreciation pressure about as strong as it’s ever been and argues the IMF has consistently missed the scale of China’s hidden intervention. He grants that Chinese demand is weak. He just says weak demand on its own doesn’t produce an export surge. That took a real depreciation, and the PBOC helped orchestrate it.

His sharpest point is about urgency. He reads their advice as counselling patience: wait for Xi to change his mind and wait for Washington to conclude it needs to tighten fiscal policy.

I don’t think the world can afford to wait for China.

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He points at the auto trade, where Europe’s balance has swung into a deficit of a million cars, and suggests Merz, Meloni, and Macron might be losing patience too.

Worth knowing there’s an institutional backdrop here. Three documents from this spring. A G7 economists’ memo in March, written by Gopinath and Rey with Chong-En Bai and Axel Weber for the French G7 presidency. An IMF policy paper in April was called Understanding Global Imbalances. And the CEPR-Bruegel Paris Report, four hundred odd pages, edited by Rey with Beatrice Weder di Mauro and Jeromin Zettelmeyer. Setser turns up in the G7 memo’s own bibliography for a 2025 piece with Mark Sobel arguing it’s time for the renminbi to appreciate sharply. So this isn’t a drive-by disagreement. It’s a live argument running through the same set of documents.

This is literature I’ve only followed superficially, and I don’t have a settled view. But it’s a real disagreement between serious people, which is rarer than it should be.

Also read this thread by the brilliant Sander Tordoir:

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Make of this what you will:

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Note: I’ve used Claude heavily for writing and editing this post.

China and global imbalances

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