In 2008, the trade deficit between US and China was $268 billion (http://www.census.gov/foreign-trade/balance/c5700.html#2008). I am not sure to which extent the Chinese government controls trade directly, but for sure it has a strong instrument to influence it - by monetary policy.
My question is - what could be the point (from the Chinese government perspective) of having such a huge deficit? Is this a renaissance of merchantilism?
I would not see any issue with this pair-wise balance between US and China, but the total balance of imports and exports for China was $361 billion (https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html). What are they doing with this money? Buying up bonds of other governments? But why?
I am interested in both plausible excuses used in PR ("to secure the position as the world economic leader"), and probable real reasons (bribes from the US government? extending powerbase?).
Thanks in advance!
Well, for one thing the process by which China's government encourages such a deficit, printing RMB and buying dollars from state owned banks, makes the process of money printing even more obscure than it is in America. Anything to mislead people into believing that inflation has nothing to do with the government / central bank is good for the government.
The other biggie that I can think of is leverage against Taiwan. If they hold a ton of US debt and then decide to attack them, crazy as it sounds, they could use the threat of selling off all of the debt all at once to keep the US from getting involved.
Of course, this threat doesn't have to only apply to Taiwan, but to almost any policy the US government would disagree with.
Then again, attitudes here in China toward the policy of accumulating enormous dollar reserves have definitely begun to change - some of the experts and many people are catching on that it's not so good for China to do so (it's good for the government and exporters, but for the average Chinese person?)
Time preferences in China are lower that those in the US. Hence Chinese are willing to invest for lower returns than yanks, hence they are the first investors to be ‘served’, hence they invest in the US, hence a balancing trade deficit must develop to offset this investment inflow.
Ever since Nixon closed the gold window back in `71, our trade deficits have grown perpetually. Back then you could not rack up deficits for long.