Thread by @Brad_Setser

I think of myself less as a China-watcher than as a BoP data nerd, but since @Noahpinion asked, I will provide a few reactions.

https://twitter.com/Noahpinion/status/1085344548983734272

1) I really liked the Studwell book, but I also think there are probably limits to how much a really large country like China can use exports and the discipline created by exporting to assure an efficient production structure.

2) China was arguably running up against those limits going into the crisis -- its surplus in manufacturing was rising at a very rapid (and in my view unsustainable) rate.

3) The global crisis was in many ways a source of discontinuity -- but tis also a matter of degree.

Before the crisis China was suppressing domestic investment and growth (hard limits on lending) to avoid overheating with an obviously undervalued exchange rate.

4) Think that helped raise China's productivity growth -- an undervalued exchange rate helped the productive export sector, while the less productive domestic state sector was being restrained -- but it wasn't good for China's trading partners.

5) Yep, I don't buy that all the benefits from trade (for the US) come from importing, and exports don't matter (except for Asia!).

6) The benefits of exporting also didn't go away in 09 when China stimulated bigly.

the inflection point on manufactured exports imo comes in 12 (the low point for the euro crisis) or 13-14 (when EMs slow) more than in 09.

7) After the crisis, China stopped exporting as much to the US (and Europe) but with the big rise in commodity prices, it started exporting a lot more to its fellow emerging economies.

manufacturing surplus rises (in USD terms) from $600b to close to a trillion etc

8) Bigger question tho is whether any economy as large as China can successfully invest domestic savings of 45% of GDP (down from a peak of 50%, but still 10% higher than in 2000)

My answer more or less is no

9) Low marginal productivity of extra investment stems in a sense from simply doing too much of it, as well as a state dominated economy (which naturally expanded when China did a domestic stimulus to offset an export shock)

10) China's savings rate is still 5-10% of GDP higher than other Asian economies during their high investment/ high savings/ rapid catchup phases ....

11) that's why in my view the original sin of China's stimulus is primarily that it took the pressure off China to do more to bring down its savings rate (and raise domestic consumption).

cfr.org/report/return-…

12) Growth was going to slow, China was hitting real limits on its export-based model (there is a limit to how many manufactures the rest of the world can absorb), and so on. But China could have shifted to a healthier domestic growth model faster.

my two cents, won't be a surprise to most ...