Thread by @michaelxpettis

1/12

We have to be careful not to misinterpret this point. Chinese investment in Australia peaked in 2016, as the chart shows, before petering off sharply in 2019-20. So of course did Australia's current account deficit, which further swung into surplus by mid-2019 and 2020.

https://twitter.com/adam_tooze/status/1366755169875165187

2/12

That is what the graph below shows. In itself this shouldn't be surprising. The current account, after all, is equal to the difference between domestic investment and savings, and by definition net foreign inflows must either raise the former or reduce the latter.

3/12

That is why whether or not Australia's current account deficit is a good thing or not depends on whether it is driven by more overall investment or less overall savings. More foreign inflows into Australia (whether from China or elsewhere) will result in more...

4/12

sustainable growth only if they lead to higher overall investment. But they could just as logically lead to less overall savings, which means Australia would suffer from either more government debt, more household debt, or more unemployment, none of which is a good thing.

5/12

This may seem confusing, but as @M_C_Klein and I explain in our book, it is only because most economists implicitly use obsolete trade models – in which savings are always, and almost by definition scarce – that they assume by default the former.

yalebooks.yale.edu/book/978030024…

6/12

But this is just sloppy thinking. If we live in a world of excess savings and weak demand – and I am pretty sure we do – it doesn't have to be true, and almost never is, that greater net foreign inflows lead to more domestic investment.

7/12

I'm not an expert in the Australian economy, so I welcome any help from the more knowledgeable, but my quick search suggests that it would be hard to make the case that higher Australian current account deficits are driven by higher overall investment.

8/12

Take a look at the following chart, for example, which shows gross capital formation in Australia from 2014 to 2020. Until 2019 there seems to be almost an inverse relationship between Chinese investment in Australia and overall Australian investment:

9/12

So what might this suggest? More Chinese investment in Australia drives, as we would expect, greater Australian current account deficits, but these deficits seem to be driven not by higher overall investment in Australia but rather lower savings.

carnegieendowment.org/chinafinancial…

10/12

Obviously there is a lot more to Australian investment and sustainable growth than what Chinese or foreigners do, but the important point is that, in itself, foreign investment can be good or bad for the economy depending on the kind of investment and whether it causes...

11/12

the economy to adjust to the change in the balance of payments raising overall investment or lowering overall savings. I realize this is highly counterintuitive to most people, but in the following essay I try to explain the conditions under which...

12/12

foreign investment can be good or bad for sustainable growth. Sorry for the very long thread, but I think the topic of foreign investment is one in which most opinions – both pro and con – tend to be far more ideological than logical.

carnegieendowment.org/chinafinancial…