The American trade deficit reached 6% of the country’s GDP in 2005, and it is likely to be close to 7% in 2006. Moreover, the rise in the price of oil, on which America is especially dependant, threatens to make this situation even worse. In addition, the budget deficit has also reached record levels and, according to many American analysts, it may well continue to grow at least until 2009. But as long as Americans are reluctant to save, the U.S. debt will be financed by foreign capital.
By contrast, China is managing to combine rapid economic growth with stable public finances: China runs a balance of payments surplus alongside a tiny budget deficit (1.5% in 2005). It uses its trade surpluses to build up dollar reserves and is becoming a major creditor of the United States.
In this article Philippe Delalande offers a comparison between the contrasting – yet increasingly interdependent – financial positions of these two major economies. He explains that the dual U.S. deficits (trade and budget) can be maintained because of the special status of the dollar abroad. Confidence in the dollar and in the American economy does not falter and the United States becomes ever more dependant on foreign capital, whereas the Chinese authorities have adopted the opposite policy, strictly regulating foreign investment in China and maintaining their currency, the yuan, undervalued vis-à-vis the dollar but tied to it.
The author explains that this is because the two countries’ financial positions are more and more closely linked as a result of this situation and the increasing trade between them.
