The role of the US dollar in anchoring the global trading system

CHINA FINANCIAL - Report 26 May 2023 by Michael Pettis

Special points to highlight in this issue:

* Trade, inflation, retail sales and industrial production data all pointed in the same way in April. China’s much-anticipated “consumption revival” still hasn’t started. All the data suggest that Chinese household income isn’t rising fast enough to drive a surge in consumption and that households continue to hold off on drawing down on their savings.

* Business investment continues to stagnate, which is what we would expect without strong domestic consumption or export growth. Very preliminary anecdotal evidence suggests, however, that businesses may have finally seen a turnaround in orders in late April and May. We will have to wait for the May data to see if this is indeed the case.

* Because Beijing is facing increasing pressure to stimulate the economy, I expect that by June we will start to see an increase in local government spending, even as they struggle to manage their existing debt burdens. Beijing is very worried about rising debt, but for now it is still more worried by slowing growth and the impact on unemployment.

* Much of the heated recent debate about the demise of the US dollar as the dominant global currency fails to recognize the role the dollar and the US economy play in underwriting and accommodating severe global imbalances. Without one we cannot have the other.

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