The reemergence of the issue of US ‘external sustainability’ and what should be China’s responses

Abstract

America’s current-account deficit has grown significantly since 2020, reaching 3.6% of GDP last year –its highest level since 2008. At the same time, its net foreign debt reached astaggering $18 trillion, or 78% of GDP. And fast-rising inflation has promptedthe US Federal Reserve to begin raising interest rates and reducing itsholdings of Treasury securities – moves that are likely to impede growth andincrease the government’s borrowing cost. Will America’s “externalsustainability” be at risk again? To answer that question, we must consider thefour variables on which external sustainability depends: the gap betweenprivate saving and private investment, the size of the budget deficit,investment-income levels, and the rate of GDP growth. Geopolitics mightcompound the challenges ahead. The US has avoided a balance-of- payments anddollar crisis in the past largely because Asian central banks and oil-exporting countries have tirelessly purchased US government bonds and Treasurybills. But amid rising geopolitical tensions, these buyers might decide – or beforced – to rethink their purchases. It is against this backdrop that the Fedis pursuing rather aggressive interest-rate hikes and quantitative tightening.But increased demand for foreign capital to finance the trade deficit, togetherwith greater reluctance by foreign investors to purchase US government bondsand Treasuries, might put America in a quandary. It is likely that America’sexternal balance will deteriorate significantly, unless US GDP growth slowssignificantly.