The International Monetary Fund reported that China is suffering its first series of annual current account deficits in 25 years because its savings rate is shrinking fast.
The IMF’s mission since its 1945 founding has been to ensure the stability of the global monetary system of exchange rates and payments for its 189 member nations and their citizens to transact with each other. With $1 trillion in lending capability through its sister organization the World Bank, the IMF supports loans to small nations to fight poverty and stands ready to serve as the “lender of last resort” during international financial crises.
The People’s Republic of China (PRC) did not join the IMF until 1980, when Taiwan was ejected from the United Nations after losing the support of U.S. President Jimmy Carter. The PRC has been a small bank borrower, but it benefited enormously from the IMF’s support for China’s admittance to the World Trade Organization (WTO) in 2001.
China’s WTO boom saw capital spending rise from 34.9 percent of GDP in 1999 to 43.2 percent in 2008. China easily financed the boom because its domestic savings rate spiked from 36 percent of GDP in 1999 to 52.3 percent in 2008. Endo Economics calculated the investment boom was profitable, because every $1 of China bank lending generated about $.79 of increased GDP over the next twelve months.
With China’s growth model and infrastructure building the envy of the world, former member of the Chinese Communist Party (CCP) Justin Lin Yiju was appointed chief economist of the World Bank in 2008. With the Great Financial Crisis devastating developed nations, China in April 2010 was able to increase its IMF ownership to the third largest share at 6.4 percent, behind only Japan’s 6.5 percent and the United States’ 17.5 percent.
Over the next decade through 2018, China continued its export boom by increasing capital spending by another +1.6 percent. Combined with its domestic savings rate falling by -7.1 percent to 45.2 percent, China financed its second boom by increasing the risk-taking leverage of its banks….