China’s economy has bigger problems than its currency by Nin-Hai Tseng @FortuneMagazine November 5, 2010, 4:01 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Image via Wikipedia Is the weak renminbi really the main problem? One analyst thinks China’s health care spending and lack of a consumer-driven economy are to blame for U.S. trade woes. In the world of politics, China’s monetary policy has proven to be an easy target to attach blame to for everything from the trade deficit to the weak dollar. But in the world of economics, the topic is much more complex than America’s politicos would have us believe. For the past decade, exports have overwhelmingly driven China’s tremendous growth, which is expected to slow only slightly from its double-digit peaks in the coming years. But the value of its currency, which many agree is undervalued, isn’t the only reason, perhaps not even the most important reason, that the economics successes of the East Asian giant has relied so heavily on exports. The problems of China’s economic imbalances with the U.S. and Europe are much deeper, UBS China expert Tao Wang told reporters this morning at a roundtable discussion at the bank’s New York City office. “I think focusing on the exchange rate issue is too simplistic,” Wang says. “It’s very political at the moment.” U.S. voters saw this all too clearly during the midterm elections in which China became the punching bag of choice for many candidates – Republicans and Democrats alike. Indeed, it’s clear that the U.S. runs a huge and unsustainable trade deficit with China. And U.S. government trade statistics released Thursday only further proves that it’s widening. For August, the U.S. trade deficit grew to $46.3 billion, up from $42.6 billion in July. The deficit with China accounted for $28 billion of the August shortfall, up from $25 billion the previous month. It’s true weaker currencies make a country’s exports able to undercut the domestic competition when shipped overseas. Outsourcing, too, takes advantage of weak currencies which makes work that can be done remotely, like call center operations, more affordable. And to a degree, a relatively weaker renminbi (as opposed to a stronger currency) has worked to China’s export advantage But China’s imbalanced economy also has much to do with problems beyond the value of the renminbi. The country exports way more than it consumes. It’s also a nation of savers as opposed to spenders. There are a host of reasons that’s the case. First, for many, access to adequate health care and education is far from reach, Wang says. This typically makes people save more than consume. This is the trend that’s been playing out in China. What’s more, China’s state-owned companies generally don’t distribute dividends. So much of a company’s profits get re-invested instead of distributed to investors. This isn’t to totally downplay issues over the renminbi as the U.S stands to gain from a stronger currency. If China’s exchange rate rose by 20% to 25% over the next two to three years, appreciation of the renminbi would reduce China’s global trade surplus by $350 billion to $500 billion, according to Fred Bergsten of the Peterson Institute for International Economics, a Washington DC-based think tank. Also, the U.S. global trade deficit would shrink by $50 billion to $120 billion. And over the next few years, that change could help create about half a million U.S. jobs, mainly in manufacturing. Wang also made a point other China experts have emphasized. Rebalancing China’s economy will take more than a rise of the renminbi, which Wang predicts will rise only “modestly” at about 5%. The country will have to consume more, economically, and export less. Increasing government spending on health care and education is the path Wang thinks China will take to spur this change. In other words, the weak renminbi looks a lot more like a symptom of a broad economic problem that China is facing over the coming years, not the primary disease that the world has to be worrying about.