Calibrating China

Is An Upturn Coming?

The big economic stories currently dividing East and West have their roots in the respective policy responses to the extreme COVID supply shocks. China cut demand honoring Classical economic textbook policy, whereas the West boosted demand in a pure Keynesian direction. The years since have seen China struggle to restart demand and the West wrestle to contain inflation. Arguably, the West has done a better job since the Chinese economy remains in the doldrums, while inflation in the US and Europe is ebbing. However, the sluggishness of the Chinese economy attests more to China’s far bigger structural problem, namely a significantly overvalued real exchange rate.