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Inevitable Trade War between US and China

 It is believed that current crisis is a product of global structural imbalance i.e. over-leverage/over-consumption by the West (particularly US), and over-savings/lack of domestic demand of emerging markets (mainly China). The structural imbalance between US and China is the inevitable result of two competing political and economic systems.

China alone accounts for 60% of US trade deficit. While China blames US for its fiscal and monetary irresponsibility, US blames China for its export driven and currency-pegging policy as the source of the problem, and hope that trade deficit would disappear if China had appreciated its currency and, somehow, boosted its domestic demand.

There are deeper reasons for China’s export driven economy. State owned/controlled enterprises (“SOEs”) still dominate the economy. The 100 largest SOEs account form over 50% profit of all Chinese corporations, which includes millions of companies. Though official statistics are not available, many people feel that SOEs, together with severe income disparity (a result of corruption and unfair dealings), means that much of the nation’s wealth is in the hand of government and a small number of wealthy people. How do you expect ordinary Chinese people to have the means to increase their spending.

The Chinese government has tried for years to encourage domestic consumption. Two sectors (real estate and automobiles) are the direct beneficiaries of this policy, and direct causes of current social problems (property bubble and horrible city traffic congestions). These two sectors also put huge debts onto the ordinary Chinese consumers, and leave them little spending power on other consumptions.

China has no choice but to rely on export to provide jobs and growth, which provide the only legitimacy for the communist government staying in power.  Unless China makes significant political reforms to address income disparity, corruption and ballooning SOEs (which are highly unlikely), export-driven policy and currency-pegging will continue.

US is a under-regulated free market where China is a highly regulated, government dominated economy. The global structural imbalance will not be resolved by currency revaluation, and is the inevitable result of two different systems.

Disclosure: No position