Raghu writes:
On Thu, Sep 4, 2008 at 1:33 PM, Charlie <[EMAIL PROTECTED]> wrote:
More perversely, unlike the US whose economy is wracked by a large
budget deficit, China has a huge budget surplus, trillions of dollars.
And what do they do with this surplus? They buy tons of US government
bonds, essentially funding our budget deficit and subsidizing each and
every American so that Americans can keep consuming and buying Chinese
goods.
...
But it's hard to understand why they don't take more of that trillion
dollar surplus and invest it in their people, especially in the rural
areas and the young people there. China has become "one nation, two
people" -- rich vs. poor, city vs. country.
This is a somewhat unfair criticism. Just because the Chinese
government has a huge surplus and lots of money doesn't mean they can
spend it freely...
====================================================
Actually, the Chinese leadership has been conscious for some time of the
need to rebalance the economy in anticipation of a downturn in China's major
markets, which has taken on added urgency during the past year. A WSJ op-ed
earlier this week details some of the measures the government has taken and
should take to boost mass purchasing power in order to facilitate a
shift from export- to consumer-led growth.
* * *
Rebalancing China's Economy
By RICHARD KATZ
WALL STREET JOURNAL
September 2, 2008
It is impossible to visit Chongqing, a 10-million-person city in western
China, without being overwhelmed by the mile upon mile of new sky-high
apartments and office buildings, bridges and roads rising in ever-widening
circles. But the sight is less impressive when one learns that it is
accompanied by rampant real estate speculation, years of double-digit price
hikes in real estate all over China, and a countrywide syndrome of excess
investment and a dearth of consumer spending. Instead, parts of the picture
look alarmingly like Japan's late-1980s bubble and subsequent "lost decade."
The two countries have experienced similar cycles. A decade ago, a mainland
investment boom led to a Chinese nonperforming loan crisis even bigger than
Japan's 1990s bust. A massive, painful restructuring of China's debt-laden
state-owned enterprises ensued. Now, China risks a repeat of that painful
adjustment. The good news is that, in stark contrast to Tokyo's decade of
denial, Premier Wen Jiabao and other leaders have publicly recognized that
today's imbalances must be addressed.
As in Japan, consumer spending is too low to keep the economy motoring
ahead. In China, consumption was only 50% of GDP in the 1980s and today an
astonishingly low 37%. Typically, poor countries devote about 60% of GDP to
personal consumption. The problem is not lack of desire to spend, but lack
of money: Household disposable income has been shrinking as a share of GDP.
The annual flow of 10 million workers from countryside to city has
suppressed wage growth while regulated rates give consumers negligible
returns on their savings deposits.
Up to a point, less consumption meant China could devote more resources to
investment, and thereby grow faster. Back in 1980, most Chinese citizens
lived on less than $2 a day, according to the World Bank. By 2015, only 13%
of the population will do so. The issue is not that consumption is not
rising fast enough on an absolute scale. Rather, as in Japan, a development
strategy that brought enormous success has been taken to an unhealthy and
unsustainable extreme. With consumption not growing as fast as GDP, China
had to find other sources of demand.
Total investment -- residential, business and public works -- has been
pushed to a sky-high 45% of GDP. Even that is still not enough to absorb all
of China's output. To avoid recession, China lends money to foreigners to
buy Chinese exports, giving China a trade surplus of 9% of GDP, way up from
the 2-3% of GDP that prevailed during most of 1990-2004. As Japan's
experience shows, this strategy is unsustainable. Excess investment is
likely to be wasteful investment, which eventually ends up undermining
growth while building up nonperforming loans. Meanwhile, China can only keep
increasing its trade surplus if other countries increase their deficits, but
the main deficit country, the U.S., has been sharply decreasing its
price-adjusted deficit.
However, if China were to simply reduce wasteful investment and the
excessive trade surplus without being able to replace it with consumer
spending, growth could plummet. That's Beijing's dilemma.
Behind China's macroeconomic imbalances lies a political calculation. With
10 million job seekers migrating into urban areas every year, China had to
provide lots of jobs to avoid mass unemployment and social unrest. Because
consumer income and spending were so weak, the government felt it had no
choice but to pump up capital investment and exports.
The good news is that Beijing has not taken as long as Tokyo to recognize
the need for a course correction. In December 2004, the Communist Party
endorsed the notion of transitioning to consumer-led growth. In 2006,
Premier Wen declared, "We must strive to reduce our excessively large trade
surplus."
The question now is, can Mr. Wen push through reform? Powerful
constituents -- from local politicians to property developers -- have now
become dependent upon the current, distorted pattern of growth. Many of
these actors have friends at the national, provincial and local levels of
government to protect them. Government by decree is no longer as easy as it
used to be.
But these rigidities should not be overestimated. China does have experience
in executing massive social shifts. Over the past decade, China eliminated
nearly 20 million factory jobs despite the explosion in industrial output.
In the 1990s debt crisis, Beijing engineered a reorganization of state-owned
enterprises, which entailed massive layoffs. Moreover, in an economy growing
9-10% a year, it's much easier to absorb people into new jobs at new firms
in new sectors. Little wonder big multinationals are already making plans on
the presumption that China will gradually shift to consumer-led demand.
Premier Wen has already taken a few initial steps in the right direction. In
2006, he abolished the 2,600-year-old agricultural tax. He also announced
exemptions for education tuition for some rural citizens, and subsidies for
others. He has expanded health insurance. In 2007, the government reduced
the tax on interest income to 5% from 20%.
Now it's time for further actions. The government could let interest rates
rise on consumer deposits, though this might be opposed by firms that can
now borrow at below-market rates. China could let its currency, the yuan,
appreciate further in inflation-adjusted terms, giving more purchasing power
to Chinese consumers. Since July 2005, when the government broke the yuan's
peg to the U.S. dollar, the currency has appreciated 22% vis-à-vis the
greenback, and 10% on a global, trade-weighted, priced-adjusted basis. The
government could also reduce personal income taxes while increasing taxes on
firms. Since profits have been rising as a share of GDP, it could increase
corporate taxes and still have room for rising after-tax profits.
While the central government has increased the minimum wage -- which could,
in principle boost wages even at higher levels -- only a narrow slice of
workers is covered by this move and the minimum wage is still quite low
relative to average wages. A new labor law mandates that employers provide
pension and insurance contributions, pay laid-off workers a month's wages
for every year worked, and that they provide an overtime premium of 50% on
weekdays and 100% on weekends. However, as with many Chinese laws,
enforcement remains very much in question.
Lastly, China could substantially increase government expenditures on
schools, health care and unemployment compensation so that people would no
longer need to save so much cash to pay for school or to prepare for a
health emergency or a job loss. These measures are opposed by many local
governments that often prefer to spend money on building roads and bridges.
That behavior may boost GDP more quickly, but it also provides more
opportunity for corruption and payoffs.
China's big advantage is that it has seen in Japan's experience that
countries which postpone decisive action end up suffering even more. While
Beijing's first moves have been small, there is good reason to hope that, in
its own incremental fashion, China will make the necessary adjustments in
time.
Mr. Katz is editor of the semiweekly Oriental Economist Alert. This op-ed is
adapted from an essay in the September issue of Current History.
_______________________________________________
pen-l mailing list
[email protected]
https://lists.csuchico.edu/mailman/listinfo/pen-l
