Today’s U.S.-China Economic Parallel
The New York Times is running a series of stories on the Chinese (NYSE:FXI) economy; the second of which came out a few days ago. There are quite a few surprising pieces of information in this one, as the view from the West is a great middle class is emerging in China, as labor wage arbitrage drives tens of millions of jobs away from developed economies and into theirs. But some of the statistics were interesting to say the least – seems like China (NYSE:FXI) is having a very similar issue to the United States where even as the economy grows, a disproportionate amount of the spoils are going to the capital (or political) class rather than the labor class. Actually that is not the only similarity – see this passage
the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation.
It’s quite a lengthy article, worth the read – I’ll bring over some of it here.
- Under an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation. At the same time, other factors in which the government plays a role — a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to keep saving anyway, against an uncertain future.
- Indeed, economists say this nation’s decade of remarkable economic growth, led by exports and government investment in big projects like China’s high-speed rail network, has to a great extent been underwritten by the household savings — not the spending — of the country’s 1.3 billion people.
- This system, which some experts refer to as state capitalism, depends on the transfer of wealth from Chinese households to state-run banks, government-backed corporations and the affluent few who are well enough connected to benefit from the arrangement. Meanwhile, striving middle-class families like the Wangs are unable to enjoy the full fruits of China’s economic miracle.
- “This is the foundation of the whole system,” said Carl E. Walter, a former J. P. Morgan executive who is co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “The banks make loans to who the Communist Party tells them to,” Mr. Walter said. “So they punish the household savers in favor of the state-owned companies.”
- It is not just China’s problem. Economists say that for China to continue serving as one of the world’s few engines of economic growth, it will need to cultivate a consumer class that buys more of the world’s products and services, and shares more fully in the nation’s wealth.
- But rather than rising, China’s consumer spending has actually plummeted in the last decade as a portion of the overall economy, to about 35 percent of gross domestic product, from about 45 percent. That figure is by far the lowest percentage for any big economy anywhere in the world.
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- Here in Jilin City, where chemical manufacturing is the dominant industry, the state banks are flush with money from savings accounts. The banks use that money to make low-interest loans to corporate beneficiaries — including real estate developers, helping fuel a speculative property bubble that has raised housing prices beyond the reach of many consumers. It is a dynamic that has played out in dozens of cities throughout China.
- Meanwhile, China’s central bank in Beijing also depends on the nation’s vast pool of consumer savings to help finance its big investments in the foreign exchange markets, as a way to keep the currency artificially weak. The weak currency helps sustain China’s mighty export economy by lowering the global price of Chinese goods. But it also makes imports unaffordable for many Chinese people.
- News reports of the nouveaux riches in Beijing and Shanghai snapping up Apple iPhones, Gucci bags and Rolex watches may conjure Western business dreams of China’s becoming the world’s biggest consumer market. But consumer choice here in Jilin and many other heartland cities is confined largely to the limited offerings of dingy state-run department stores and mom-and-pop shops. Any sales of global “brands” come mainly in the form of the counterfeits and knockoffs often sold at outdoor markets.
- Why would China, which hopes eventually to surpass the United States as the world’s biggest economy, deliberately suppress the consumer market that might help it reach that goal? Some analysts trace the current policies to habits formed in the late 1990s. That’s when the bloat of China’s giant, uncompetitive state-run corporations nearly brought China’s economic expansion to a standstill. Suddenly, with state-owned companies facing bankruptcy, the state banks were saddled with hundreds of billions of dollars in nonperforming loans; many banks faced insolvency.
- To avert a crisis, Beijing allowed state-owned companies to lay off tens of millions of workers. In 1999 just one of those companies, the parent of PetroChina, a big oil conglomerate, announced the layoff of a million employees. And to shore up the banks, Beijing assumed tighter control over interest rates, which included sharply lowering the effective rates paid to depositors. A passbook account that might have earned 3 percent in 2002, after inflation, would today be effectively losing 3 to 5 percent, once inflation is factored in.
- That is how Chinese banks can provide extremely cheap financing to state-owned companies while still recording huge profits. It has also helped the banks provide easy financing for big public works projects, which besides the high-speed train system have included the 2008 Beijing Olympics and the monumental Three Gorges Dam.
- It was during this same period that the Communist government discarded the longstanding “iron rice bowl” promise of lifelong employment and state care. Beijing shifted more of the high costs of social services — including housing, education and medical care — onto households and the private sector.Together, these measures added up to the managed-market system now known as state capitalism.
Trader Mark is the author of Fund My Mutual Fund.
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