Spend, China, spend!

Desperate measures? In a rather unusual editorial today the NY Times urges China to spend more money to pick up the slack of reduced spending by the US and Europe, and thus help keep the global economy lubricated.

China has grown 13-fold over the last 30 years, thanks to hypercharged exports and white hot investment. But its economy is lopsided. Consumer spending amounts to little over a third of economic production, probably the lowest share in any country in the world. And its overwhelming dependence on exports has made it overwhelmingly vulnerable to changes in world demand.

The government in Beijing, which is running a huge budget surplus, also has money to spare.

The government has announced some measures to fuel domestic spending —including a tax cut on home purchases to revive an ailing housing market and a vague plan to invest in public works. But it must do more to unlock the savings of its citizens and encourage them to spend.

To do that it needs to rebuild the system of social insurance that fell apart when state-owned industries collapsed and were replaced by the private sector. Government investment in things like health care, education and pensions would help develop China’s middle class and its domestic market.

A boost to consumer spending would undoubtedly help China weather the economic storm. But by raising Chinese imports and reducing its dependence on exports, it would also help the rest of the world.

Are you listening, China? This isn’t just anybody telling you what you should do, it’s the New York Times!

Actually, there’s nothing in the editorial I disagree with. And if nothing else, it’s certainly confirmation of just how huge a role China now plays in the world economy – almost as if the pedestal has shifted from being the US to China. Is that what the editors meant to imply? I’m not sure, but the title of the editorial is “As China Goes, So Goes …” There’s definitely a new order rising.

Meanwhile, it’ll be interesting to see how receptive China is to this well-meaning if unsolicited advice from The Gray Lady.

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Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.

The Discussion: 60 Comments

Chinese citizens and the majority of Chinese corporations do not directly invest their foreign money in the US. They invest in Chinese banks and Chinese investment companies, almost all of which are state owned, through savings accounts, mutual funds, etc. These banks in term invest their clients’ money in US bonds.

Even if you only wish to accept private Chinese citizens’ money, you still have to suck up to the Chinese government.

October 28, 2008 @ 1:09 pm | Comment

Even if you only wish to accept private Chinese citizens’ money, you still have to suck up to the Chinese government.

It is up to the Chinese govt to provide private sector investment solutions to its citizens, if it wants them to invest in the US. The US would rather have lower foreign demand for US assets so that the dollar would decline and thus boost exports and correct imbalances. The is true especially now that inflation is not a problem because of the weak economy (During normal times, a weaker currency usually results in inflation).

October 28, 2008 @ 1:41 pm | Comment

MT.

Did you say the US would rather have lower foreign demand for US assets? Are we in a financial crisis? Isn’t the US government begging Mitsubishi to buy Morgan Stanley?

About inflation. It is still there. The world has no shortage of cash. The US government does.

As George W. said so eloquently, this sucker is going down.

October 28, 2008 @ 9:50 pm | Comment

Did you say the US would rather have lower foreign demand for US assets? Are we in a financial crisis? Isn’t the US government begging Mitsubishi to buy Morgan Stanley?

The US wants private investors (whether foreign or domestic) to invest in banks because the Bush administration is opposed to injecting govt capital into the banks and nationalizing them. If it wants the US congress/treasury can easily capitalize all the banks itself (it is doing that now).

I general I am against putting govt capital into banks (mainly because we don’t want politicians to interfere with who gets a loan etc.) By the same logic it is much worse to have a foreign govt interfering with US banks. So I think it would be bad for the US govt to let the Chinese govt invest in major US banks even if the Chinese govt is interested.

About inflation. It is still there. The world has no shortage of cash. The US government does.

In fact during the current crisis the world is short of US dollars (probably temporarily) and only the Fed can supply them. That is why the US dollar is going up. That is also why the Fed is starting swap agreements with other G7 central banks (ECB, Bank of England etc.) for hundreds of billions of dollars so that those banks have a ready supply of dollars to lend to their companies.

The Chinese and Russian central banks are also responding to the shortage of dollars in foreign markets by providing access to their foreign reserves to their companies so that those companies can survive and continue trade. There were some rumors this month of ships loaded with merchandise getting stranded because they can’t arrange trade financing. This is happening because the dollar is the currency of trade and is the currency in which most international transactions are settled.

There is a shortage of dollars in the US also because the banks have no equity capital to make loans. They have easily borrow lots of dollars from the Fed, but you need equity capital to make loans (most banks are required to maintain a certain loan to equity ratio). The US Treasury/Fed is fighting this by injecting equity capital into the banks to recapitalize them, as well as making loans directly to companies (buying commercial paper).

Bottom line: The US has an unlimited supply of dollars. The only risk is that foreign investors suddenly lose interest in US assets and result in a dollar collapse. To prevent such a scenario, we need to engineer a gradual decline of the dollar so that the trade imbalances can be corrected.

October 28, 2008 @ 10:38 pm | Comment

http://shs.ndrc.gov.cn/yg/

If you do care about China’s healthcare system reform, go to the above website, read the whole draft, and make constructive suggestions.

Healthcare reform has been one of the most important topic discussed today, it concerns not only with the health of Chinese people, but will also affect the whole economic situation, especially consumer spending.

So, this is your chance to make a difference.

October 29, 2008 @ 8:23 pm | Comment

http://shs.ndrc.gov.cn/yg/

If you do care about China’s healthcare system reform, go to the above website, read the whole draft, and make constructive suggestions.

Healthcare reform has been one of the most important topic discussed today, it concerns not only with the health of Chinese people, but will also affect the whole economic situation, especially consumer spending.

So, this is your chance to make a difference.

October 29, 2008 @ 8:26 pm | Comment

Its interesting how much attention this gets when the NYT advises it. Have we all forgotten the fact that, at least since the Central Economic Work Conference of December 2003, the government of Hu Jintao and Wen Jiabao have been saying almost exactly the same thing. The CPC effectively declared at the CEWC that the PRC’s existing economic growth model of relying on exports and investment was unsustainable. It said that the PRC should switch to economic growth fundamentally based on domestic consumption, and that to stimulate that they should do more for ordinary people in terms of a safety net.

YET very little has actually changed in China since 2003 and certainly not in the economic growth model, despite Hu/Wen’s desires. I wonder why that might be? Can you say vested interests? The US certainly has no lock on vested interests and pork-barrel local politics. For all the talk by Hu/Wen about healthcare and rural affairs the sad fact is the people who got extremely rich from the old growth model and their ‘connections’ are doing their damndest to thwart any shift to a new model that would necessarily ‘redistribute’ the benefits of economic growth away from them.

Now those vested interests in a few coastal provinces are squealing for an end to revaluation of the yuan and a return to the good old days of massive export tax rebates and other disguised subsidies for exporters. How will that help shift China’s growth model?

October 30, 2008 @ 8:02 pm | Comment

Even if Beijing loosens its purse strings, there is much to spend on within China that does not involve importing products. Creating a real social safety net and K-12 tuition relief would cost alot of money, take several years and require at most paying some foreign experts (mostly from the US Social Security Administration and its European counterparts).

So just because Beijing goes on a spending spree doesn’t mean that foreign MNCs would prosper.

November 1, 2008 @ 1:27 pm | Comment

China might not be listening to the NY Times, but somehow, when Obama speaks about it, there seems to be some echoes…

Obama says China must stop manipulating currency

“China must change its policies, including its foreign exchange policies, so that it relies less on exports and more on domestic demand for its growth,” Obama said in a letter to the National Council of Textile Organizations.

“That is why I have said I will use all diplomatic means at my disposal to induce China to make these changes,” Obama said in response to a questionnaire from the group.

Could we witness a strong return of protectionist ? And maybe he won’t even have to do anything about it, since it’s already what China is doing (I wonder why)…

November 1, 2008 @ 7:34 pm | Comment

[…] no denying that). He also specifically takes issues with the NYT editorial board for its somewhat rosy belief that China can spend its way – and the world’s – out of a recession. There’s been a lot […]

November 6, 2008 @ 11:08 pm | Pingback

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