Joined: 27 Nov 2004 {Posts: 1763 } Location: Hudson Valley, NY
Posted: Thu 13 Mar 2008 16:44 Post subject: China: The danger in the horizon
Quote:
Product recalls: toy sundae sets and magnetic building toys
The Associated Press
The following recalls have been announced:
• About 22,000 Play Wonder toy sundae sets, manufactured in China by Battat Inc., because the wooden cherries that attach to the top of the wooden ice cream pose a choking hazard. No injuries have been reported. The sundae sets were sold at Target stores around the country between December 2006 and December 2007. Details: by phone at 1-800-247-6144; by Web at www.battatco.com or www.cpsc.gov.
• About 7,000 Battat Magnabild magnetic building toys or sets, manufactured in China and distributed by Battat Inc., because small magnets inside the building pieces can fall out and young children can swallow them. If more than one magnet is swallowed, the magnets can attract each other and cause internal damage. This expands an earlier recall of about 125,000 Magnabild magnetic building systems announced Jan. 23. Battat has received 16 reports of magnets falling out of building pieces. No injuries have been reported. The building sets were sold online and at stores around the country between July 2005 and February 2008. Details: by phone at 1-800-247-6144; by Web at www.battatco.com or www.cpsc.gov.
WASHINGTON – While China continues to promise to impose higher safety standards on exports, a WND study shows two of every three products recalled by the Consumer Product Safety Commission last year were Chinese imports – with an upward trend of defective, unsafe products found in every quarter of 2007.
The CPSC recalled a total of 447 products for safety concerns last year. Of those, 298 were manufactured in China. Only 62 were made in the USA. The rest were made in other countries.
In 2006, the CPSC recalled a total of 467 kinds of products – 221 of which were Chinese imports. Only 113 were for products made in the USA.
As recently as 2002, the figures were virtually reversed – with 150 U.S. made products being recalled and just 99 from China.
The trend illustrates not only vastly different standards in safety between the two countries, but also a massive shift in manufacturing from the U.S. to China. The Chinese products recalled in 2007 include:
Portable baby swings that entrap youngsters, resulting in 60 reports of cuts, bruises and abrasions;
Swimming pool ladders that break, resulting in 127 reports of injuries, including leg lacerations requiring up to 21 stitches, five reports of bone fractures, two back injuries, two reports of torn ligaments and eight sprained ankles;
Faulty baby carriers that result in babies falling out and getting bruised, getting skulls cracked and hospitalizations;
Easy-Bake Ovens that trap children's fingers in openings, resulting in burns;
Oscillating tower fans whose faulty wiring results in fires, burns and smoke inhalation injuries;
Exploding air pumps that have resulted in 13 lacerations including six facial injuries and one to the eye;
Bargain-priced oil-filled electric heaters, selling for less than $50, that burn down homes;
Notebook computer batteries that burn up computers, cause other property damage and burn users;
Circular saws with faulty blade guards that result in cutting users, not wood.
Last year Chinese imports were hit for poisoning America's pets, risking America's human food supply and reintroducing lead poisoning to America's children.
Electrical products made in China represent a significant percentage of the recalls. The CPSC noted the market is saturated with counterfeit circuit breaker, power strips, extension cords, batteries and holiday lights that are causing fires, explosions, shocks and electrocutions.
"Many counterfeit products are made in China and CPSC is actively working with the Chinese government to reduce the number of unsafe products that are exported to the United States," said the alert issued in May.
The agency suggests that if the price of such an item seems to be too good to be true, it could be because the product is an inferior or unsafe counterfeit.
You might think an attractive, normal-looking table lamp would be safe. But 1,500 manufactured in China had to be recalled because of faulty light sockets that posed the risk of electrical shocks and fire hazards.
Or how about emergency lights that look just like other emergency lights but whose circuit board malfunctions, preventing illumination during emergencies? The CPSC recalled thousands of those in 2007.
And be careful which heated massaging recliners you relax in. If you choose one of the 1,700 manufactured in China and recalled by the commission last year, you might have found yourself medium rare because of an overheating and burn hazard discovered.
Even the simplest, most inexpensive items from China seem to pose massive risks. About 2,700 $12 pine cone candles had to be recalled when it was determined the exterior coating, not just the wick, caught fire.
The problem is Americans see a cheap electrical power strip with a circuit breaker and assume it does what it is supposed to do. That is not the case with many Chinese counterfeits. They are not only counterfeits in the sense of improperly using brand names, they are actually counterfeits in the sense of pretending to do something they were never intended to do.
But big problems occur when an over-taxed power strip doesn't trip a circuit. Fires can occur. Property can be damaged. People can be killed.
Likewise, when Americans buy attractive-looking glassware at a bargain price, they might ask themselves: "How can I go wrong?"
Pier 1 Imports found out when 180,000 pieces of glassware were ordered recalled by the CPSC because the items broke for no apparent reason, sometimes cutting the hands of those holding them.
How could one go wrong purchasing an attractive kitchen stool engraved with a rooster on the seat? After all, it was only $30. Well, several people found out when the stools collapsed, even under the weight of small children.
You might want to think twice before entrusting your child to something as simple as a crib made in China. For years, American manufacturers scrupulously lived up to the exacting safety standards imposed by agencies like the CPSC. Not so with Chinese manufacturers.
Some 40,000 cribs had to be recalled when it was discovered directions instructed consumers to assemble them in ways that would result in the baby falling out and becoming entrapped. Additionally, locking pins on the side of the crib could pop off and cause a choking hazard.
About 450,000 infant car seat carriers manufactured in China had to be recalled when it was determined infants were falling out because of a faulty design. The Evenflo Co., which imported the carriers from China, received 679 reports of the handle on the car seat releasing for no reason, resulting in 160 injuries to children, including a skull fracture, two concussions and cuts and bruises.
American manufacturers also adapted years ago to requirements that products designed for young children avoid small parts that could result in choking accidents. But, again, based on a survey of recalls in the first six months of 2007, this seems to be a foreign concept among Chinese companies.
Even books for young children have been found to contain plastic squeaker toys that have become lodged in babies' throats and metal clips that break off, potentially injuring kids.
Graco received 137 reports of infants mouthing, chewing and sometimes choking on tiny pieces of its soft blocks tower toys imported from China. At least 32 infants were found gagging on the pieces and 49 choked on the plastic covering. In all, 40,000 had to be recalled.
It's not just the CPSC turning away Chinese imports. The Food and Drug Administration was busy in 2007 as well. A slew of Chinese exports were banned or turned away by U.S. inspectors, including wheat gluten tainted with the chemical melamine that has been blamed for dog and cat deaths in North America, monkfish that turned out to be toxic pufferfish, drug-laced frozen eel and juice made with unsafe color additives.
As WND reported last year, China, the leading exporter of seafood to the U.S., is raising most of its fish products in water contaminated with raw sewage and compensating by using dangerous drugs and chemicals, many of which are banned by the FDA.
The stunning news followed WND's report that FDA inspectors report tainted food imports from China are being rejected with increasing frequency because they are filthy, are contaminated with pesticides and tainted with carcinogens, bacteria and banned drugs.
China consistently has topped the list of countries whose products were refused by the FDA – and that list includes many countries, including Mexico and Canada, who export far more food products to the U.S. than China.
While less than half of Asia has access to sewage treatment plants, aquaculture – the raising of seafood products – has become big business on the continent, especially in China.
In China, No. 1 in aquaculture in the world, 3.7 billion tons of sewage is discharged into rivers, lakes and coastal water – some of which are used by the industry. Only 45 percent of China has any sewage-treatment facilities, putting the country behind the rest of Asia.
The Chinese government has actually blamed WND's reports for fanning the flames of hysteria about the safety of Chinese products.
WASHINGTON – Would you be willing to pay a little extra for goods made in the USA?
Join the club.
Polls show a majority of Americans willing to do the same.
And with China charging Americans to ship its hazardous materials to line the shelves of Walmart, Roger Simmermaker thinks he has the answer – a guide to buying American.
If you think Americans no longer care about where goods are made or have concerns about safety of foreign products, think again. Simmermaker has assembled some surprising statistics:
92 percent of Americans want country-of-origin labels on meat and produce;
68.6 percent of Americans check labels for information like manufacturer, nation of origin and ingredients – up from 52.9 percent a year ago;
86.3 percent of Americans would like to block Chinese imports until they raise their product and food safety standards to meet U.S. levels;
33 percent of Americans would be willing to pay four times as much for American-made toys;
63 percent were willing to join a boycott of Chinese-made goods in general.
"Supporting American companies leads to a more independent America," says Simmermaker. "Ownership equals control, and control equals independence. We cannot claim to be an independent country or control our own destiny if our manufacturing base is under foreign ownership or foreign control. A nation that cannot supply its own needs is not an independent nation. If we are to claim independence from the rest of the world and truly be a sovereign nation, we must begin supplying our own needs once again."
Yet, in the age of the global village, knowing which company is American and which is not can be quite confusing. Simmermaker has made it easy – listing companies and their nation of ownership.
Consumer decisions, Simmermaker argues, allow Americans to vote every single day of their lives – making important decisions about their own future and the future of their country when they shop.
We get what we get . No brainer here. China does manufacture products for American companies if they are inferior products, then they just are.
laws, regulations are different there and you are getting what you get ,what you asked for. Lead paint, etc.
Last edited by Creole GAL on Mon 06 Oct 2008 20:22; edited 1 time in total
["Supporting American companies leads to a more independent America," says Simmermaker. [b]"Ownership equals control, and control equals independence. We cannot claim to be an independent country or control our own destiny if our manufacturing base is under foreign ownership or foreign control. A nation that cannot supply its own needs is not an independent nation. If we are to claim independence from the rest of the world and truly be a sovereign nation, we must begin supplying our own needs once again."[/b]
That's pure parnoia.
If we start being overly independent then we will only hurt ourselves. The law of trade states that what you can export you export and what you need you import. We are a service economy not a manufacturing one. Tryign to re-adapt to what we wonce were will only waste time and resources. Making more instead of less will be a disadvantage in the long run if Chinese people whom are on average poorer than us aren't willing to sustain our PCI's.
Joined: 24 Sep 2008 {Posts: 102 } Location: Santiago, DR
Posted: Thu 16 Oct 2008 23:12 Post subject:
hantana wrote:
We are a service economy not a manufacturing one.
Yet we used to be a manufacturing one!
Of course this is good news about the Chinese inferior products as this will mean more work for Americans. As anyone in business knows, any product that you sell that costs you significant money (such as recalls and returns) isn't worth having and thus alternatives need to be found.
Joined: 27 Nov 2004 {Posts: 1763 } Location: Hudson Valley, NY
Posted: Fri 17 Oct 2008 00:27 Post subject:
hantana wrote:
That's pure parnoia.
If we start being overly independent then we will only hurt ourselves. The law of trade states that what you can export you export and what you need you import. We are a service economy not a manufacturing one. Tryign to re-adapt to what we wonce were will only waste time and resources. Making more instead of less will be a disadvantage in the long run if Chinese people whom are on average poorer than us aren't willing to sustain our PCI's.
Would this work for military hardware??? Should we have the Chinese make our waepons???
I for one, will not purchase inferior Chinese products.
Joined: 07 Feb 2007 {Posts: 1829 } Location: Lookin DC Metro, Feelin Geneva
Posted: Wed 03 Dec 2008 22:52 Post subject:
Quote:
Global financial crisis will hurt China much more than the US
By elliottng
Posted in China Economy
I had coffee with Philip Johnson, former Silicon Valley Bank executive who is now a Beijing-based financial adviser to start-up companies in China. On his visit to the US, one of the most frequent questions people asked him is “How is China affected by the global financial crisis?“ I’ve had similar questions myself: How badly will China be affected? Does the US need China more, or does China need the US more?
When I was in Hong Kong, I asked some of these questions of my Hong Kong based uncle who is in the apparel manufacturing business. He responded that China would be deeply affected by the crisis, maybe even more than Western countries. He then provided a simple, easy to understand framework that I then double-checked against the writings of Michael Pettis, Nouriel Roubini, Brad Setser, and other economists on the Web. Based on this research, I’ve sadly concluded that my uncle is right. Instead of coming to the rescue of the global economy, China will suffer more deeply from the crisis than the US or Europe.
Uncle’s simple but powerful framework: China is supported by a three-legged stool, but two legs are now broken
China’s economic growth is supported by three primary legs:
1. export-led growth
2. real property growth
3. government spending
The first leg is clearly broken. US and European consumers can no longer consume at the debt-supported levels they have at the past. The second leg is also broken, in part because of the first. Rising unemployment, declining Chinese consumer confidence, and significant price declines in real property have slowed sales. So what is left is government spending. Government plays a more significant role in the Chinese economy than Western economies, but can increased government spending make up for the other legs of the stool?
The consensus among economists is “no.” And even more worrying, is the belief that Chinese government policy response could make the global financial crisis worse.
Roubini: The Rising Risk of a Hard Landing for China
Nouriel Roubini, the NYU economics professor that predicted many elements of this global meltdown, writes (at RGEMonitor, reprinted with commentary at JapanFocus) that there is strong evidence that China is facing a hard landing. Roubini points out that a hard landing actually still means a 5-6% growth rate. 9-10% growth is needed to absorb 24 mm new entrants into the labor market, including 12-14 mm poor rural farmers. A 5-6% growth rate means a significant risk to social stability and continued political control, so its clear that Chinese leaders are in a tough place. John Pomfret concurs.
Unfortunately, according to Roubini, China is still an export-led economy without the ability to crank up domestic consumption to absorb its domestic production capability. Roubini:
Note that China is an economy is structurally dependent on exports: net exports (or the trade balance surplus) are close to 12% of GDP (up from 2% earlier in the decade) and exports represent about 40% of GDP. Real investment in China is about 45% of GDP and, leaving aside the part of this investment that is housing and infrastructure spending, about half of this capex spending goes towards the production of new capital goods that produces more exportable goods. So, with the sum of exports and investment representing about 80% of GDP, most of Chinese aggregate demand depends on its ability to sustain an export based economic growth.
Because China’s GDP growth is dependent on exports, when exports go away, there is no domestic consumption to keep fueling growth. Which means that factories need to get shut down and people laid off.
Financial Times: China needs a true change of course
The Financial Times, on 11/10, published an editorial that applauded China for cutting interest rates and announcing the large RMB4 trillion stimulus package. But at the same time, the paper criticized Chinese policy makers for doing too little, too late:
China’s growth to date has been phenomenal, but it was based on exports and investment, at the expense of consumption. China almost aimed to be a supersized South Korea: in 2005, capital investment made up more than half of China’s gross domestic product. The capital-intensity of its growth also meant profits grew strongly as a share of GDP. But employment growth has slowed since the 1980s, so workers have gained small benefit.
Undervalued RMB and a lack of domestic safety net have caused Chinese households and companies to save. This “Supersized Korea” inadvertently created a “savings glut” which poured Asian savings into Western countries, flooding the markets with cheap capital.
Setser: Unhelpful - China never did what it needed to do.
According to Brad Setser, Chinese policy makers knew that China’s “Supersized Korea” strategy needed to change and that the strategy was not sustainable on a global level:
…it also turned out that China never really carried through on its 2004 and 2005 and 2006 and even 2007 rhetoric that it planned to rebalance its economy.
Back in 2004 China’s leaders generally got the benefit of the doubt…most observers expected that China’s leaders would be able to deliver when they announced their plan to shift the basis of China’s growth away from exports and investment. Chinese policy makers generally had a pretty good track record of doing what they said they would do.
But four years after China indicated that it wanted to rebalance its economy, its economy looks more unbalanced than ever – its current account surplus is far far larger than in 2004, and investment accounts for a higher share of GDP than in 2004…
The underlying problem we are faced with is a global shortfall in demand. Because China did not allow its currency to appreciate when times were good, and did not stimulate domestic consumption, China can only help soak up their own production overcapacity through government spending.
Michael Pettis - China Financial Markets
11/20 - Rising unemployment increases the pressure for misguided trade policies
11/16 - Would a trade war help solve the problem of excess capacity?
11/13 - Can Smoot-Hawley return in a wholly different guise
Michael Pettis, professor at Peking University’s Guanghua School of Management, has been the premier blogger on China’s economy and financial markets. Earlier this year we followed his writings on RMB appreciation and the need for a one-time maxi-revaluation of the RMB. Obviously, things have changed.
He has written on a few themes recently, influenced in part on his reading up on the Great Depression. Here are some of the key insights:
1. Unemployment is putting a lot of pressure on Chinese policy makers–potentially to do counterproductive things like export subsidies or even RMB depreciation.
The employment outlook is looking worse and worse. According to a Financial Times report, the official urban unemployment rate is only 4% but this excludes all rural migrants to the cities. According to Pettis, most people believe official urban employment rate significantly understates real urban unemployment, and the real level could be as high as 10-11%.
The key to social stability is adequate employment growth. That growth either has to be fueled by maintaining exports, or increasing domestic consumption. But there are important reasons why domestic consumption won’t increase. For one, the lack of safety nets in health and elder care cause Chinese households to save in order to self-insure their risks for illness or health care emergencies.
The “super-sized Korea” response would be to stimulate exports, depreciate the RMB, and try to get the export machine humming again. But China is simply too big to play this game. According to Pettis:
Export subsidies, depreciating RMB – all of this might seem to make sense if you look at China as divorced from the global balance of payments system. These measures to boost exports are, after all, pretty standard ways of increasing production.
But if you think of China’s role within the global balance of payments, it seems to me that this is little more that a form of Smoot-Hawley-with-Chinese-characteristics. Global demand is slowing, just as it did in the 1930s, and China as the leading source of global overcapacity is trying to address its global demand problem by shifting the burden abroad.
But it seems quite plausible that Chinese policymakers will do everything necessary to reduce unemployment, reduce social unrest, and maintain political legitimacy. And shifting the problems abroad might work for a while until and unless Western countries respond with trade barriers and protectionism.
2. The exporting countries that have more productive capacity than domestic consumption (the “current account surplus” countries like China) will bear the most pain in the recession.
Most people are comparing the United States of today to the United States of the 1930s. But Pettis argues that this is not the right analogy. The correct analogy is between the US of the 1930s and China of today. In both cases, each country was the source of massive productive overcapacity, and export-led growth. In both cases, domestic consumption was not sufficient to soak up domestic production. And in the case of Smoot-Hawley, US policy makers responded with protectionism because European demand for US goods crashed by 70% in 3 years. And ultimately, the US bore the brunt of the pain.
Today it is China who is exporting overcapacity and it is the US who is consuming too much, fed by Chinese financing. With the collapse of bank intermediation US households and businesses are cutting consumption and raising savings. This is a necessary adjustment. Calling on the US government to engage in massive fiscal expansion to replace lost private demand is crazy. It means that we should continue the current game that has led us into so much trouble, but instead of having US over-consumption and rising debt at the private level we must have it at the public level.
If Keynes were around today he would probably make the same point he did over 60 years ago. Demand must be created by the current account surplus countries, which have, to date, relied on net exports to protect themselves from the consequence of their overcapacity. They must force demand up quickly in order to close the gap, and since expecting private consumption to rise quickly enough is unrealistic, it has to be public consumption – a large fiscal deficit.
Just as the US stupidly tried to increase its ability to dump capacity abroad by creating import restrictions (which has the effect of further expanding domestic production), China seems to be hoping for the same thing by increasing export rebates and slowing the currency appreciation (there is even increasing talk of depreciation).
The responsibility is for the Chinese government to close the gap in Chinese production and Chinese consumption, and that means public spending since private consumption is not going to rise fast enough. Lets hope that Smoot-Hawley with Chinese characteristics does not come to pass.
3. The only way out is massive fiscal stimulus from the “current account surplus” countries like China
China’s RMB4 trillion stimulus package is a good step in the right direction. And the provinces have put together a wish list of projects totalling RMB 10 trillion or more, according to AP and CCTV (h/t China Digital Times). But its not clear that all of these projects are actually incremental projects and many were already planned. This is headed in the right direction but there seems to be a lot of skepticism that fiscal stimulus in China, where graft and corruption could soak up some of the money, will be successful.
Morgan Stanley: Further Growth Forecast Downgrade amid Deeper Global Recession
Morgan Stanley also indirectly confirms my uncle’s three legged stool framework. According to Morgan Stanley, 45% of China’s exports go to US, Europe, and Japan. And 30% of total fixed-asset investment goes into export-oriented manufacturing. So the first leg is highly dependent on the developed economies. Secondly, consumer confidence in the property sector is damaged, with people holding back. Slow property sales will lead to slow investment. Finally, fiscal stimulus is the third leg.
According the Morgan Stanley, likely policy response will be:
1. more base-interest rate cuts
2. more bond issuances for infrastructure e.g. railway
3. reduced taxes
4. boosting property sector
5. energy price normalization
6. agricultural support to farmers
Biggest downside risk is collapse in real estate investment.
My conclusion
Here’s my conclusions:
* China’s equity markets could fall further. Many listed companies are dependent on real property or export markets.
* China’s property markets could fall further. Not only are private individuals freezing up, but the government is also making significant investments in public housing. That might have some effect on price levels for private housing. To early to buy.
* RMB will neither appreciate or depreciate. It will likely hold the dollar peg at the current level, for quite some time.
* China’s labor markets will get more attractive to employers, but less attractive for employees and job seekers. There will be a large number of unemployed new graduates. There is risk of social unrest.
* Freedom of speech and media will likely be curtailed further in the future as the risk of social unrest increases.
In summary, the world doesn’t look as wonderful as it once did.
Joined: 07 Feb 2007 {Posts: 1829 } Location: Lookin DC Metro, Feelin Geneva
Posted: Thu 04 Dec 2008 13:29 Post subject:
DChapman wrote:
Thanks for posting that. It will be very interesting to see how this pans out.
Yes it will, the trick will be for China to keep the economy stable enough to avoid mass riots that literally turn into revolution...as usually, in Chinese history, all revolutions come from rural peasants (or outsiders)...Mao knew this. Control the peasant, control China. The KMT didn't get this and hence, they had to run to Taiwan to keep their heads.[img][/img]
Joined: 27 Nov 2004 {Posts: 1763 } Location: Hudson Valley, NY
Posted: Thu 04 Dec 2008 14:26 Post subject:
Dragon Horse wrote:
DChapman wrote:
Thanks for posting that. It will be very interesting to see how this pans out.
Yes it will, the trick will be for China to keep the economy stable enough to avoid mass riots that literally turn into revolution...as usually, in Chinese history, all revolutions come from rural peasants (or outsiders)...Mao knew this. Control the peasant, control China. The KMT didn't get this and hence, they had to run to Taiwan to keep their heads.[img][/img]
Exactly. A stable China is necessary for the stability of the planet. I still try not to purchase Chinese products. Let's hope that this does not turn into a disaster, it would not be good for anybody in the world of today.
Joined: 07 Feb 2007 {Posts: 1829 } Location: Lookin DC Metro, Feelin Geneva
Posted: Thu 04 Dec 2008 18:46 Post subject:
My biggest concern is China trying to channel domestic discontent into greater nationalism. Prime targets are Taiwan first and foremost and then Japan.
Joined: 07 Feb 2007 {Posts: 1829 } Location: Lookin DC Metro, Feelin Geneva
Posted: Mon 23 Mar 2009 14:33 Post subject: China and the Global Recession: Part I
I'm currently writing for the Center for New Politics and Policy at the University of Denver blog.
My first piece on China came out today.
Quote:
BFPR ANALYSIS
By Collin Spears, Chief Foreign Policy Correspondent,
Washington D.C. Bureau
The consensus of mainstream China analysts is that the Chinese Communist Party (CCP) is a unified entity that is destined to guide China into a new golden age where it will enjoy global superpower status. This sanguine narrative maybe challenged as the current global economic recession has served to elucidate the genuine fragility of China’s political economy. Stability in the immediate future, let alone, decades from the present is not a fact to be taken for granted, but a likely possibility to be continuously observed and evaluated.
The Chinese leadership is less of a cohesive organism than a mixture of overlapping and competing regional, ideological, and institutional interests. This leaves China vulnerable to conflict. The glue that binds the various CCP factions and the moneyed elites is a vast patronage system made possible by 20 years of unprecedented economic growth, no Maoism or a constitutional “balance of powers”. The Chinese elite are conscious of this. Even President Hu Jintao recognized the importance of various factions to maintaining national stability by designating two possible successors from divergent ideological perspectives, Xi Jinping and Li Keqiang. The CCP has also been touting the phrase “zhengdi tuandui” (team of rivals) in the media, in reference to political cooperation, which seem to be part of President Hu’s larger goal of creating a “Harmonious Society”. China’s ability to realize this harmony is heavily dependent on the financial liquidity that feeds its “Leviathan”.
Most sources will site China as the third largest economy in the world, just behind Japan; however, according to the World Bank and IMF (2007 figures), China has the world’s second largest economy, if Gross Domestic Product (GDP) is adjusted by Purchasing Power Parity (PPP). The PRC (People’s Republic of China) has $1.9 trillion USD in foreign exchange reserves, which provides it with a measure of security against the current global recession.
Unlike the world’s two largest economies, America and Japan, China will likely avoid a domestic recession, but it has not escaped unscathed. From October to December last year, a collapse in exports only exacerbated the slowdown in China’s growth already occurring since January 2008. The latter was actually purposely created by the implementation of domestic banking policies intended to fight inflation. By the 4th quarter of 2008 growth had slowed to a meager 6.8 percent, and the Chinese stock market had also lost 65 percent of its value (roughly $3 trillion USD).
Chinese Premier Wen Jiabao, recently made the optimistic prediction, that despite the economic downturn, China will see an 8 percent economic growth rate in 2009. Even an 8 percent growth rate would still fall under the decade average of 11 percent. The International Monetary Fund (IMF), being less assured, projected China’s 2009 growth at just 6.7 percent. It should be remembered that Chinese figures should always be viewed with healthy skepticism due to weaknesses in data collection and ambitious local officials seeking to aggrandize themselves before their superiors. Counterintuitively, some analyst actually believe, overall, China routinely understates growth to avoid the appearance of an economic bubble.
It is likely that the source of Wen’s confidence is the Chinese government’s proposed stimulus plan and the current state of the banking system. Chinese banks have limited international exposure; being less integrated, they were not as affected by the financial crisis. The PRC’s $584 billion USD (~4 trillion Yuan) stimulus package is roughly 6% of its total GDP. The package will focus on training migrant workers, research and development and improving infrastructure. There is also a special emphasis placed on improving domestic companies’ international competitiveness by streamlining the approval process for these companies to make foreign acquisitions, especially in automotives; textiles; energy; electronics and machinery sectors.
China’s banks are funding this corporate expansion by lending at a higher rate than at any time within the last year. It is expected that Chinese corporate investment of $16.3 billion last year could double this year. Globally the value of mergers and acquisitions has dropped by over 35%. Chinese companies have particularly focused on buying up billions of dollars in strategic natural resource assets in Iran, Brazil, Venezuela, and France. The Chinese government has used loans in Russia, Brazil, and Venezuela to ensure state owned energy companies secure deals. For example, China will supply up to $25 billion in loans to Russia in exchange for long term deals for the China National Petroleum Corporation. This will likely spur further concerns over future availability and price of these resources in nations that are in competition for them.
This is a sea-change in activity considering the attitude of the CCP in 2007. In that year, the CCP established credit quotas that domestic banks were subject to and they were continually adjusted upwards by the People’s Bank of China, the country’s central bank, as inflation became a significant concern. Exports grew only 9.4 percent for 2008 a downward trend from the decade’s average of 20 per cent. Export growth in January 2009 was -17.5 percent, industrial production also dropped. After the conditions of the last two years, the state-owned banks (SOB’s) are quite willing to follow the stimulus mandate to increase lending and they also cannot now be held responsible for future nonperforming loans. Much of the stimulus money will be cycled through the banks and loaned to State-owned Enterprises (SOEs) and local governments. The CCP Standing Committee, partially in response to current and anticipated public pressure, have already made vague comments about the need for more transparency in how the stimulus package is spent, to head off corruption that could lead to public outrage.
China’s financial liquidity is largely a result of its people’s exceptionally high savings rate; China’s households save nearly 25% of their disposable, although they get low or even negative rates of return from the banks and financial markets. The recent decrease in exports has inversely effected employment, making the situation of the most vulnerable citizens precarious. The Asian Development Bank has found that China has one of Asia’s highest income inequality rates. In 2004, the combined income of the richest 20 percent being 11.4 times the aggregate income of the poorest 20 percent. These numbers have gotten progressively worse every year since. China has been trying to grow its domestic market, but consumption was low before the global recession and savings high due to the lack of social safety nets. There are three-year plans to provide universal health care and education. Currently, Chinese consumer spending accounts for only 35 percent of China’s GDP, whereas in America it is two-thirds.
By February of 2009, there were 20 million unemployed migrant workers, which was double the estimate of December 2008; and an additional 6 to 7 million low skilled rural residents are expected to join the migrant workforce, as many multinationals are cutting back or shutting down factories. For the employed, raises in salary have fallen for the first time in 4 years. The only upshot is that wage deflation somewhat halts China’s recent loss in price competiveness regional revivals, such as Vietnam, Philippines, and Cambodia.
There has been much talk in the Western media over the last year concerning Chinese government crackdowns on ethnic minorities in the provinces of Xinjiang and Tibet, but this behavior is not isolated to minorities on the periphery of China Proper; to the contrary, the majority of these actions seems to be in response to the uptick in “mass incidents” in Han majority areas.
The Chinese government has hired more than 40,000 state employees to police the 250 million Chinese that are on the internet in an effort known as the “Golden Shield Project”. Thousands of websites have been banned or censored and even text messages have been filtered. Many analysts supposed the increase in arrest and crackdowns were temporary, due to sensitivity around the Olympics Games, but this has proven incorrect. The crackdowns are directed at any criticism of the government that could cause poplar discontent, such as the “Tainted Milk Scandal” and last springs’ Sichuan Earthquakes, as well as any talk of democracy, Taiwan, Tibet, and other such contentious issues. It maybe that this is a two pronged approach, as Premier Wen, in early March, made his first internet address to the online Chinese community to encourage controlled discussion as an alternative to citizens possibly taking to the streets of China’s major cities.
The Chinese government has not published official figures on “mass incidents”, a CCP term for riots; demonstrations; and protests since 2004. In that year 74,000 incidents were recorded, a 28% change over the previous year. Foreign analysts, drawing on Chinese sources, estimated the 2005 figure to have been 80,000-85,000. Considering the trend line, starting from 1993, there is no reason to think the number of incidents has not increased at the historic average of 20% a year. The weak performance of the PAP in the pre-Olympic riots in Tibet, which resulted in the PAP forces reportedly losing control of the situation and forcing the People’s Liberation Army (PLA) to become involved, surely caused alarm inside the CCP and the military. In January 2009, President Hu gave an ominous warning that the People’s Armed Police (PAP), that they will face difficult challenges ahead.
There has also been an increase in the number of “black houses,” unofficial jails for citizens that exercise their right to petition the national government in Beijing, a last desperate attempt to addresses grievances with provincial officials peacefully. The Chinese government denies the existence of these jails, but citizens are being abducted off the street, usually at the behest of local party cadre, in or in route to Beijing, to prevent them from filing embarrassing appeals. The state media has reported that 10 million such petitions have been filed in the last five years on complaints as diverse as unjust taxation, illegal land seizures and unpaid wages.
The fundamentals of the Chinese economy may be strong, but they are not “harmonious”. The history of China is instructive; in that, most revolutions in China have come from rural areas in bad economic times when the central government is seen as impotent, having lost the “Mandate of Heaven”. This “right of rebellion” against an unjust or ineffective rule has been a part of Chinese political philosophy since the Zhou Dynasty (1045 BC to 256 BC). The CCP is acutely aware of this history; its own origins lie in a rural populist movement led by a charismatic leader against a corrupt and incompetent regime. The CCP has also been a diligent study of how perestroika and glasnost led to the fall of the Soviet Communist Party.
The current global economic crisis has revealed significant cracks in China’s political and economic system. Harmony will be heavily dependent on the length of the global downturn and how adaptive and not reactive the CCP is to changing circumstances. It will also be contingent upon if the CCP earnestly intends to make substantive movements toward greater freedom of speech, tort reform, restraining graft and banking reform. If recent overtures from the party elites are just a guise designed to ride out any potential threats to party power by strengthening security forces and drawing out potential enemies, this could be catastrophic, especially if the party’s patronage system’s life-blood does indeed dry up, corruption could increase in tandem with poverty. These twin forces would disproportionately strike rural areas, where most Chinese still live. In this situation the CCP’s “Great Wall” against the people will be the security forces. Due to the fractious nature of Chinese politics, it is quite possible that some members of the elite, especially of the tuanpai (populist faction) or even the military, could exploit this situation to their own political advantage. They could use populist appeals targeted to the urban poor and rural peasants to weaken their rivals. Hopefully the global economic downturn will be short lived or those who keep predicting China’s inevitable success will have to hedge their bets on the CCP reforming itself in a crisis. Historically, power does not willingly concede when under threat.
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May 17, 2009
The China Puzzle
By DAVID LEONHARDT
On Timothy Geithner’s first day as a Dartmouth freshman, while he was walking across campus on his way to register for classes in the fall of 1979, he heard a man speaking Thai — swearing in Thai, to be precise — from a balcony. Geithner found this amusing, because only a couple of months before, he left his home in Thailand, where his father worked for the Ford Foundation, to move to Hanover, N.H. So he stopped to talk to the man, who turned out to be David Keenan, a Chinese teacher at Dartmouth. The two quickly realized that they had a lot in common; among other things they attended the same schools, about a decade apart, in Bangkok and Delhi. (The cause of Keenan’s swearing, alas, has been lost to history.) Having established a rapport, Keenan then decided to do a little salesmanship. He urged Geithner to take Chinese, the only Asian language that Dartmouth offered at the time.
Geithner did, and found that he liked it. Learning another Asian language, he told me recently in his soaring office at the Treasury Department, “was a nice little piece of continuity for me.” He ended up majoring in government and Asian studies and taught basic Mandarin classes to make some money. After Dartmouth, he attended the School of Advanced International Studies at Johns Hopkins. He then spent three years at Kissinger Associates, working with Brent Scowcroft, the future national security adviser, and helping Henry Kissinger write chapters on China and Japan for one of his books. From there, he joined the Treasury Department and began a meteoric rise through the bureaucracy.
In the five months since Barack Obama introduced him as the next Treasury secretary, Geithner has already run through what seems to be a career’s worth of images: the brilliant technocrat whose appointment caused stocks to soar; the neophyte public figure who flopped in his debut; the regulator who has grown too close to Wall Street; the Obama adviser with the same unflappable nature as his boss. One image that hasn’t yet attached itself to him, however, is his original professional image. By training, Tim Geithner is a China hand. And though the immediate financial crisis is likely to dominate his tenure at Treasury, the economic relationship between the United States and China may ultimately prove just as important. It could be crucial to preventing the next crisis.
Over the past decade, China and the United States have developed a deeply symbiotic, and dangerous, relationship. China discovered that an economy built on cheap exports would allow it to grow faster than it ever had and to create enough jobs to mollify its impoverished population. American consumers snapped up these cheap exports — shoes, toys, electronics and the like — and China soon found itself owning a huge pile of American dollars. Governments don’t like to hold too much cash, because it pays no return, so the Chinese bought many, many Treasury bonds with their dollars. This additional demand for Treasuries was one big reason (though not the only reason) that interest rates fell so low in recent years. Thanks to those low interest rates, Americans were able to go on a shopping spree and buy some things, like houses, they couldn’t really afford. China kept lending and exporting, and we kept borrowing and consuming. It all worked very nicely, until it didn’t.
The most obviously worrisome part of the situation today is that the Chinese could decide that they no longer want to buy Treasury bonds. The U.S. government’s recent spending for bank bailouts and stimulus may be necessary to get the economy moving again, but it also raises the specter of eventual inflation, which would damage the value of Treasuries. If the Chinese are unnerved by this, they could instead use their cash to buy the bonds of other countries, which would cause interest rates here to jump, prolonging the recession. Wen Jiabao, China’s premier, seemed to raise this possibility in March, in remarks to reporters at the end of the annual session of China’s Parliament. “We have lent a huge amount of money to the U.S.,” Wen said. “Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” In all likelihood, this was mostly posturing. Were China to cut back sharply on its purchase of Treasury bonds, it would send the value of the bonds plummeting, hurting the Chinese, who already own hundreds of billions of dollars’ worth. Yet Wen’s comments, which made headlines around the world, did highlight an underlying truth. The relationship between the United States and China can’t continue on its current path.
It has already helped create the global economic crisis, by splashing cheap money around the world and enabling American indebtedness and overconsumption. This country is now suffering through its worst recession since the early 1980s, one that could ultimately become the worst since the Great Depression. In China, the collapse of global trade has eliminated 20 million jobs along the industrial southern coast, according to Beijing’s official numbers. One Obama adviser told me the real number may be much higher.
So putting the global economy onto a more sustainable path will require dealing with the imbalances between China and the United States. In the broadest terms, this will mean that Americans must consume less and that Chinese must consume more. Domestically, Obama’s economic agenda is organized around the first half of this equation. He has said that economic growth must rely less on consumer spending than it has, and he is pushing for a series of investments — in education, science, medicine and alternative energy — the fruits of which are meant to replace consumption. But those fruits won’t mature as quickly as American households are paring back. For the sake of the global economy, persuading China to consume more will be crucial, too. It will also make a big difference to China’s 1.3 billion citizens. Most are still poor enough that consumption doesn’t mean yet another Barbie or iPod; it means basic comforts, like medical care and transportation.
Moving to an economy based more on consumption and less on exports happens to be the policy of the Chinese government, and has been since 2003. Its latest five-year economic plan, announced in 2006, was organized around the idea. “The biggest problem in China’s economy,” Wen said in 2007, “is that the growth is unstable, imbalanced, uncoordinated and unsustainable.” Remarkably, though, the Chinese economy has become even less reliant on household spending, and even more reliant on business and government spending, in recent years. Consumer spending now makes up about 35 percent of China’s gross domestic product, down from 40 percent in 2004 and almost 50 percent in the early 1990s. By comparison, the share is 54 percent in India, 57 percent in Europe and 70 percent in the United States.
The challenge for Geithner and the rest of the Obama administration, then, is persuading China to live up to its own five-year plan.
***
Given Geithner’s history with China, his tenure as Treasury secretary could hardly have gotten off to a worse start. As part of his confirmation process, senators gave him a long list of written questions. One question was from Charles Schumer, the New York Democrat who has frequently criticized China for artificially holding down the value of its currency, the renminbi, who asked Geithner whether the U.S. should confront China on the issue. Geithner replied, in writing: “President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency.”
The answer immediately became the big story about the confirmation hearing. It seemed to signal that the Obama administration would take a tougher line than the Bush administration on probably the most sensitive subject between the two countries. Many Chinese leaders were incensed.
Foreign-exchange rates are maddeningly complex, but the debate over the renminbi is really just a part of the broader issue of the economic imbalances between China and the United States. When a country exports more than it imports, as China has, the value of its currency tends to rise. Exports then become more expensive (and thus decline), while imports become relatively cheap (and increase). It’s a self-correcting system that, theoretically, prevents big trade gaps between countries. But China has frequently intervened in the foreign-exchange markets to hold down the value of the renminbi and keep its exports booming. It has become less aggressive about doing so over the past few years, responding to international pressure, and the renminbi has risen more than 20 percent relative to the dollar. Still, many American economists say that it still appears to be undervalued by about 10 to 20 percent. The Chinese tend to take umbrage at this analysis, because it suggests their boom has come at the expense of others.
Against this backdrop, Geithner’s debut as Treasury secretary struck a nerve in China. It was also personally painful for him. In the four months since, he has set out to undo the damage. After the hearing, administration officials quickly put out the story that the words about manipulation weren’t really Geithner’s. They were written by a midlevel staff member, who was helping Geithner answer the hundreds of written questions from senators. Geithner, staff members said, did not mean to signal a new hard line.
Once in office, Geithner himself also began reaching out to the Chinese. “I have talked to my counterparts in China over the past few months much more than I’ve talked to my counterparts from any other country,” he told me. During the G-20 meetings in London last month, he traveled to the Mandarin Oriental Hotel for a late-night meeting in the suite of Vice Premier Wang Qishan. The two have also spoken regularly by phone. When I asked Geithner whether his language skills were good enough to make translators unnecessary, he laughed and said it had been a long time since he taught Mandarin. But he and Wang still seem to have developed a tentative rapport, thanks in part to their similar backgrounds. Wang has been nicknamed the Fireman because, like Geithner, he owes his rise to the work he has done on various economic crises. “He’s my kind of person,” Geithner said, “pragmatic” — the ultimate compliment in the Obama circle — “very direct.”
Frequent as the conversations with the Chinese have been, though, their content is telling. They have not focused on the imbalances in consumption and trade. Instead, the discussions have been about the comparatively tame issue of what the two countries have been doing to stimulate the global economy. Unlike most European countries, the United States and China have enacted big stimulus programs. Geithner has also walked Wang through the administration’s plan for bringing down the budget deficit in the future, which is meant to assuage Chinese fears that the dollar, and the value of Treasury bonds, could crash.
Since Geithner’s confirmation hearing, the Obama administration’s general approach to China has been something of a charm offensive. When Secretary of State Hillary Clinton went to Beijing in February, she made sure to avoid any suggestion that she was criticizing the government’s human rights record, as she did during a 1995 visit as first lady. At his G-20 bilateral meeting with Chinese leaders, Obama described China as “a great power,” a phrase Wen is fond of using. And when the Treasury Department issued its annual report on foreign currencies in mid-April, it concluded that China was not manipulating its currency. Instead, Geithner praised China for taking “steps to enhance exchange-rate flexibility,” a reference to the recent rise in the renminbi.
The message that has been coming from Beijing, meanwhile, has sounded almost hostile. In the weeks that followed Wen’s comments at the end of the Parliament session, Chinese leaders made clear that the aggressive posture wasn’t a one-time event. In late March, Zhou Xiaochuan — the head of China’s central bank and the senior official who’s closest to Geithner — gave a speech suggesting that the dollar be replaced as the world’s reserve currency. In late April, the minister of commerce published an op-ed in The Wall Street Journal saying that American complaints about China’s trade policy would “seriously test China-U.S. economic and trade relations.”
The most remarkable aspect of these remarks is how much of a departure they are from China’s usual stance. Deng Xiaoping, the Chinese leader who ushered in its market reforms starting in the late 1970s, famously gave his country the following advice: “Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.”
Obama administration officials take comfort in the fact that the Chinese haven’t followed up their confrontational words with confrontational actions. This seems to indicate that the words are intended to soothe a domestic audience upset about job losses more than they are a sign of actual policy (much as Geithner’s and Obama’s rhetoric on trade is). But if nothing else, the last few months have suggested that China is no longer content to maintain a low profile.
***
When economists describe the relationship between China and the United States, it often sounds circular and even permanent. We save too little and they save too much. They export too much and we consume too much. The situation can seem to be a reflection of Chinese and American cultures, with their respective attitudes toward thrift and hedonism.
Yet the huge imbalances between the two economies are actually a very recent phenomenon. Throughout most of the 1990s, China’s current account surplus — the value of exports minus the value of imports — equaled less than 2 percent of its gross domestic product. As late as 2001, this surplus was only 1.3 percent of G.D.P. But then it began soaring. Last year, it was 10 percent of G.D.P., according to the World Bank. In more concrete terms, China sold $338 billion worth of goods to American consumers and business, more than the combined annual revenue of Microsoft, Apple, Coca-Cola, Boeing, Johnson & Johnson and Goldman Sachs. American businesses sold only $71 billion to the Chinese.
How did this happen? Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington, compares the relationship to that of an addict and a drug dealer. Americans became hooked on cheap goods and cheap money, and China came to depend on the income from selling those goods. Chinese leaders didn’t set out with a grand plan to create an enormous trade gap, Lardy argues, but each step along the way seemed to make sense. “I think they genuinely fell into this,” he says. The authoritarian government could stifle dissent with jobs. Local party leaders were rewarded for presiding over economic growth, and exports were the easiest way to achieve it. Once the export sector was built up, the cost of allowing the renminbi to appreciate was enormous.
If you think of the exports as the first link in the causal chain, the resulting pile of Chinese savings is the second. Much of this savings has been by the corporate sector, which is subsidized by the government in all sorts of ways (an undervalued currency, low interest rates, cheap energy). The economic boom brought big profits, and companies held on to much of them. The government has also increased its savings in this decade by collecting more taxes and, until the financial crisis, running a budget surplus. And households increased their own savings in the 1990s, in reaction to the dismantling of many bloated state-run companies and the cradle-to-grave benefits, known as the “iron rice bowl,” they once provided to their workers. When a Chinese citizen is rushed to the hospital after a car accident today, the first stop for the victim’s family is often the cashier’s window. Many hospitals won’t admit patients until they have paid, and many families have no health insurance. Instead, they insure themselves, by saving.
These vast piles of savings have made up the crux of what Ben Bernanke, the Federal Reserve chairman, has called the “global saving glut.” By this telling, the imbalances can seem to be overwhelmingly China’s fault. But that’s not really the case. Just as policy makers in Beijing encouraged the rise in savings and exports, American policy makers took steps that encouraged overconsumption. They allowed incomes for most families to stagnate, which made savings a luxury that many couldn’t afford and debt a way to finance rising living standards. Alan Greenspan and, to a lesser extent, Bernanke encouraged a series of financial innovations, like cash-out mortgage refinancings and interest-only mortgages, that tempted people to spend more and save less. Washington pretended — even argued — that there was no housing bubble. As Justin Yifu Lin, a Chinese economist who became the World Bank’s chief economist last year, says, “You can’t put this all on China.”
Even more to the point, China, like the United States, is now paying a price for the two countries’ co-dependent relationship. The coastal cities that experienced tremendous booms over the past decade are struggling with mass unemployment. Millions of recent college graduates, the demographic that often starts protest movements, are unemployed across China. Stocks have fallen more sharply than they have here. These are the consequences of the unsustainable growth Wen worried about in 2007. And they provide the Obama administration with perhaps its one compelling argument for why Beijing should listen to their advice: It’s in China’s interest.
“There is symmetry,” Geithner says. “We want the world to emerge from this with a different balance of domestic and export growth, here and around the world, and we want recovery to be a little less driven by the U.S. consumer, both for our purposes as well as for the world.” A more vibrant consumer economy in China would, by definition, mean spreading more of the bounty from China’s boom to its masses, rather than allowing it to pile up in corporate or government coffers. A better safety net would give households enough peace of mind to spend their money. The Chinese consumer could begin replacing some of the spending that had been done by the once-indefatigable American consumer. This spending would benefit companies all over the world, but none more than those in China.
***
At the end of a discussion with Lardy about the imbalances between the U.S. and China, I asked him what forms of leverage he thought the Obama administration had. “We have no leverage,” he replied. He then couched this slightly, saying that the administration could threaten the Chinese with trade barriers but that such threats weren’t likely to be very credible.
Geithner had told me that he considered Lardy one of the more insightful China analysts, and so I repeated the point about leverage to Geithner and asked for his reaction. He made it clear that he essentially agreed. “When I was last in this building,” he said, referring to his time as an international expert in the Clinton Treasury Department, “I was always thinking, What’s our next point of influence, of leverage?” But he could rarely find a good one.
Geithner then mentioned reading an old newspaper interview with Michel Camdessus, the head of the International Monetary Fund in the 1990s. Camdessus’s tenure included the Asian financial crisis and Mexican peso crisis, and some European leaders were unhappy about the extent to which the I.M.F. followed the advice of American policy makers, Geithner among them, in managing these crises. Geithner recalled that when the interviewer asked about this, Camdessus replied that America had influence disproportionate to its weight in the institution only when it had an idea others were willing to follow. The Camdessus strategy — make sure you have an idea worth following — will be the Treasury Department’s approach to China.
The strategy actually dates to the Bush administration and a series of meetings with Chinese leaders that Henry Paulson, Geithner’s predecessor, helped set up. If Obama’s advisers admire one aspect of President Bush’s economic policy — and coming up with another isn’t easy — it’s the effort to nurture a relationship with China. The meetings, which began in 2006, were called the Strategic Economic Dialogue. For the first sessions, Bernanke accompanied Paulson as a demonstration of respect to the Chinese and a sign of how seriously United States viewed the agenda. American and Chinese officials are now negotiating the logistical details of the next round of the dialogue, which will be jointly led by Geithner and Clinton. Internally, officials from State, Treasury and elsewhere in the administration have been jockeying for influence over China policy. But they all seem to agree that one of the main goals of the dialogue is to bring a wide variety of important Chinese officials — including those who represent industries and regions that have benefited from the imbalances — into the same room for the talks.
During the initial 2006 meetings, in a speech at the Chinese Academy of Social Sciences in Beijing, Bernanke laid out the essential parts of the argument that the Americans are likely to make this year. He began by ticking off what he called China’s “remarkable accomplishments”: the quintupling of per capita economic output, the lifting of 200 million people out of poverty and the like. But then, in the polite, technical manner of a central banker, he turned to its imbalances. He argued that by overinvesting in heavy industry, China had failed to grow as quickly as it could have (and to create more jobs for its people). It was devoting significantly more of its output to such investments than Japan or South Korea had during their respective rises in the 20th century, yet China was growing no faster than they had. That ran counter to economic theory and suggested, though Bernanke didn’t say so in these terms, that China was wasting resources. Rather than spreading the bounty of its boom and allowing households and businesses to find productive uses for it, China was spending so much on heavy industry and its export sector that it was necessarily propping up weak businesses. In 2006, this argument might have sounded like nit-picking. It doesn’t today.
There have recently been some signs that China has become more serious about dealing with its imbalances. For the first time since 2000, its trade surplus shrank, relative to G.D.P., last year. Late last year, China also cut taxes on fuel-efficient vehicles, which led to a surge in sales that helped Chinese consumers surpass American consumers, at least for now, as the world’s largest purchasers of vehicles. China’s economic planners also seem to have focused more in the last few years on highways and other infrastructure that would help households and sectors other than industrial ones. David Loevinger, the Treasury Department’s representative in Beijing, told me that when he visited the Great Wall recently, he drove on a highway that didn’t exist a year ago. And China has announced a plan to provide health insurance to hundreds of millions more people over the next three years. Jim O’Neill, the chief economist of Goldman Sachs, recently wrote that the health care expansion could prove to be “the most important development in the world economy.”
***
Geithner, along with other administration officials, insists that he is cautiously optimistic about the path China is on. And that’s understandable. It’s not especially pleasant to think about what the global economy will look like if China and the United States fail to fix their dysfunctional relationship.
The frequent flares of social unrest in China could spread, and the government could decide that its short-term problems take precedence over its long-term ones. It might then try to stimulate its economy at the expense of everyone else — the beggar-thy-neighbor approach — by reversing the recent rise of the renminbi, lavishing new subsidies on exporters and restricting imports. In an otherwise optimistic article in a recent issue of The Atlantic Monthly, James Fallows, an American writer living in China, pointed out that the United States followed a similar protectionist strategy during the Great Depression. As a big exporter, it felt the need to help its struggling manufacturers. Other countries soon retaliated, and the depression deepened.
For China, such a strategy would resemble a doubling down. It would benefit the same parts of the economy — the industrial sectors, the coastal south, the wealthy — that have already done the best. Living standards for the rest of China would continue to grow more slowly than the pace of economic growth suggests they should.
For the rest of the world, China’s retreat would mean slower growth. The much-anticipated day when the Chinese middle class became a global economic force would be pushed back. If China remained committed to a smokestack growth policy, the efforts to slow climate change would become all the more difficult. China’s energy needs have already caused it to become closer to the governments in Iran and Saudi Arabia, and if China moved even closer, it could further complicate the already complicated balance of power in the Middle East.
Here in the United States, we could delude ourselves into thinking that our consumer economy really was sustainable. We could put off the hard choices, and sacrifice, that will inevitably be part of building a new one. There may not be a single one of the world’s most vexing problems, in fact, that isn’t aggravated by the imbalances between the United States and China.
In an odd way, that reality makes Obama’s advisers more hopeful. Jeffrey Bader, who now runs the East Asian affairs office for the National Security Council, has pointed out that China has made a series of choices since Deng’s reforms — allowing more imports, joining international organizations, building ties with foreign governments it previously tried to overthrow — that were all “designed to be supportive of the existing order.” Geithner makes the same point: “They have a deep stake in the system now. And they recognize this.”
So it’s only reasonable to think that the United States and China will figure out how to solve their problems. Unsustainable economic trends are just that — unsustainable. But they can, unfortunately, cause a lot of damage before they are resolved.
David Leonhardt is an economics columnist for The Times and a staff writer for the magazine. His most recent article was an interview with President Obama.
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