James Surowiecki: Why The Chinese Don’t Spend!
Regardless of the reasons for thrift and hard work the Chinese mentality is underestimated. I dedicate this post to our Chinese readers who makeup our 3rd largest viewership.
Click Here to Read: James Surowiecki: Why The Chinese Don’t Spend!
Introduction (Via The New Yorker)
China makes, the world takes.” For decades, that has been the motto of the Chinese economy, which is built on providing an endless supply of goods for the rest of the world to buy. But these days there’s a palpable sense that this needs to change. Barack Obama, on his recent trip to Asia, called for a “rebalancing” of the world economy, meaning that China should save less and spend more, while the Chinese President, Hu Jintao, stressed his country’s “vigorous” efforts to promote consumer spending. Everyone wants Chinese consumers to spend more. So why don’t they?
It isn’t that China doesn’t spend at all: it’s already the world’s biggest car market, and consumer spending grew eight per cent annually in the past decade. But, proportionate to its economy, China spends far too little. Consumption accounts for just thirty-five per cent of G.D.P., significantly lower than for most Asian countries and only half the rate in the United States. Chinese households set aside a quarter of their disposable income, and, collectively, consumers and institutions put away $2.5 trillion every year. And in the past ten years consumption has actually fallen as a share of G.D.P. This makes the economy more dependent than ever on exports and investment, creating an imbalance in the global economy. It also means that Chinese consumers aren’t really reaping the full fruits of their labor. If Americans are addicted to living beyond their means, the Chinese are too adept at living beneath theirs.
Additional Excerpts (Via The New Yorkers)
One common explanation for this thrift is that it’s the product of “Confucian values.” Yet China has not always been so thrifty—in the eighties, consumption was more than fifty per cent of G.D.P.—and today other “Confucian” countries consume far more than China does. The real source of China’s underconsumption is the way it manages its economy. Credit isn’t always that easy to come by. China’s policy of holding down the value of its currency means that consumer prices are higher than they would otherwise be, which obviously discourages spending. And, as a recent McKinsey Global Institute study points out, once you move beyond China’s biggest cities, there’s often a dearth of retail outlets and products for sale. Potential spenders are also held back by systemic issues. Paradoxically, in this still putatively Communist society, families for the most part have to fend for themselves. Health insurance is limited in what it covers and far from universal, so getting sick can be a costly proposition. Only a fraction of the workforce receives unemployment benefits, while pensions are underfunded and haphazardly administered. A scarcity of student loans and subsidies for higher education, meanwhile, means that paying for college requires hefty savings. The inadequacy of the social safety net forces the Chinese to engage in “precautionary savings,” buffering themselves against disaster. A recent Brookings Institution study attributes much of the increase in household savings to the rising cost of health care, together with that of housing and education.
This doesn’t mean that China should start emulating the American model. There’s no denying that its economic strategy has yielded remarkable results. But there is a point at which you can oversave, and overinvest, and that’s where China seems to be. Its current approach depends on the willingness of countries like the U.S. to buy everything China makes while producing very little themselves, which is both risky and arguably unsustainable. More important, it’s not necessary: while some assume that striking a better balance between investment and consumption will hurt China’s economic growth and cost jobs, the opposite is true. A better safety net, higher wage growth, more options for consumers—these things will create more jobs, not fewer. For China, saving less and spending more will improve the lives of ordinary people in the present and make the economy stronger in the future. That’s the rarest of all things in economics: a free lunch. China should go ahead and eat it.
Click Here to Read: James Surowiecki: Why The Chinese Don’t Spend!
