Monday, 8 December 2008

China saves, the US spends, the economy crashes

It is a sign of China's growing confidence that its officials are able to blame US over consumption for the worlds ills.

The Chinese capacity for saving is well known. So how can we get the Chinese to spend more of their hard earned money?

The other topic that this blog tends to gravitate towards is the artificially low exchange rate that commentators suggest is kept low to encourage trade and hence jobs.

However, the two points above are in conflict. In today's FT the editorial suggests that to solve the under spending problem the currency should be allowed to appreciate. I happen to believe that this would not be enough. China should spend money on welfare schemes if they expect the average citizen to stop saving for a rainy day.

Whilst this might have worked for a while and the currency was allowed to slowly appreciate China has recently reversed this trend.

As we have mentioned before, this is to protect jobs and jobs are what matters.

The world should not bank on a currency appreciation any time soon. However unfair it might appear for China (with such a large surplus) to keep a currency rate too low the West had better get used to it and plan for it.

Chinese acrobats [FT]

It would have taken a heart of stone not to smile at the spectacle of Hank Paulson, US Treasury secretary, receiving a lecture on economic stabilisation from Chinese officials. Zhou Xioachuan, governor of the Chinese central bank, blamed US over-consumption for the crisis, while Wang Qishan, the leader of the Chinese delegation, urged Mr Paulson to guarantee the safety of Chinese investments in the US. At a separate event in Hong Kong, the chairman of China’s sovereign wealth fund pointed out that many developing countries had clearer and more consistent economy policies than Mr Paulson did. Ouch.

Yet just because Mr Paulson has stumbled badly in recent months does not mean that China is on the right track. Zhou Xioachuan is wrong to urge a higher savings rate in the US. The US consumer is in full retreat; were the retreat to become a rout, China’s factories would be among the first to be ruined. To commandeer Saint Augustine’s prayer: “Give us global rebalancing – but not yet.”

If the US has overconsumed, China suffers from the opposite malaise. The savings rate is close to 60 per cent of gross domestic product, and Chinese policy has centred on producing cheap products to sell to the US on credit. This cannot continue forever. China’s citizens deserve to enjoy more of the fruits of their labour, which means spending more and saving less. China’s concrete-pouring fiscal stimulus is unlikely to help. It should be handing cash to its own citizens and spending more on health, education and social security. China’s citizens save because they fear nobody will look after them in bad times – and bad times are coming.

A quick way to encourage domestic spending would be for China to allow the renminbi to appreciate. Until this summer, China had been doing that carefully. The appreciation has now stopped and last week the renminbi experienced its largest one-day fall against the dollar. Nobody should be surprised: China warned in October that this change in policy was on the cards. But it cannot be right for a country with such a huge surplus to resort to competitive devaluation. China’s main defence, for now, is that the renminbi is still appreciating against a trade-weighted basket of currencies. But if the dollar falls, the renminbi must not try to overtake it on the way down.

China must walk a tightrope. Too sharp an export slowdown risks domestic unrest, and neither can it allow a dollar collapse. Let us hope that China’s leaders are acrobatic. The world cannot afford a trade war with Chinese characteristics.


No comments: