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Brigadier
The Poor Man's Consumption Fix for China
Discussion of China's economy inevitably focuses on imbalance, the idea that the savings rate and investment are too high. Every policy wonk worth his salt is busy offering solutions to get China to consume more. However, while there are imbalances in the Chinese economy, the main cause is not what most people think. China's consumption as a proportion of GDP is not purposely repressed. Rather, it is a function of the way the country is urbanizing.
This misunderstanding partly explains the mystery of why instead of moderating, the imbalances have become even more extreme. Yes, China's consumption is lower than investment: The share of personal consumption in GDP has fallen, while personal savings rates have risen. This is bound to show up in the trade surplus, which is the difference between what a country produces and what it consumes.
But conventional wisdom follows this up by arguing that consumption is low primarily because both exchange rates and interest rates are held down. Critics then suggest that raising interest rates to provide savers with more income and appreciating the yuan to make imports cheaper would increase the share of consumption in GDP and in turn reduce the trade surplus. U.S. Treasury Secretary Tim Geithner repeated the exchange-rate trope during his most recent trip to Beijing last week.
What many critics don't appreciate is that for three decades China has been undergoing a major structural transformation from an agrarian to an industrial economy. Thirty years ago, China's population was 80% rural with agriculture accounting for more than one-third of GDP. Today the rural-urban population split is 50-50, while agriculture makes up less than 10% of GDP.
Workers have moved from less productive agriculture where labor's share of the value of production is almost 90%, to more capital-intensive industry where labor's share is only 50%. This transformation accounts for about 80 % of the decline in the share of household income in GDP over the past decade, equivalent to about six percentage points with repressed interest rates accounting for about 1.5 percentage points or about 20%, even as the absolute value of personal incomes has been increasing at an impressive 8% to 9% per year.
By itself, however, the decline in the share of household income to GDP does not fully explain the decline in the share of consumption. The other reason - although less significant - has been the surge in urban household savings rates. Many factors have been cited for contributing to this increase, including weak social programs, an aging population, saving for housing purchases. But the most important reason has been largely overlooked: domestic migration.
Savings rates of migrant workers are much higher than those of established residents, as much as twice as high in some cities. Without formal residency rights (called "hukou") that provide access to public services, migrants have more incentive to hoard for their rainy days, and hence less to consume. These migrants now account for around half of the labor force in many coastal cities, explaining their impact on the country's personal savings rate.
Overall, the structural transformation of China accounts for about 70% of the decline in consumption relative to GDP over the past decade, given its impact on the decline of household income coupled with the increase in urban savings rates. Financial repression and other factors are responsible to some extent, but only for the remaining 30%.
Macro imbalances may be becoming more extreme, yet on the whole this has been good news as workers shift to more productive activities. It's only in the eyes of the West that this is bad news since the steady decline in the consumption to GDP ratio is mirrored in the large trade deficits the U.S. runs against China.
This difference in perception affects Western policies designed to moderate China's trade imbalances. Most of the debate has focused on exchange and interest rates as it is easier to key in on headline-grabbing numbers instead of the complexities of a structural transformation. But with China projected to become 60% to 70% urban by 2020, the transformation can't be ignored. No matter what the changes in exchange and interest rates, China's consumption-to-GDP ratio is unlikely to turn sharply upward anytime soon.
If policy makers want to soften the impact of this structural change, they should stop recommending changes in the yuan or in the financial system and instead focus on the nuances of urbanization. The National Bureau of Statistics announced recently that China's urban population exceeded its rural one for the first time in history last year. Policy makers can't reverse urbanization, but they can accelerate it. If migrants had hukou or residence rights in the urban areas they worked in, they would automatically have the security to save less and consume more.
The alternative—appreciating the yuan to make its own exports less competitive—isn't attractive for China, and it wouldn't do much to reduce the U.S. trade deficit. Instead Western policy makers should help Beijing to better manage its internal migration to the cities. This could single-handedly turn China's trade account with the U.S. and Europe from surplus to deficit and thus remove a major thorn in relations.
---------- Post added at 11:34 PM ---------- Previous post was at 11:11 PM ----------
Three Big Myths About China
This week many Americans are getting their first introduction to Xi Jinping, the presumed next president of China, as he spends five days touring America. It is an important visit that will help set the course of U.S.-China relations, which are already tense, for the next several years.
Unfortunately, most of America’s conventional view of China is outdated or based on inaccurate information. America’s foreign policy establishment needs to rethink common myths about that nation or else risk following the wrong strategies for dealing with China’s rise.
Myth No. 1: China is primed for an Arab spring. When Americans see Xi Jinping hobnob with the political and business elite or catch a basketball game, they needs to realize they are not seeing a man who is about to seize power over a tottering country and an officialdom ready to implode. There is no Arab Spring on the horizon, as Senator John McCain declared last week. No, Xi Jinping is about to preside over a self-satisfied—perhaps overly smug—bureaucracy and a relatively happy population.
The major difference between China’s government and regimes like Mubarak’s in Egypt or Qaddafi’s in Libya is that there is far more diffusion of power than many Western observers realize. Unlike in Middle Eastern nations that have seen turmoil where despots clung to power for decades, buttressed by corrupt family members enriching themselves from the country’s coffers, China has mandatory retirement ages for even its most powerful political leaders.
The offspring of the nation’s leaders tend to go into the private sector to make fortunes, and there the Communist Party does not control most aspects of their lives. Moreover, senior leaders, once they retire, are not allowed to publish memoirs freely, take jobs in private industry, or travel abroad in a private capacity. And with more than 60 million party members, nearly every Chinese has a family member or close friend who is part of the system. Even if anger arises, there is no single unifying person or family for people to aim at to topple.
Myth No. 2: China is stealing American jobs by manipulating its currency. Many Americans believe the old line trotted out by analysts like Nobel Prize-winning economist Paul Krugman that China is stealing American jobs by artificially keeping its currency, the yuan, low. In reality those arguments don’t hold up to even basic scrutiny. True, China has pegged the yuan to the U.S. dollar, which is a form of manipulation, but the low exchange rate is not the real reason why China is outcompeting America for manufacturing jobs. Quite simply, China has become the world’s manufacturing hub because of efficient labor forces and superior infrastructure.
After all, Indonesia and Vietnam have millions of workers toiling for a quarter of the typical Chinese wage. Yet those nations have not been able to attract much manufacturing aside from light industry like clothing and shoe production, because their labor pools are unproductive and untrained. Even with China’s labor supply getting far more expensive—21 of China’s 31 provinces increased their minimum wage by an average of 22% in 2011—it is unlikely that lower wages in other countries will offset the benefits of China’s productivity and infrastructure anytime soon.
Instead of blaming China’s currency policies for America’s unemployment situation, the U.S. needs to cut red tape so that American companies can stop outsourcing so many jobs and start attracting more foreign investment. After all, Chinese businesses invested only $1.13 billion in the U.S. in 2011, versus $4.6 billion in Europe, according to China’s Ministry of Commerce.
Myth No. 3: China is trying to upend the world order. Despite its increasing military budgets, the Chinese government still spends more on its internal security than on its military. Historically, the country has rarely strayed far beyond its borders, or what it has considered its borders, including Taiwan and Tibet. In military ventures it has nothing like the U.S.’s Christian missionary-like zeal.
In fact, China prefers to downplay its power. It would rather take a free ride as America serves as the policeman of the world. It is far more likely to use aggressive words to balance American power than to actually use military force. It leaders are far more interested in making money and creating jobs than in spending the vast resources it would take to be the dominant power in international affairs.
---------- Post added 02-18-2012 at 01:33 AM ---------- Previous post was 02-17-2012 at 11:34 PM ----------
The Chinese vice president, Xi Jinping, met the US president, Barack Obama, and his own opposite number Joe Biden in Washington DC on Tuesday, after which the three released a fact-sheet statement on strengthening US-China economic relations. Of significance, China has agreed to open its auto insurance market to foreign competition, reports our Chinese-language sister newspaper Want Daily.
In the 20-point statement, Xi said China has decided to open up his country's mandatory third-party liability insurance for motor vehicles to foreign-invested insurance companies.
Meanwhile, to improve the imbalance in bilateral trade, China is committed to actively expanding domestic demand and stepping up tax reduction policies, as well as increasing importats.
"A rising China is a positive development, not only for the people of China but for the United States and the world as a whole," Biden was quoted as saying after the meeting by the official Chinese news agency Xinhua.
Xi, who arrived in Washington on Monday for a five-day official visit to the United States, stressed the two sides should also remain the basic pattern of mutual benefits and win-win results in their trade and economic relations.
Gao Hucheng, China's vice commerce minister, said the accompanying Chinese trade and investment delegations would buy US$27.1 billion of US goods including electronic materials, silicon chips, equipment and machinery, as well as farm produce.
The huge US deficit in trade with China has been the focus of economic and trade talks. China has sent business delegations to the US many times to look for ways to bridge the gap. When China's president, Hu Jintao paid a visit to the United States in January last year, his delegation signed purchase agreements worth US$45 billion, including an order for 200 Boeing passenger planes.
Discussion of China's economy inevitably focuses on imbalance, the idea that the savings rate and investment are too high. Every policy wonk worth his salt is busy offering solutions to get China to consume more. However, while there are imbalances in the Chinese economy, the main cause is not what most people think. China's consumption as a proportion of GDP is not purposely repressed. Rather, it is a function of the way the country is urbanizing.
This misunderstanding partly explains the mystery of why instead of moderating, the imbalances have become even more extreme. Yes, China's consumption is lower than investment: The share of personal consumption in GDP has fallen, while personal savings rates have risen. This is bound to show up in the trade surplus, which is the difference between what a country produces and what it consumes.
But conventional wisdom follows this up by arguing that consumption is low primarily because both exchange rates and interest rates are held down. Critics then suggest that raising interest rates to provide savers with more income and appreciating the yuan to make imports cheaper would increase the share of consumption in GDP and in turn reduce the trade surplus. U.S. Treasury Secretary Tim Geithner repeated the exchange-rate trope during his most recent trip to Beijing last week.
What many critics don't appreciate is that for three decades China has been undergoing a major structural transformation from an agrarian to an industrial economy. Thirty years ago, China's population was 80% rural with agriculture accounting for more than one-third of GDP. Today the rural-urban population split is 50-50, while agriculture makes up less than 10% of GDP.
Workers have moved from less productive agriculture where labor's share of the value of production is almost 90%, to more capital-intensive industry where labor's share is only 50%. This transformation accounts for about 80 % of the decline in the share of household income in GDP over the past decade, equivalent to about six percentage points with repressed interest rates accounting for about 1.5 percentage points or about 20%, even as the absolute value of personal incomes has been increasing at an impressive 8% to 9% per year.
By itself, however, the decline in the share of household income to GDP does not fully explain the decline in the share of consumption. The other reason - although less significant - has been the surge in urban household savings rates. Many factors have been cited for contributing to this increase, including weak social programs, an aging population, saving for housing purchases. But the most important reason has been largely overlooked: domestic migration.
Savings rates of migrant workers are much higher than those of established residents, as much as twice as high in some cities. Without formal residency rights (called "hukou") that provide access to public services, migrants have more incentive to hoard for their rainy days, and hence less to consume. These migrants now account for around half of the labor force in many coastal cities, explaining their impact on the country's personal savings rate.
Overall, the structural transformation of China accounts for about 70% of the decline in consumption relative to GDP over the past decade, given its impact on the decline of household income coupled with the increase in urban savings rates. Financial repression and other factors are responsible to some extent, but only for the remaining 30%.
Macro imbalances may be becoming more extreme, yet on the whole this has been good news as workers shift to more productive activities. It's only in the eyes of the West that this is bad news since the steady decline in the consumption to GDP ratio is mirrored in the large trade deficits the U.S. runs against China.
This difference in perception affects Western policies designed to moderate China's trade imbalances. Most of the debate has focused on exchange and interest rates as it is easier to key in on headline-grabbing numbers instead of the complexities of a structural transformation. But with China projected to become 60% to 70% urban by 2020, the transformation can't be ignored. No matter what the changes in exchange and interest rates, China's consumption-to-GDP ratio is unlikely to turn sharply upward anytime soon.
If policy makers want to soften the impact of this structural change, they should stop recommending changes in the yuan or in the financial system and instead focus on the nuances of urbanization. The National Bureau of Statistics announced recently that China's urban population exceeded its rural one for the first time in history last year. Policy makers can't reverse urbanization, but they can accelerate it. If migrants had hukou or residence rights in the urban areas they worked in, they would automatically have the security to save less and consume more.
The alternative—appreciating the yuan to make its own exports less competitive—isn't attractive for China, and it wouldn't do much to reduce the U.S. trade deficit. Instead Western policy makers should help Beijing to better manage its internal migration to the cities. This could single-handedly turn China's trade account with the U.S. and Europe from surplus to deficit and thus remove a major thorn in relations.
---------- Post added at 11:34 PM ---------- Previous post was at 11:11 PM ----------
Three Big Myths About China
This week many Americans are getting their first introduction to Xi Jinping, the presumed next president of China, as he spends five days touring America. It is an important visit that will help set the course of U.S.-China relations, which are already tense, for the next several years.
Unfortunately, most of America’s conventional view of China is outdated or based on inaccurate information. America’s foreign policy establishment needs to rethink common myths about that nation or else risk following the wrong strategies for dealing with China’s rise.
Myth No. 1: China is primed for an Arab spring. When Americans see Xi Jinping hobnob with the political and business elite or catch a basketball game, they needs to realize they are not seeing a man who is about to seize power over a tottering country and an officialdom ready to implode. There is no Arab Spring on the horizon, as Senator John McCain declared last week. No, Xi Jinping is about to preside over a self-satisfied—perhaps overly smug—bureaucracy and a relatively happy population.
The major difference between China’s government and regimes like Mubarak’s in Egypt or Qaddafi’s in Libya is that there is far more diffusion of power than many Western observers realize. Unlike in Middle Eastern nations that have seen turmoil where despots clung to power for decades, buttressed by corrupt family members enriching themselves from the country’s coffers, China has mandatory retirement ages for even its most powerful political leaders.
The offspring of the nation’s leaders tend to go into the private sector to make fortunes, and there the Communist Party does not control most aspects of their lives. Moreover, senior leaders, once they retire, are not allowed to publish memoirs freely, take jobs in private industry, or travel abroad in a private capacity. And with more than 60 million party members, nearly every Chinese has a family member or close friend who is part of the system. Even if anger arises, there is no single unifying person or family for people to aim at to topple.
Myth No. 2: China is stealing American jobs by manipulating its currency. Many Americans believe the old line trotted out by analysts like Nobel Prize-winning economist Paul Krugman that China is stealing American jobs by artificially keeping its currency, the yuan, low. In reality those arguments don’t hold up to even basic scrutiny. True, China has pegged the yuan to the U.S. dollar, which is a form of manipulation, but the low exchange rate is not the real reason why China is outcompeting America for manufacturing jobs. Quite simply, China has become the world’s manufacturing hub because of efficient labor forces and superior infrastructure.
After all, Indonesia and Vietnam have millions of workers toiling for a quarter of the typical Chinese wage. Yet those nations have not been able to attract much manufacturing aside from light industry like clothing and shoe production, because their labor pools are unproductive and untrained. Even with China’s labor supply getting far more expensive—21 of China’s 31 provinces increased their minimum wage by an average of 22% in 2011—it is unlikely that lower wages in other countries will offset the benefits of China’s productivity and infrastructure anytime soon.
Instead of blaming China’s currency policies for America’s unemployment situation, the U.S. needs to cut red tape so that American companies can stop outsourcing so many jobs and start attracting more foreign investment. After all, Chinese businesses invested only $1.13 billion in the U.S. in 2011, versus $4.6 billion in Europe, according to China’s Ministry of Commerce.
Myth No. 3: China is trying to upend the world order. Despite its increasing military budgets, the Chinese government still spends more on its internal security than on its military. Historically, the country has rarely strayed far beyond its borders, or what it has considered its borders, including Taiwan and Tibet. In military ventures it has nothing like the U.S.’s Christian missionary-like zeal.
In fact, China prefers to downplay its power. It would rather take a free ride as America serves as the policeman of the world. It is far more likely to use aggressive words to balance American power than to actually use military force. It leaders are far more interested in making money and creating jobs than in spending the vast resources it would take to be the dominant power in international affairs.
---------- Post added 02-18-2012 at 01:33 AM ---------- Previous post was 02-17-2012 at 11:34 PM ----------
The Chinese vice president, Xi Jinping, met the US president, Barack Obama, and his own opposite number Joe Biden in Washington DC on Tuesday, after which the three released a fact-sheet statement on strengthening US-China economic relations. Of significance, China has agreed to open its auto insurance market to foreign competition, reports our Chinese-language sister newspaper Want Daily.
In the 20-point statement, Xi said China has decided to open up his country's mandatory third-party liability insurance for motor vehicles to foreign-invested insurance companies.
Meanwhile, to improve the imbalance in bilateral trade, China is committed to actively expanding domestic demand and stepping up tax reduction policies, as well as increasing importats.
"A rising China is a positive development, not only for the people of China but for the United States and the world as a whole," Biden was quoted as saying after the meeting by the official Chinese news agency Xinhua.
Xi, who arrived in Washington on Monday for a five-day official visit to the United States, stressed the two sides should also remain the basic pattern of mutual benefits and win-win results in their trade and economic relations.
Gao Hucheng, China's vice commerce minister, said the accompanying Chinese trade and investment delegations would buy US$27.1 billion of US goods including electronic materials, silicon chips, equipment and machinery, as well as farm produce.
The huge US deficit in trade with China has been the focus of economic and trade talks. China has sent business delegations to the US many times to look for ways to bridge the gap. When China's president, Hu Jintao paid a visit to the United States in January last year, his delegation signed purchase agreements worth US$45 billion, including an order for 200 Boeing passenger planes.
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