Obama, China, and wishful thinking about American jobs
The disconnect between production and consumption threatens both China and America.
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"We cannot go back," he said in September, "to an era where the Chinese ... just are selling everything to us, we're taking out a bunch of credit-card debt or home equity loans, but we're not selling anything to them." He hopes that hundreds of millions of Chinese consumers will make up for the inability of American consumers to return to debt-binge spending.
This is wishful thinking.
True, the Chinese market is huge and growing fast. By 2009, China was second only to the US in computer sales, with a larger proportion of first-time buyers. It already had more cellphone users. And excluding SUVs, last year Chinese consumers bought as many cars as Americans.
Even as the US government was bailing out General Motors and Chrysler, the two firms' sales in China were soaring; GM's sales there are almost 50 percent higher this year than last. Proctor & Gamble is so well-established in China that many Chinese think its products (such as green-tea-flavored Crest toothpaste) are Chinese brands.
If the Chinese economy continues to grow at or near its current rate and the benefits of that growth trickle down to 1.3 billion Chinese consumers, the country would become the largest shopping bazaar in the history of the world. They'll be driving over a billion cars and will be the world's biggest purchasers of household electronics, clothing, appliances, and almost everything else produced on the planet.
So this will mean millions of American export jobs, right? No.
In fact, China is heading in the opposite direction of "rebalancing." Its productive capacity keeps soaring, but Chinese consumers are taking home a shrinking proportion of the total economy. Last year, personal consumption in China amounted to only 35 percent of the Chinese economy; 10 years ago consumption was almost 50 percent. Capital investment, by contrast, rose to 44 percent from 35 percent over the decade.
China's capital spending is on the way to exceeding that of the US, but its consumer spending is barely a sixth as large. Chinese companies are plowing their rising profits back into more productive capacity – additional factories, more equipment, new technologies.
China's massive $600 billion stimulus package has been directed at further enlarging China's productive capacity rather than consumption.
So where will this productive capacity go if not to Chinese consumers? Net exports to other nations, especially the US and Europe.
Many explanations have been offered for the parsimony of Chinese consumers. Social safety nets are still inadequate, so Chinese families have to cover the costs of healthcare, education, and retirement. Young Chinese men outnumber young Chinese women by a wide margin, so households with sons have to accumulate and save enough assets to compete in the marriage market.
Chinese society is aging quickly because the government has kept a tight lid on population growth for three decades, with the result that households are supporting lots of elderly dependents.
But the larger explanation for Chinese frugality is that the nation is oriented to production, not consumption. China wants to become the world's preeminent producer nation. It also wants to take the lead in the production of advanced technologies. The US would like to retain the lead, but our economy is oriented to consumption rather than production.
Deep down inside our national consciousness we assume that the basic purpose of an economy is to provide more opportunities to consume. We grudgingly support government efforts to rebuild our infrastructure. We want our companies to invest in new equipment and technologies but also want them to pay generous dividends.