Why China鈥檚 currency announcement is hokum
The stock market is euphoric over China鈥檚 apparent decision to allow its currency to rise against the dollar.
Watch your wallets.
China isn鈥檛 really changing anything. It鈥檚 only doing the minimum to prevent Congress from listing China as a currency manipulator, leading to a squeeze on Chinese imports.
Over time 鈥� and I鈥檓 talking about months if not years 鈥� China will raise its currency to where it was before the global meltdown in 2008. Big deal.
Even then, a stronger yuan won鈥檛 generate lots of new jobs in the United States
That鈥檚 because most of the gains of China鈥檚 meteoric growth are still not finding their way into the hands of Chinese consumers, whose spending is growing far more slowly than China鈥檚 overall economy. In 2009, total personal consumption in China amounted to only 35 percent of the economy; ten years ago it was almost 50 percent.
Why are Chinese consumers so reluctant to spend? First, social safety nets are still inadequate there, so Chinese families have to cover the costs of health care, education, and retirement. (China recently doubled its spending on these services but the total is still low by international standards 鈥� around 6 percent of the Chinese economy, compared with an average of around 25 percent in most developed nations.)
Second, young Chinese men outnumber young Chinese women by a wide margin, so households with sons have to save and accumulate enough assets to compete successfully in the marriage market.
Third, Chinese society is aging quickly because the government has kept a tight lid on population growth for three decades. That means households are supporting lots of elderly dependents and must save in anticipation of supporting even more.
But most fundamentally, China is oriented to production, not consumption. It wants to become the world鈥檚 preeminent producer nation. While keeping the yuan artificially low is costly to China 鈥� it pushes up the prices of everything China imports 鈥� China is willing to bear these costs because its currency policy is really an industrial policy.
We think the basic purpose of an economy is to consume, not to produce. So we only grudgingly support industrial policy. We think of government efforts to rebuild our infrastructure as a 鈥渟timulus.鈥� We approve of government investments in basic research and development mainly to make America more secure through advanced military technologies. And we give American companies tax credits for R&D wherever they do it around the world.
Don鈥檛 be fooled into thinking that US companies will continue to make big profits from sales in China. China allows big U.S. and foreign companies to sell in China on condition that production takes place in China 鈥� often in joint ventures with Chinese companies. It wasn鈥檛 American know-how, so it can eventually replace the US firms with China firms.
GM鈥檚 China sales are soaring but it鈥檚 making those cars there. It鈥檚 even designing and developing a new subcompact for China, in China. Proctor & Gamble is so well-established in China that many Chinese think its products (such as green-tea-flavored Crest toothpaste) are local brands. They might as well be. P&G makes most of them there.
Other American are helping China build a 鈥渟mart鈥� infrastructure, tackle pollution with clean technologies, develop a new generation of photovoltaics that convert solar radiation into electricity and wind turbines, find new applications for 鈥渘anotechologies,鈥� and build commercial jets and jet engines. GE was producing wind turbine components in China.
Even if some of this enhances the profits of American-based companies, it doesn鈥檛 translate into more jobs in the United States. And it doesn鈥檛 build know-how here. It builds it there.
China鈥檚 currency policy also doubles as a social policy designed to maintain order. Each year, tens of millions of poor Chinese pour into China鈥檚 large cities from the countryside in pursuit of better-paying work. If they don鈥檛 find it, China risks riots and other upheaval. Massive disorder is one of the greatest risks facing China鈥檚 governing elite. That elite would much rather create export jobs, even at the high cost of subsidizing foreign buyers, than allow the yuan to rise much against the dollar and thereby risk job shortages at home.
Here鈥檚 the awkward truth that鈥檚 not openly discussed on either side of the Pacific: Both the United States and China are capable of producing far more than their own consumers are capable of buying. In the United States, the root of the problem is a growing share of total income going to the richest Americans.
Inequality is also widening in China, but the root of the problem there is a declining share of fruits of economy growth going to average Chinese and increasing share going to capital investment.
Both our societies are threatened by the disconnect between production and consumption. In China, the threat is civil unrest. In the United States, it is a prolonged jobs and earnings recession which, when combined with widening inequality, could create a political backlash.
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