Stephen Roach on China

Stephen Roach's memo this week is a treat (via Brad Sester)

On why Chinese consumes less than American
  • At the China Development Forum, I challenged Chairman Ma on the execution of this strategy, asking him point blank how China expects to spark a dynamic consumer culture in the face of a daunting sense of job and income insecurity that appear to be unavoidable outgrowths of ongoing reforms. My question: “Don’t the massive headcount reductions brought on by the continuing dismantling of a state-owned system make it very difficult for China to count on a pro-consumption growth dynamic?” Chairman Ma’s response was both candid and very wise. He stressed four keys to success for China’s shift to an increasingly consumer-led growth dynamic:
    • (1) Income support -- always the main driver of consumption -- will be directed at the lower end of the pay distribution, especially in rural and agricultural China.
    • (2) The safety net will be emphasized as the means to cope with consumer insecurity and the related excesses of precautionary saving; this implies heightened emphasis on social security, educational, and healthcare reforms.
    • (3) Emphasis will be placed on improving the retail distribution network; this is a physical infrastructure issue (i.e., roads and rail) but also a commitment to expanding China’s retail and wholesale trade establishments -- part of a broader set of services-based growth initiatives.
    • (4) Improving the quality of the Chinese consumption experience is also a major focus; this includes initiatives on land-price reform, enforcement of hazardous product regulations, and tilting export growth away from the low-labor-cost production model.
Note Ma Kai's careful ordering, esp point number 1. As anyone who has been to Chinese cities in the past 5 years, be it Shanghai or Lanzhou or even small cities such as Yanbian(Jilin), Yingtan(Jiangxi), you would observe people buying and selling consumer goods, and apartments. So where does the 'lack of consumerism' come from? My hypothesis

  1. As for all other Asian cultures (e.g., HK, Korea, Thailand, Japan), Asians tend to save more than Westerners
  2. On top of that (Chinese saves even more than their Asian neighbors recently), income disparity. The super-riches do not have much to spend, they are as rich as their counterparts in US in nominal terms and things are much cheapers in China
So, as Roach anticipates, it would 'take a good deal of [time]'.

Well, if someone prefers to work very hard and give you what you need at a price lower than you want to buy, and he does not eat and does not want anything in return from you, what is it there to complain? As a sensible businessman and intellectual, Roach is more concerned about the potential pitfall due to unbalanced growth.

Then Roach turned to observe the three stooges amigos' China sojourn. I am sure Mr NVR would enjoy this.
  • Chuck Schumer is a very smart and savvy man. He is using the bully pulpit of a prominent politician to put so much pressure on China that it will have no choice other than to give. Nor does he have much doubt that this approach will work. “This is exactly what I did in Japan in 1986,” he said -- apparently the last time he was in Asia. “It worked in Japan and it will work in China.” Senator Schumer is not Reed Smoot -- Utah’s protectionist senator who co-sponsored the Smoot-Hawley Tariff Act of 1930 that led to the Great Depression. In the end, Schumer doesn’t want tariffs -- he wants to go down in history as the man who made China blink. But he is perfectly prepared to play high-stakes political poker in order to achieve this objective. So is the rest of the US Congress. The big risk is that China calls Washington’s bluff and the two parties start to stumble down the very slippery slope of trade frictions and protectionism.
  • While the senators claimed they were there to listen and learn, my guess is that this was a classic window-dressing sojourn. As I probed them on the issues, they had all the answers down pat -- their minds were made up. Schumer actually conceded the point on the structural macro linkage between the trade deficit and the national saving problem -- a first for a major China basher. This, of course, has been a major leg of my own macro stool for longer than I care to remember. “I agree with you,” he said, “America doesn’t save enough and we consume too much.” Fine to that point, but then he turned the logic inside out: “I care deeply about the loss of US manufacturing jobs to China. If I am successful in cutting our trade deficit with the Chinese, not only will those jobs come back home but I will have succeeded in boosting US saving and cutting excess consumption. My bill can do all that and more.” I am rarely speechless, but at that point, I started to choke on a huge bite of watermelon. “Let me get this straight,” I gasped, “tariffs will boost saving?” Too late -- he was already off to face the ever-present battery of cameras and microphones.


1 comment:

Anonymous said...

Very interesting and informative post, both parts. I am always amazed (in spite of my not wanting to be impressed by a centralized non-democratic government) at how well the Chinese government seems to "get it" and at how well they react.