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Posted at 10:30 AM ET, 11/29/2010

The most important two sentences I've read on China's economy

By Ezra Klein


From David Leonhardt's terrific piece on the same:

Saying that China does not have a big-enough consumer economy is really another way of saying that not enough of its resources reach the broad mass of its people. If they had more resources, they would surely spend more.

When it comes to why the Chinese don't consume more, there are really only a few possibilities:

1. They don't have enough money to consume more because there isn't enough money to consume more.

2. They don't have enough money to consume more because the state is using the money available for them to consume more to purchase Treasury bonds, build bridges, etc.

3. They have enough money to consume more, but for both cultural and economic reasons, they choose not to consume more. Perhaps high-profile consumption is frowned upon, or perhaps the social safety net is weak and unreliable and so people have to save an enormous amount to deal with emergencies, illnesses and old age.

As Leonhardt notes, China's "per-capita G.D.P. is about $7,000, and consumption makes up only 35 percent of the economy. ... In Brazil, where per-capita G.D.P. is one and a half times that of China’s, consumption is more than two and a half times as high, or about $7,000." So the answer probably isn't that more consumption is economically impossible. That means we're left with either two or three, or, more likely, some combination of two and three. James Fallows made the case for two here.

By Ezra Klein  | November 29, 2010; 10:30 AM ET
Categories:  China  
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China is complicated. Some parts (predominantly the eastern seaboard) are comparatively wealthy, others very poor. China has more "surplus" workers than our entire population, hence an almost endless supply of cheap labor.

One of the enduring -and foolish IMO- refrains from free marketeers is that we need to "compete globally" (by eliminating unions for example). We'll never compete with the 40% of the world that lives on <$2 a day, nor should we try.

But maybe that's precisely the "conservative" vision; to keep the workers at slave-wage levels sleeping "shoulder to shoulder, sardine style" (to quote the Atlantic piece) while the "princelings" (the nouveau billionaire ruling class) live like the economic royalty they are.

Posted by: GreenDreams | November 29, 2010 11:35 AM | Report abuse

My go-to expert on China (not that I desperately need one), tells me that the Chinese middle classes actually really love conspicuous consumption, but only if it's conspicuous. An example would be taking friends out for a feast at a restaurant; having a well-decorated apartment apparently does not fit the bill there.

Posted by: albamus | November 29, 2010 1:17 PM | Report abuse

It's true; they're purchasing less big screen TVs and mansions, and more state of the art broadband, infrastructure, and universities. That's why they're growing at close to ten percent per year, which means a real doubling of GDP every 7 years and beating the US in GDP even per capita in about three decades if we don't stop spending so much on mansions and Ferraris and so little on education, infrastructure, and other high return public investments, i.e. we'll no longer be number 1 if we keep electing Republicans.

Posted by: RichardHSerlin | November 29, 2010 1:35 PM | Report abuse

James Fallows writes:

"When the dollar is strong, the following (good) things happen: the price of food, fuel, imports, manufactured goods, and just about everything else (vacations in Europe!) goes down. The value of the stock market, real estate, and just about all other American assets goes up. Interest rates go down—for mortgage loans, credit-card debt, and commercial borrowing. Tax rates can be lower, since foreign lenders hold down the cost of financing the national debt. The only problem is that American-made goods become more expensive for foreigners, so the country’s exports are hurt.

When the dollar is weak, the following (bad) things happen: the price of food, fuel, imports, and so on (no more vacations in Europe) goes up. The value of the stock market, real estate, and just about all other American assets goes down. Interest rates are higher. Tax rates can be higher, to cover the increased cost of financing the national debt. The only benefit is that American-made goods become cheaper for foreigners, which helps create new jobs and can raise the value of export-oriented American firms (winemakers in California, producers of medical devices in New England)."

The above paragraph is direct from Fallows piece. It tells us that he has never progressed beyond his econ 101 education, or thinks that the rest of us haven't.

Most of the correlations he talks about between the strong and weak dollar have been left behind years ago. Just a small sample, the weak dollar has NOT produced higher interest rates, and stock markets now rise with the falling dollar, as do the value of other assets such as commodities. He also overlooks the main benefit of a weaker dollar, and the reason the Fed has made it such a strong priority, namely a weak dollar reduces the deficit in real terms, to the detriment of foreign holders of our currency.

Mr. Fallows may know a lot about China, but judging from this column alone, absolutely nothing about currency. Ezra, your winning streak on "experts" continues.

Posted by: 54465446 | November 29, 2010 2:08 PM | Report abuse

there is a number 4 reason for why the Chinese don't consume more

number 4 is a statement from fallows' article "The Chinese public is beginning to be aware that its government is sitting on a lot of money"

consumers cannot spend money in the hands of the state

Posted by: jamesoneill | November 29, 2010 5:21 PM | Report abuse

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