Tuesday, February 19, 2008
China and the U.S.
This link is to a longer article by James Fallows on how China is subsidizing American consumption. He gives a great explanation of how this works in practice, and then considers the ramifications. It is long, but well worth the read. I'd suggest that people might want to use this as the basis for their longer paper that is due at the end of the semester.
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In this article, author James fallow discusses three basic questions. Firstly he discusses how China has helped to reduce American consumption expenditure. Secondly he discusses how Chinese economic system works in reality and finally he describes the possible consequences of the economic arrangement between China and the United States.
In the last few decades, China had been very aggressive in terms of expanding its industrial sector and overall economy. China produces tremendously but its consumption is very low. The author says that Chinese leaders have purposively held down standard of living in China. This has led to major trade surplus in China and a huge deposit of Chinese money in the U.S. Federal Reserve. The author predicts that although in short run this economic arrangement between the two countries allows China to experience a constant economic growth and the United States to enjoy cheap consumer goods, in long run it will affect both the countries.
China’s has highest savings rate in the world, 50 percent. This has been possible by keeping their people’s standard of living lower than what it naturally would be and general Chinese people comply with the arrangement because the economy has been growing so much that even suppressed consumption makes people richer. Chinese government control RMB-dollar exchange rate value and also dictates RMB’s value relative to other currency. This allows Chinese-made goods cheap, hence creating a constant demand, therefore keep Chinese factories running. To control exchange rate Chinese government also require to control other aspects of their financial system such as, imposing high savings rate on its people to reduce their buying power. China does not spend enough on its own development because government fears that improving average living conditions could intensify social conflicts, especially between rich and poor. Improving average lifestyle would lead to inflation. Therefore the authors concludes that Chinese government will continue with their strategy to save more, consume less, produce cheap goods, control social conflicts and economic instability through stringent control of the economy. This will not only allow continue supply Chinese money to Federal Reserve but also pump enough cash in U.S. market to sustain high consumerism, in a way keep Chinese factories running.
The author mentions about the possible ramifications of this economic arrangement between China and the United States. According to him, in recent times China is gradually getting unstable in terms of controlling its people and the financial situation. Moreover, China has developed some business issues over time in terms of transparency. Even though China is now trying to emphasize on organizational and process improvement in their financial institutes such as, China Investment Company (CIC), Chinese financial leadership failed to develop trust in their foreign counterparts. Foreign companies are now skeptical about China’s transparency in terms of business as well as political motives.
In the last section of the article, the author discusses if China could be a potential threat to the United States. The author states that though U.S. and Chinese government disagree about several issues, due to economic reasons, China would not be a military threat to the United States. Chinese economy is fed by U.S. market. Similarly U.S.’s market is flooded with cheap Chinese goods and money. Breaking this symbiosis would neither benefit China nor the United States. Moreover China’s national savings is based on U.S. dollar. Any damage to dollar value would devastate Chinese economy. Therefore as long as these two countries benefit each other, they will not be any threat to each other. According to the author, this balance could be damaged if the economic system adopted by China becomes dysfunctional (due to internal or external problems) or if structural problems develop in U.S. economy.
Fallows portrayed a vivid picture of Sino-U.S. economic relationship and the potential problems of their dependency. However, he failed to discuss how China is trying to diversify its investment portfolio in other continents such as Africa and Latin America. Although majority of China’s current foreign investment is still with the United States, its approach toward diversification could indicate that China wants to free itself from dollar dependency. In that situation what could be the nature of U.S.-China economic and political relationship.
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