No U.S. bounce from China’s safety net

June 3, 2009

Christopher Swann— Christopher Swann is a Reuters columnist. The views expressed are his own —

Offer a U.S. Treasury secretary visiting Beijing one wish, and he will certainly opt for a revalued Chinese currency. Offer a second, and the probable choice would be a strengthened social safety net.

Timothy Geithner followed bipartisan tradition when he recently called on the Chinese to strengthen their social benefits. Indeed, it has become an article of faith that a solid welfare state will allow the Chinese to curb their abnormally high savings rate — which is at the heart of the global economic imbalance.

Luckily for Geithner, this consolation prize appears within reach. China’s spending on welfare rose 27 percent last year.

Particular excitement has surrounded China’s plan to provide near-universal healthcare by 2011. Free from the need to stockpile for a medical emergency, the Chinese people will be more able to splurge on consumer goods, it is thought.

Jim O’Neill, Goldman Sachs’ chief global economist and the doyen of China enthusiasts, argues that this is perhaps the most important public policy in the world at the moment.

Yet while welfare reform is almost certainly good for the Chinese, it may do precious little for the United States. Hopes for China on this front are based on half truths.

The first is that imbalances stem from the unnatural thrift of Chinese households. Levels of saving are certainly high — around 25 percent of disposable income — and did rise in the 1990s. But this has not increased noticeably since the turn of the century — the period over which the economy got most out of kilter. It is also less of an anomaly than is often assumed.

Citizens of India, in comparison, squirrel away even more, around 28 percent of income. Yet there is no clamor for Indians to curb their savings and enjoy themselves more. They run a current account deficit. So, household frugality is not always a worry.

Rather, the real increase in savings since 2000 in China has come from the nation’s companies, which are now bigger savers than the nation’s households. While encouraging Chinese people to set aside less may help, it has not been the main source of the problem.

Second, the lack of a social safety net may not be the principal reason that savings are relatively high. The traditional explanation for the surge of frugality in the 1990s is that China dismantled its welfare state.

A more powerful reason for the extra stockpiling, however, is that China hit a demographic “sweet spot”. The country’s ever-tightening family planning dictates from the 1970s left many couples with fewer mouths to feed and thus able to save more. This explains why savings rates rose even in rural areas.

If demographics are indeed the main driver, it is unrealistic to expect the rebuilding of social programs to return the households savings rate to the level of around 15 percent that prevailed in the mid 1980s.

The main reason the Chinese are such rotten shoppers is that workers are getting an ever-shrinking share of the economic pie.

Household consumption, at just 38 percent of gross domestic product, is indeed exceptional — and has fallen sharply in the past decade. In India, it is closer to 61 percent.

It is not that Chinese companies have been particularly stingy with workers. Even allowing for Chinese statistical window dressing, UBS believes that real wages have grown about 10 percent a year since 1999.

Instead the culprit is the unusually capital intensive strategy for economic growth. Heavy industry now accounts for close to 70 percent of value added in China.

This has been fostered by financially ambitious local officials whose pay is often linked to “industrial production and visible changes in the locality,” according to Tao Wang of UBS. The bias against the service sector and other labor-intensive companies has helped halve the pace of job growth since the 1980s.

Even profits from Chinese state companies are often locked up in a perpetual investment loop and never end up being spent on consumption, according to Richard Herd, the OECD’s top China economist. “It’s not like India where the portion of the income created by the companies is paid to the owners, boosting consumption,” he says.

To really bolster spending, China needs to stop pampering heavy industry and take its heel off the neck of the service sector.


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Geitner has simply asked for what has already happened. Are we so desperate that we now want to tell other nations what to do with their money for our economic benefit?

Consumption is now the “Holy Grail” of economic recovery. This is meaningless in the abstract. We need to consume products that enable us to use resources more efficiently. The market place lacks such choices. This leaves us only to buy the same old fodder in order to jump start the economy. Consumers are waking up to this fact and manufacturers are not adapting.

So much for the free market.

Posted by Anubis | Report as abusive

As china inflates, deflation will hit the US. All these job losses are the starting signs of what is to come.

Posted by J Fernandes | Report as abusive

Great column….totally original stuff.

Posted by Rolfe WInkler | Report as abusive

Mr. Swann, this is one of the most incisive analyses I’ve read with nearly a quarter of a century living in Asia, 4 in mainland China and 4 in Macau (while it still belonged to Portugal).

When I lived in Tianjin 1985-86 and Beijing 1986-88, the commorn street intelligence held that a typical worker saved around 40% of his or her income, partly because there wasn’t all that much to buy and partly of the then-extant cradle-to-grave system that provided for practically everything. While I’m certainly no expert on anything at all to do with economics, that seemed to be borne out by Chinese I knew, including the family of a lady from Beijing I married. Her Mother save 35-40% of her salary, while her Father usually hit the 50% range (but, then, his salary was considerably higher than hers). Other friends, colleagues, and students (I taught in universities) told me comparable stories. I even got into the act myself after marrying, knowing that we would be going to the U.S. for further studies for my wife, and in about 19 months, earning the equivalent of $400/month, I saved about $2750. But even I had few expenses, though I didn’t get *quite* everything a Chinese citizen did.

So, I’m a bit puzzled by the percentage saved as cited in your article. True, what I read was in the popular press, and my direct experiences with Chinese were (1.) only anecdotal, and (2.) univerfied — I never asked anyone to show me their bank book or to see the stash under the bed or whatever.

I returned to mainland China for nearly a year 1999-2000, and even that late my boss and his wife, both of whom worked, after about seven years of marriage (and having a daughter along the way) saved enough money to buy multiple household high-end goods (television, refrigerator, sound system, etc.), a late-model used car, and a late-model used motorcycle — AND an apartment measuring about 750 dquare feet. And their families both were dirt-poor, so it wasn’t the daddies forking over a chunk.

Anyway, I thoroughly enjoyed the article and learned some things from it — thanks!

Posted by Mekhong Kurt | Report as abusive