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