The Silk Road to Recovery

by Larry Mongoss, guest blogger

It was interesting to see Xujun’s post on consumer activity in China. Her observations suggest some interesting developments may be coming in the years ahead. Curious about this, I contacted a couple of my friends in Shanghai to get their take on consumer activity. Their personal observations were consistent with hers, but they were prudently reluctant to draw any conclusions from that, especially given the Spring Festival splurging going on. When it comes to officially reported numbers, all were viewed with skepticism.

With all those disclaimers, it is still seems that the Chinese consumer is far more confident than his or her American counterpart. Could this mean that China will help rescue the US?

China and America have had an odd relationship over the past 20 years. Things get produced in China and sent to America. Then, instead of sending back other things of equal value, America sends an IOU. Lots of people, including me, have worried endlessly about what will happen when those IOUs come due. But we have been missing the point.

Now that America doesn’t want so much of the stuff it was not paying for, the Chinese will have to turn elsewhere, most notably to themselves. It sounds like the government, by simple admonishment, can cause a jump in consumer spending. The effect of that may dwarf their 500 billion dollar stimulus package announced last year. A pretty cool technique if it works, especially if it is possible to turn consumer spending back down as well.

Telling Americans to spend more, on the other hand, is not at all likely to work. Many would need to borrow money to make that happen, and right now those that can borrow don’t want to and those that want to can’t – or so it seems. Most Chinese, in contrast, only spend money that they have saved, and many have built up modest accounts over the past decade. Thus, narrowly from the perspective of consumer sentiment and ability to spend, China is much better positioned to grow consumption, and there are signs they are doing just that.

Put simply, the Chinese are taking care of themselves. Domestic consumption appears to be compensating for the fall off in exports, not magnifying it as is happening in Japan. And that consumption, though with a different focus than the export production, is related. All of this is good for China, at least in the short run, but what about America?

Since the 1980s, China has seen amazing economic advancement, in large part from catching up to western manufacturing techniques. Some people have belittled this as just being the activity of copycats, but that was exactly smartest thing to do. It is much faster to copy what is being done than to reinvent it. Giving stuff away, and manufacturing to the needs of the developed world, has allowed China unprecedented growth in both activity, and sophistication.

That sophistication is good news for America, because it also carries over to consumers. Chinese consumers love things that are made in America, and growing consumerism in China is a golden opportunity. In the past, the Chinese government has discouraged consumption to keep the export driven economy from overheating. Now, it will need to discourage exports, to keep the consumer driven economy from overheating.

An exaggeration most likely, but we have a very real possibility to see more exports from America to China. We may, in fact, see the huge American trade deficit turn into a trade surplus. America will be producing things, and giving them to the Chinese along with the money to pay for them. Only this time through, it will be because the money is being paid back by America instead of lent by China.

Unlike the past situation, which was clearly not sustainable, the present situation is. If America can become proficient at producing more than it consumes, it will pay back its foreign debts. Once those debts are paid back, America can turn back to itself, and use that excess production to take care of its retired people. China becomes the training ground for dealing with the social security crises people keep talking about.

For China the path is somewhat more convoluted. They are facing an even stronger demographic adjustment than America. In addition to doing something for the rural population, the Chinese need to temper their domestic consumption with the knowledge that people will be retiring without replacement in the near future. Developing the equivalent of a social security system is critical to keeping China functioning smoothly. Luckily for them, there is no shortage of poor people to practice on.