Can the Chinese still save us?
Posted
Dec 04 2008, 02:24 PM
by
Anthony Mirhaydari
Rating:
One cause of the epic global slowdown deserves a closer look: the Chinese consumer.
No other private-sector force is able to offset the dramatic capitulation of American consumers and their counterparts in Europe, Japan, and elsewhere. No one else is willing or able to muster the purchasing power necessary to kick start the recovery.
Party leaders in Beijing need to encourage their citizens to tap their impressive savings (as high as 50% of income recently) to engage in American-style shopping sprees. Consumption has lagged economic growth in China for the last 10 years. This must change, but the clock is ticking.
Many are concerned that after a record fall in the yuan vs. the dollar this week, China will continue to play the currency manipulation game and focus on exports. However, I don't believe malice nor militant mercantilism led China's State Council to announce its intention to use all available tools including "interest rates and exchange rates" to maintain stability in its financial system.
It's cold, hard fear. Even after announcing a massive $586 billion economic stimulus package, focused on infrastructure and social programs, civil unrest among the unemployed continues to rise. And in a country of more than 1.3 billion, popular protests can quickly turn to revolution.
It's a two-way race against time. Each day that global demand remains low increases the risk of a deflationary spiral -- the effects of which I outlined in a previous post. But as China tries to enact policies that encourage consumer spending, it must also battle unemployment caused by a construction slowdown, factory layoffs, and a real estate slump.
It is in this context that the recent weakening of China's currency makes sense. In order for China to successfully reorient its economy, unemployment must be kept as low as possible during the transition. If it doesn't, Chinese consumers will continue their miserly ways if not revolt outright while the global recession becomes something much worse.
Anecdotal evidence suggests this scenario could very well be playing out. Jing Ulrich, JPMorgan's director of Chinese equities, paints a sad picture: "Our discussion with operators have found a similar slowdown among some apparel and luxury goods retailers. Even mass-market food retailers and fast-food chains have shown signs of moderation since mid-October." Other indicators, from disinflation to house prices, provide corroboration.
As a sign of just how interconnected economies have become, the hopes, dreams, and futures of America's citizens depend largely on the effectiveness of communist bureaucrats in China. If they decide to enact Depression-era U.S. trade policy and dump exports on the world, disaster will follow.
But if they successfully hold the line on their currency, expand social safety nets, increase employment in service and consumer-oriented sectors, and open themselves to high-value exports from other nations, the Chinese could very well save us all.
Feel free to comment below. I can be contacted at anthony.mirhaydari@live.com
Related reading:
Recession: Beginning of the end or just the beginning?
The 'frugal future' has arrived
Credit card cutbacks hit consumers hard
Mourning China
