The Chinese Economy is mostly Bad Investments, Savings and little Domestic Consumption

Posted by PITHOCRATES - May 26th, 2012

Week in Review

The Chinese economic juggernaut is losing steam.  The communist 5-year plans in infrastructure projects isn’t having the magic it once did.  Exports are down thanks to a worldwide recession.  And worse of all for Keynesians everywhere savings are outpacing consumption.  People across China are acting responsibly.  And this just won’t do (see Chinese urged to spend more, save less by Mure Dickie posted 5/25/2012 on The Washington Post).

Yet with China’s economy slowing — to a relatively modest annual rate of 8.1 percent growth in the first quarter — some observers fret that consumption could be faltering. Retail spending in April was weaker than expected. And while Wen Jiabao, the premier, last week signaled action to shore up growth, the government appears to have set its policy focus on promoting investment rather than consumption…

Indeed, [Andrew] Batson [research director at GK Dragonomics] suggests that the present slowdown could promote a much-heralded rebalancing of China’s economy, away from reliance on increasingly unproductive investment to a healthier consumption-driven model.

While the government has long talked of such a shift, the proportion of gross domestic product accounted for by investment actually soared to 46 percent in 2010, while household consumption’s share of GDP slumped to just 35 percent…

So China’s investment is increasingly unproductive.  Perhaps their high-speed train program isn’t the only black hole for their investment capital to disappear in.  The Chinese have invested a fortune in their high-speed trains but so far that has been an investment earning a negative return.  Sure, it created a lot of jobs but their high-speed trains can’t turn a profit.  So far they’re only accumulating debt.  But they keep spending this money.  Adherents to Keynesian economics that they are.  For the Keynesians say anything that puts more money into a workers pocket is good.  Because that worker will spend that money.  Even if we pay him to dig a ditch.  And then pay him to fill it back in.  Or pay him to build a very costly high-speed railway that the people don’t need.  Or can ever pay for itself.  A Keynesian will say that’s good.  Because it will give the worker money.  And that worker will spend that money.  Thus increasing consumption.  Unless that worker does something stupid like put it in the bank.

Some economists say the government needs to do more to promote this rebalancing in a country where citizens still save a far larger proportion of their incomes than do their counterparts in developed economies…

Lower-income consumers also save fiercely. In the village of Wuti in northern Hebei province, house builder Li Moxiang and his farmer wife aim to set aside $3,150 or more a year to help raise their future grandchild — even though stingy state-set interest rates mean such savings are constantly eroded by inflation…

A big motivation for such saving is the lack of a social security system to cushion Chinese in old age or ill health. Serious illness or accident often spells household bankruptcy. For most rural people, children have to play the role of pension provider.

In a report this week, the World Bank said fiscal measures to support consumption — including targeted tax cuts, social welfare spending and other social expenditures — should be Beijing’s top priority as it seeks to avert an economic “hard landing.”

Some economists would like to see mass privatization to shift wealth out of the dominant and domineering state sector.

Keynesians hate savings.  They want people to spend their money.  And not be responsible and save for their retirement.  Or to save to pay for any unexpected expenses.  Why they hate savings so much that they constantly inflate the currency to dissuade you from saving.  For if you do save you’ll only see inflation eat away the value of your savings.  Sort of like putting an expiration date on your money.  Telling you saving is for fools.  That consumption is the smart way to go.  And so what if you can’t afford food or housing in your retirement.  Or pay for medical care.  That’s what family is for.  So you can be a burden to them.

Right now the social democracies of Europe are imploding from the massive debts they incurred from their social spending.  And the World Bank is encouraging Beijing to increase their social spending.  To be as irresponsible as the Europeans were.  Unbelievable.  Europe is burning because of the social expenditures they can no longer afford to pay.  And the people are rather reluctant to give up.  So when the government tries to live within their means with a touch of austerity the people reply with riots.  And this is what the World Bank is advising the Chinese to do.

History repeats.  For everything the Chinese are doing, or trying to do, or are being advised to do has been done by every nation with a spending and debt problem.  Sure, China is still enjoying 8% GDP growth.  But a lot of that growth is from building stuff that the market isn’t demanding.  Consumer spending in China is only at 35%.  With the worldwide recession hurting Chinese exports that leaves that 35% as a large component of their market-driven spending.  And you can rarely sustain economic growth from making stuff the market isn’t demanding.  Instead this artificial growth usually leads to some kind of a bubble.  And a painful recession to correct the mess the government made while artificially increasing economic output.

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