China's Sovereign Wealth Gets Burned
James Fallows, writing in the Atlantic, has produced a fascinating piece on China's fund. I have covered the emerging sovereign wealth funds several times already (1 2 3 4 5 6 7), however, Fallows' piece is one of the more economically literate I have seen on the subject. Most writers presume that the so-called "export-lead growth strategy" has something to do with economic growth because of its name. But naming something incorrectly does not prove cause and effect. I drank a dozen beers before getting in my car and called it the "beer-lead safe driving strategy", that would not make it so. In terms of its actual effects it should be called the "export subsidization savings-wasting strategy". Fallows does a great job of explaining how the currency peg generates more investment in export sectors at the expense of a lower standard of living for Chinese consumers:
- Any economist will say that Americans have been living better than they should--which is by definition the case when a nation's total consumption is greater than its total production, as America's now is. Economists will also point out that, despite the glitter of China's big cities and the rise of its billionaire class, China's people have been living far worse than they could. That's what it means when a nation consumes only half of what it produces, as China does.
- Some Chinese people are rich, but China as a whole is unbelievably short on many of the things that qualify countries as fully developed. Shanghai has about the same climate as Washington, D.C.--and its public schools have no heating. (Go to a classroom when it's cold, and you'll see 40 children, all in their winter jackets, their breath forming clouds in the air.) Beijing is more like Boston. On winter nights, thousands of people mass along the curbsides of major thoroughfares, enduring long waits and fighting their way onto hopelessly overcrowded public buses that then spend hours stuck on jammed roads. And these are the showcase cities! In rural Gansu province, I have seen schools where 18 junior-high-school girls share a single dormitory room, sleeping shoulder to shoulder, sardine-style.
- China's savings rate is a staggering 50 percent, which is probably unprecedented in any country in peacetime. This doesn't mean that the average family is saving half of its earnings--though the personal savings rate in China is also very high. Much of China's national income is "saved" almost invisibly and kept in the form of foreign assets.
- Foreign observers also suggest that, even after exposure to the Lou Dobbs clips, the Chinese financial leadership may not yet fully grasp how suspicious other countries are likely to be of China's financial intentions, for reasons both fair and unfair. The unfair reason is all-purpose nervousness about any new rising power. "They need to understand, and they don't, that everything they do will be seen as political," a financier with extensive experience in both China and America told me. "Whatever they buy, whatever they say, whatever they do will be seen as China Inc."
- Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like--and keep the domestic economy's growth rate from crossing the thin line that separates "unbelievably fast" from "uncontrollably inflationary."