Your Money or Your High-speed Rail
October 11th, 2011
The New York Times recently had an article about the shrinking purse Chinese consumers have been suffering for the last decade. The article discusses how central government infrastructure projects and the resuscitation of the State-owned Enterprises (SOEs) has been at the expense of all but the well-connected and very rich.
Indeed, economists say this nation’s decade of remarkable economic growth, led by exports and government investment in big projects like China’s high-speed rail network, has to a great extent been underwritten by the household savings — not the spending — of the country’s 1.3 billion people.
This system, which some experts refer to as state capitalism, depends on the transfer of wealth from Chinese households to state-run banks, government-backed corporations and the affluent few who are well enough connected to benefit from the arrangement.
Inflation has its part to play, as inflation rates holding between 5-6 percent eat away at bank deposits that accreted only 3-percent interest. With not many other options in which to place their money, families have been squirreling away an increasingly larger portion of their income. With government strictures severely limiting purchase of additional residential property and overseas investments dramatically curtailed, families pretty much have three options: traditional banks or gray-market banks that promise stratospheric returns on interest. Or under the mattress.
James Kynge writes in an article in the Financial Times about the gray market for deposits and the extent to which the Beijing Consensus of central government interference in the economy and industrial policy has left the country with hidden debts of its own that leave the country unable to provide another adrenaline-jolt to the economy, in case the world goes into double-dip recession.
It’s no wonder the powers that be are increasingly concerned about placating the masses during eruptions of discontent.
image credit: eastsunrises.wordpress.com
October 11th, 2011 at 8:20 am
Hi Bill,
Interesting post. The issue of having no bullets left to fire in the event of a double-dip is an issue for every government now, even the Chinese, or so it would seem.
However, I’m not so sure the government of the PRC will be all too concerned about this. A stimulus package this time round may not be desirable. If Greece is forced, as its looking increasingly likely to be, into an orderly default with bondholders accepting a 20% or so haircut on Greek bonds and kicking Greece out of monetary union, as long as the Euro banks are recapitalized before this occurs, the likelihood is that the Euro will strengthen against the RMB. The Greek economy will no longer be holding the Euro down, so it could and should rise in relation to other currencies.
In the event the markets are spooked, capital flight from the Eurozone, as we’ve seen this week, will likely go to safer climes, such as the US$.
As the Eurozone is China’s largest trading partner, it could rejunvenate China’s exports at least in the short term. Any strengthening of the US$ or Euro would allow China to cash in some debt and use for further infrastructure if necessary.
Its all speculation, but I think the Chinese are in a very strong position. If the west tanks, they can move their vast assets overseas through outward FDI and pick up failing western companies in a fire sale. Reverse that scenario and Chinese goods become cheaper, bringing about the possibility of a burst of exports.
MG
October 18th, 2011 at 3:32 pm
@Mike; Yes, I agree. I don’t see a hard landing in the near future; though the country will eventually have its come-to-jesus moment, it’s just not now. Even then, I think the government would lard specific regions that were in trouble in China, not necessarily wholesale, like last time.
Thanks for commenting!