Gordon Chang: China Not Transitioning to Consumer-Led Economy

Includes: CNY, CYB
by: Howard Richman

Writing in Business Week on November 15 (China Offers No Chance of Revaluation before 2012), Gordon Chang takes an honest look at what China is doing. He writes:

Analysts love to say that China is making the transition to a consumer-led economy. But such assertions aren’t consistent with the facts or common sense. The steps that the central government is taking to create trade surpluses -- such as holding down the value of its currency -- inevitably discourage consumption. The government’s stimulus program, which focuses on building infrastructure and industrial production, is also, by definition, anti-consumption.

The overriding reality is that consumption can’t become significant until Chinese officials, in fact and not just in words, abandon the current investment-led strategy. We need to recognize that low consumption is the inevitable result of China’s growth model, not merely a remediable feature of it, so consumption’s role won’t increase much until the government takes painful measures to change its approach.

Chang points out that China doesn't change, partly because its leaders are risk averse:

Model-changing is inherently risky, and Chinese leaders are especially risk-averse these days. Before a major transition, when the so-called Fourth Generation leaders are scheduled to give way to the Fifth at the end of 2012, China’s political system won’t be able to implement any radical plans.

Chang's writing reinforces exactly what my father, son and I wrote in our 2008 book Trading Away Our Future:

By ignoring strategic manipulation of the terms of trade by our more mercantilist trading partners, the United States may create conditions in which strategic trade and mercantilism rather than free trade are in equilibrium for those countries. We are trading away our future for a mess of mercantilist produced pottage! (p. 18)

Has our country ever been more poorly served by incompetent economic leaders? As advocates of unilateral free trade, they insure that our mercantilist trading partners suppress their consumption of our imports.

There is a simple solution: The scaled tariff. Its rate would go up as our trade deficit with a mercantilist country would go up, down when our trade deficit goes down, and disappear when our trade deficit goes to balance. If we were to implement it, China would be forced to take down its barriers to American products, in order to reduce our tariff rate on its products.

China would then stimulate its consumption, perhaps through the steps recommended by Gordon Chang:

What steps are needed? China will have to let the yuan float, permit banks to compete for deposits by offering market interest rates, allow labor to organize and demand higher wages, and provide a better safety net, especially in health care.

Disclosure: I own Chinese yuan through CYB