“Winter Break WK #2: “China to the Rescue? Not!”
Hong Kong
I had no idea that many of those oil paintings that hang in hotel rooms and starter homes across America are actually produced by just one Chinese village, Dafen, north of Hong Kong. And I had no idea that Dafen’s artist colony — the world’s leading center for mass-produced artwork and knockoffs of masterpieces — had been devastated by the bursting of the U.S. housing bubble. I should have, though.
“American property owners and hotels were usually the biggest consumers of Dafen’s works,” Zhou Xiaohong, deputy head of the Art Industry Association of Dafen, told Hong Kong’s Sunday Morning Post. “The more houses built in the United States, the more walls that needed our paintings. Now our business has frozen following the crash of the Western property market.”
Dafen is just one of a million Chinese and American enterprises that constitute the most important economic engine in the world today — what historian Niall Ferguson calls “Chimerica,” the de facto partnership between Chinese savers and producers and U.S. spenders and borrowers. That 30-year-old partnership is about to undergo a radical restructuring as a result of the current economic crisis, and the global economy will be highly impacted by the outcome.
After all, it was China’s willingness to hold the dollars and Treasury bills it had earned from exporting to America that helped keep U.S. interest rates low, giving Americans the money they needed to keep buying shoes, flat-screen TVs and paintings from China, as well as homes in America. Americans then borrowed against those homes to consume even more — one reason we enjoyed rising wealth without rising incomes.
This division of labor not only nourished our respective economies, but also shaped our politics. It enabled China’s ruling Communist Party to say to its people: “We will guarantee you ever-higher standards of living and in return you will stay out of politics and let us rule.” So China’s leaders could enjoy double-digit growth without political reform. And it enabled successive U.S. administrations, particularly the current one, to tell Americans: “You can have guns and butter — subprime mortgages with nothing down and nothing to pay for two years, ever-higher consumption and two wars, without tax increases!”
It all worked — until it didn’t.
With unemployment now soaring across the U.S., said Stephen Roach, the chairman of Morgan Stanley Asia, Americans — “the most over-extended consumer in world history” — can no longer buy so many Chinese exports. We need to save more, invest more, consume less and throw out most of our credit cards to bail ourselves out of this crisis.
But as that happens, we need China to take our discarded credit cards and distribute them to its own people so they can buy more of what China produces and more imports from the rest of the world. That’s the only way Beijing can sustain the minimum 8 percent growth it needs to maintain the political bargain between China’s leaders and led — not to mention pick up some of the slack in the global economy from America’s slowdown.
However, if I’ve learned one thing here, it’s just how hard doing that will be. China’s whole system and culture nourish saving, not spending, and changing that will require a huge “cultural and structural” shift, said Fred Hu, chairman for Greater China for Goldman Sachs.
In China, for instance, to buy a home you have to put at least 20 percent down, and the average is 40 percent. If you try to walk away from the mortgage, the bank will come after your personal assets. Moreover, China can’t just shift production from the U.S. market to its own consumers. Not many Chinese villagers want to buy $400 tennis shoes or Christmas tree ornaments.
Also, China has no real Social Security, health insurance or unemployment insurance. Without that social safety net, it’s hard to see how Chinese don’t end up saving most of their stimulus. “You open up the newspaper every day and you hear about this factory shutting down or that supplier going belly up,” said Willie Fung, whose company, Top Form International, is the world’s leading bra maker. “You can never be too careful in this financial climate.”
As such, “the world should not have a false hope that China can cushion the global downturn,” by stimulating its domestic demand in a big way, said Frank Gong, head of China research for JPMorgan Chase. “The best thing China can do is keep its own economy stable.”
It’s good advice. China is not going to rescue us or the world economy. We’re going to have to get out of this crisis the old-fashioned way: by digging inside ourselves and getting back to basics — improving U.S. productivity, saving more, studying harder and inventing more stuff to export. The days of phony prosperity — I borrow cheap money from China to build a house and then borrow on that house to buy cheap paintings from China to decorate my walls and everybody is a winner — are over.
Why should China have to get us out of an economic crisis? We’re the country who gave all of our jobs to people there instead of here. The least they could do is give those jobs back… at least the ones that involve little kids, seeing as they obviously don’t have child labor laws. Is that ever going to actually happen? No. The people here don’t want to make toys or shoes on assembly lines, which is why we gave them the job in the first place. I really think we need to start thinking more like China if we’re ever going to get the economy up. We need to stop using credit cards, which put so many people into debt each year, and start buying things like houses and cars with the same mort-gage (it wouldn’t let me use this word) as China, 20-40% down. It may seem like a lot to our way of life, but they save so much that it doesn’t hit them like a brick when they try to buy a house. There are probably more things that make their country and economy work so well, but it sounds to me like they are doing something right and we are doing the opposite. Maybe if we start doing things more like China, our economy will start working more like China, it will no longer be spiraling downward.
Connection: This connects to basically everything that has been going on with our economy. The bailout plans, the stock markets going down, etc. As we have been worried about another depression, China has been doing better with theirs, besides the lack of trade between our countries. I would hate to see them go into a depression as well because of our stupidity, but with the way it looks right now, with the bailout plans not working and such, it may just happen.
It is American’s own fault that we are in this mess. I completely agree with the author. It is because Americans spent phantom money that never existed and then turned around and borrowed on the phantom money. I also don’t think this problem is as big as everyone thinks it is. It is partly a phantom recession, or so I think. Like Mr. Kautzman has said in class, “Once you call it a recession, it will come to be a recession,” meaning that once the word recession floats about, people do things that cause the recession to actually happen. China is tied to us in a huge way. Their economy rises with our economy and falls when ours falls. In a way this could be a good thing. If China’s economy fails, or at least does not rise 8%, their communist government could fail. This could open the doors for a democratic government to form. This would be great for the United States in many ways. Hopefully the new government would enact laws that did not allow children to be forced to work. This would cause more of China’s adult population to get jobs. This would in turn lead to a revolution in the wages that employees are paid in China. This would then lead to less outsourcing by American companies because it would no longer be so much cheaper for Chinese workers to do their manufacturing. And this would finally lead to solving our unemployment problem which would in turn fix our economy. (Wishful… but possible)
Connection: We have talked about phantom money in class a bunch. What is happening in China is almost the opposite. The Chinese don’t spend as much, they just have a LOT more people, and so now that they are in a recession as well, they still won’t spend. Spending and exports are what drive the economy. If the Chinese people won’t spend anything it will be a tough time for their economy.
This article was well put. It just goes to show you that China isn’t everything it claims to be. And I’m happy to see that the leaders of industry of China realize that. They don’t want to blind the whole world into hoping that China will save the world from an economic depression, which is true, they won’t. I can hardly believe they have to maintain a whopping eight percent growth rate! That is going to be quite the challenge. But the thing is, is because China is communist, it’s not like they can really make the difference – it has to be the leaders of China. For us Americans, it can be pretty easy; like the article said, we need to stop spending and start saving, and thinking a bit harder so we can export the inventions. Well China doesn’t really have the money to save like we do, and they can’t really import anything either, because China’s stuff is so cheap.
Connection: This shows exactly how a depression in the US causes a depression to the entire world, as we talked about in class. Because we are the greatest consumer and producer, China’s paint industry has gone to a halt due to our lack of buying houses, and thus a lack of walls to put paintings on.
I enjoyed this article a lot. Who would have ever thought that America’s “recession” would not only be hurting the whole country, but also some Chinese village in the north of Hong Kong. It is incredible to me how our country’s economy basically decides the rest of the world’s’ economic status. It would be interesting to see how many American’s really knew how much we owe China for our low interest rates. I for one did not know this, and thought it was very fascinating that China would hold on to the Treasury bills and money earned from exporting. Since America is such a consumer nation I doubt we would be able to hold on to such things for very long. I definitely agree with what Stephen Roach says, that we need to “save more, invest more, consume less and throw out most of our credit cards to bail ourselves out of this crisis.” I think that in a way, this recession is good for our country. Now, I am not saying that it is good for people to be losing homes or jobs, but I do think that this recession is teaching America and American’s a lesson. That we can’t just spend, spend, spend, and consume, consume, consume forever. We need to cut back and maybe learn from the Chinese.
In response to Clarin: I never really thought about our debt we owe to other nations. You bring up a good point that leads to a question; will the nations of the world start calling in our debts to them if the economic situations in their countries get too bad? I sure hope not. I also don’t really think they will. We are a powerful nation that, as Clarin stated, has an economy that drives the world markets. If our situation gets too bad, which I don’t think it is even close to right now, calling in debts against us would be the worst thing the world could do. That would send us into a depression that would in turn spread to the rest of the world. I agree with Clarin when she says the recession is good for America. I don’t necessarily think that this will stop Americans from “spend[ing], spend[ing], spend[ing], and consum[ing], consum[ing], consum[ing] forever.” I do feel, however, that this will make them think twice about spending and consuming beyond their limit. That is the base problem of this economic slowdown; people have gone into too much debt and can’t pay it off. (Kind of like the US has a huge debt right now… some of it for good reasons, like the war on terror, and some not so much)
We live in a materialistic nation and our materialistic nature is biting us in the butt right now. America buys too much needless, worthless crap. An excellent example is near the end of the article, “Not many Chinese villagers want to buy $400 tennis shoes or Christmas tree ornaments.” Why do so many people spend so much on tennis shoes and some women spend twice that on a pair of Minolos. Is it because we can? I don’t think it is because it’s obvious that very few of us actually have the personal wealth to spend that much on a pair of shoes. We should be investing more and buying fewer shoes, and being a girl that’s a very hard thing to say, but I agree with this article. America needs to chop the credit cards and stop spending money we don’t have. It’s only going to lead us further into a recession and if the brakes aren’t put on soon there is a strong possibility that it could lead to another depression. I do not agree with what the article says about China taking over our credit cards. I think that will make more problems and spread them beyond our borders which will only create a worse global economy.
Connection: This is our entire economy in a nut shell. America has too much credit card debt and its spreading to create world wide problems.
I found this article to be very interesting. Although it seems so obvious, I never really thought about how profoundly our economy affects economies throughout the world. There is no doubt that over the past century or so, America has grown to become the king of consumption. According to ecofuture.org, America makes up 5% of the worlds population but is responsible for 30% of the world’s consumption. Obviously, we have been buying from many countries all over Europe, Asia, and even South America. When we stop buying, we are not the only ones who suffer.
In many ways, the American consumer mindset is disgusting. We want to own everything and pay nothing. We actually “want to buy $400 tennis shoes or Christmas tree ornaments,” because we seem to feel that we can buy them with a piece of plastic rather than real money. The Chinese mindset of saving, and of actually earning and paying for what they buy, is much more honorable than the American approach of getting what we want, when we want it, for “free.” Even if a shift to the American attitude toward consumption in China could save us, I hope that they never take the materialistic view of consumerism that we hold in America today. We made this mess, and it is our job to get out of it.
Connection: Newspaper Article
I recently read an article about Europe’s reaction to our president-elect. For the most part, Europeans are very supportive of Obama. One big reason for their support is the hope that Obama will make a change in economic policy and pull the U.S. out of the current recession. They are, on some level, counting on America to help pad the European economy from falling into a deeper economic slump.
In Response to David Marshall:
Like you, I think that it is a good thing that China is not pretending to be something it isn’t. As Americans, we got ourselves into this mess, and we can’t rely on others to get us out of it. However, I do not necessarily think that it will be easy for us to do. Americans are accustomed to getting whatever they want, and getting it for cheap. We are a consumer nation. It is going to be hard to switch mindsets and start saving. I think that Americans don’t realize how good life is. While we enjoy “guns and butter — subprime mortgages with nothing down and nothing to pay for two years, ever-higher consumption and two wars, without tax increases!”, the Chinese have to put an average of 40% down while buying houses. In America, the government takes pretty good care its people, while in China, it’s citizens don’t have Social Security, health insurance, or unemployment insurance. We are used to being GIVEN things – it is going to be very hard for Americans.
I also have a question. We learned in class that spending more would actually boost the economy. This article said that we should “save more, invest more, consume less…” Wouldn’t that actually hurt the economy then?
Seriously, we really do need to “get out of this crisis the old-fashioned way: by digging inside ourselves and getting back to basics” and then why do we need to help China after that? If us becoming less dependent on other countries and removing our debt ruins Chinas economy I do not see why we should then ruin ourselves to save them. If America is worried about America then they need to worry about America. I realize that we are definitely entangled in an economic mess with China and that in some ways we feed from each other, and it seems, get screwed by each other. Want to know the best was to fix the “global economy?” Fix America. The best way to fix America? Fix ourselves, individually. It seems that America as a government and America the people have come up with the same stupid idea: get rewards now (pay with money you don’t have) and pay for it later. Well guess what, it is later, we need to pay for it. Is it simple laziness or just financial stupidity that transcends all levels of American society?
Connection: The bail-outs, we create rules and problems and think that simply pumping more money into the system will solve the problem when it really just covers them up to be discovered for a later time. The auto bail-out is a great example of ruining our economy (debt) for a quick fix where we should be fixing the problem (unions). This mindset is applying to America as a whole.
The author is basically saying the American public is full of idiots. He is absolutely right. How does it make any sense to buy things you can’t afford? Did people honestly think that the credit card debt would just disappear, or the unfixed finance rate would never rise? Americans have a sense of entitlement, cause we are the best, we are the brightest, we won the cold war and capitalism beat communism. We are now seeing the failure of capitalism, when people forget how to manage money. When companies get stupid and loan out money to sketchy individuals. With our sense of entitlement we believe the government should solve all of our problems. By sending welfare money to live off of, or by flexing our military muscles, our government should do it all. If everyone is on welfare, who is paying for it? I don’t agree with the Chinese form of government in any way shape or form. They don’t treat their people like humans and any time someone speaks out (Tiananmen square) they silence them. Their people are smart though. They save their money; they don’t tap into the emergency fund to buy that brand new TV. I agree with the author, its time we stop letting the government fix our problems, roll up our sleeves, and earn the title of American, like our Grandfathers and theirs before them.
Connection: The great depression, we may be heading for another at the rate we are going.
In response to Rachel D:
Although I see where you are coming from, I think your idea of China’s communist government failing is a little farfetched. Yes, communist governments are mostly built on money, and yes, if the world were to go into a depression, it is likely that their government would suffer. However, it is unlikely that we will go into another depression that is even half as bad as the Great Depression, let alone even go into a depression at all. That would mean that their government isn’t going to fail any more than ours is. Like you said, this may be just a phantom recession. People hear the word and freak out, making the recession more of a reality than it used to be, but it still isn’t as bad as it sounds. Yes, it would be nice if they would enact some child labor laws, I also disagree with the way they treat children there, but that is also very unlikely. I agree with you that it would be nice if all of what you said actually played out, but I’m pretty sure it won’t happen. Personally, I don’t understand why our government seems to need to interfere with everyone else’s governments when we have so many problems here that need fixing. Maybe that’s just me.
In response to Alexa Erickson’s response to me:
First, to answer your question: We learned in class that spending more would actually boost the economy. This article said that we should “save more, invest more, consume less…” Wouldn’t that actually hurt the economy then?
I believe that article is saying we should not buy so much on credit, and to invest with real money in the stock market. This is similar to the depression of the 1930s – too many people buying stocks on credit, and using the money that they would have from selling their previous stocks to invest in new ones. So essentially they were buying stuff with nothing. The article wants us to save more (on our credit cards), invest more (with real money into the stock market), and consume less (food? I don’t really understand that one my self… that would, after all, help stimulate the economy.) And I do see your confusion, because people need to spend in order for the economy to do well.
Anyways, now that I have read another perspective, I totally agree with you that Americans really are totally used to having everything spoon fed to them. We enjoy the greatest luxuries of the entire world. And that will be very difficult for us to take away from ourselves. But I believe that if the government puts great restrictions on certain things, so that we cannot buy so much on credit, or whatever, that we could climb out of this recession with ease.
In response to Alex:
I think that you made a really interesting point. It is probably true that the reason the Chinese are willing to put down such large down payments (ignoring, for a minute, the fact that they have no other option) is because they have been taught to actually work for their possessions. The reason Americans see that number as outlandish is, most likely, because we have been taught to take our possessions instead of working to earn them. Many have been handed everything, from insurance to housing to a gas-guzzling Hummer, without ever working hard enough to be able to afford them. It is hard to decide how the government should respond to this problem, because many people do need benefits such as cheap housing and insurance in order to survive, whereas others simply take advantage of such offers. I think the government needs to examine the situation and decide where to draw the line. It makes sense for America to offer health insurance and a roof to those who cannot afford them, but where is the logic behind handing out loans so that families can buy flat screen TVs or multiple SUVs? What started as a wonderful concept, the idea of offering support and providing options for those in need, has grown completely out of control.
I agree with Sam, the American public is full of idiots. People can not expect the economy to just work itself out when a large portion of the people are spending more than they can afford. People need to continue to spend money to keep the economy working, but they have to know what they can afford and what they can not afford. The government can handle only so much of the debt that its citizens build up before it tries to solve the problem with things like the bailout bill. We can not rely on other countries like China to bail the US out either, even when that country has its people on average set down 40 percent of their homes. This is because China is facing similar economic problems caused by the US economy collapsing, which can no longer buy Chinas products in the same quantity. “It all worked — until it didn’t”. The people of the US need to dig them selves out of this hole, they can’t rely on the government and they can not rely on other countries coming to help the US out of this situation, people need to just manage their spending and savings wisely.