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BPO Journal

Thursday, October 13, 2005

Must China Change?

Treasury Secretary John W. Snow, on a recent tour of the Sichuan province, urged China on Thursday to take lessons from the U.S. on how to "spend more, borrow more and save less". Daniel Gross, in a recent post, makes a vehement protest:

"...Yeah, that's exactly what we need: a billion more people in this world leveraging up homes they can't afford, to buy SUVs they can't afford to drive, to drive to the mall to buy merchandise they can't afford.

U.S. exports may never be competitive in the Chinese market. But if Snow is successful at encouraging the Chinese to binge on credit, the already-robust U.S. bankruptcy industry may find itself with a gigantic new market."

Snow is not alone. A recent article in the Economist states that the Communist Party leaders’ recent annual meeting on economic policy ended with word of a strategic shift: greater emphasis on redressing the inequality and social disruption that market reforms have left in their wake. The leaders believe that closing the inequality gap will help China develop domestic demand. The underlying rationale is that Chinese consumers, confident in the provision of basic amenities, affordable healthcare and education, will be more willing to spend more and save less. However, China is a long way from accomplishing these objectives. The savings rate is well over 50%, and the economic, financial and political reform required to support these objectives is a gradual process. So, to begin with, we're far cry from a billion people driving to the mall to buy merchandise they can't afford.

Further, while economists and politicians grapple with the how, the whether is not really in doubt. Contrary to what Gross says, it is their considered opinion that decreased dependence on the American consumer and stimulation of domestic demand are key to macro economic stability. Gross must consider what will take up the slack when America’s appetite for cheap goods falters, given the paucity of its national savings. What will come to the rescue in face of that nasty economic shock? Perhaps the answer is "encouraging the Chinese to binge on credit".

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