October 17, 2005
No one will confuse China with the United States, but Treasury Secretary John Snow is working on it.
Based on the secretary's comments on his latest trip to the Middle Kingdom, China's consumers are spending fast enough to buy TVs, cars, and other goodies. And that irks America's Treasury chief. "Developing a stronger consumer credit system in China will be important in helping to facilitate the further development of the country," Snow advised reporters last week, according to ChinaDaily.com. How magnanimous of him to say so. Indeed, he suggested that China's "extraordinarily high" savings rate wasn't being deployed as productively as it might be.
Might Snow have any ideas on how to solve this thorny problem? Indeed he does. In a word, his strategy boils down to this succinct message for Chinese consumers: buy. The secretary, of course, comes from a nation that excels in just that. Nobody does it better. Whether the secretary's advice will find any traction in China remains to be seen, but Snow's doing his best to induce just that. Why? Simple, really. To quote the Treasury boss from AP via the International Herald Tribune: "As China moves toward a more consumer-based society, the savings rate will go down and consumers will spend more, allowing China to buy more from the United States."
Buying more from America will, in turn, help close the ever-rising trade deficit. In August, nearly one-third (31%) of the U.S. trade deficit was with China, according to the Bureau of Economic Analysis. Joe Sixpack is less than inclined to cut back on his purchases here in these United States. Perhaps, then, his Chinese counterpart can do his part to cure the global economic imbalance.
Secretary Snow's previous efforts to compel China to let its currency float according to supply and demand was designed for much of the same intent, namely, closing the U.S. trade deficit. A pessimist might find reason to fear such a future, assuming that the bond market ever decided to worry over this mounting pile of red ink. The thinking at Treasury goes like this: a floating Chinese currency would lead to a stronger yuan, which would then make U.S. exports to China more attractive by way of lower prices. The flip side: Chinese goods are less attractive to American buyers by way of higher prices, as per a rising yuan. In short, floating the Chinese currency might very well solve America's trade deficit.
But China, being nobody's fool when it comes to unsolicited economic advice from Superpower nations, let its currency float albeit within a narrow range, thus far. America's long-running lecturing to the Chinese about the value of free-floating currencies turned out to be less than the red-ink killer some thought it might have been.
On to phase two of curing the U.S. trade deficit, this time by pushing the better-living-through-buying sermon.
It should come as no surprise that the United States is becoming more sensitive to resolving such formerly low-priority challenges as rising trade deficits. What garnered precious-little notice yesterday now grabs more than passing notice at the highest levels of government.
What's changed? America, for one, is an economy where both inflation and unemployment are on the march. (Consumer prices last month advanced 1.2%, more than double the 0.5% rate logged in August, while the jobless rate in September advanced to 5.1% from 4.9% in the previous month.) It may be too early to decide if these twin demons are set to take wing for the foreseeable future. But for the moment, they're climbing, and in the past that's been no trivial affair in the realm of politics.
One might recall that a simultaneous ascent of inflation and unemployment was, in an earlier age, dubbed the rise of the misery index. The fact that this ignominious measure is again making threatening gestures creates problems, if only temporary, for the Federal Reserve in that it reduces the monetary options. If America's jobless rate is rising, the central bank may feel compelled to lower short-term rates at some point. But in a world where the U.S. trade deficit is rising, long rates may start rising. Talk of inverted yield curves is nothing new of late. But what about talk of a deeply inverted yield curve? The monetary rock and the hard place may yet be sidestepped.
Not to worry. The bond market isn't yet inclined to sell and run. The yield on the benchmark 10-year Treasury Note barely budged today, closing the session at around 4.49%. But the future may become more complicated, as some U.S. lawmakers weigh their options and monitor the political winds. Indeed, talk of imposing trade tariffs on China are gaining attention and rattling cages. Secretary Snow even felt compelled today to comment that Senate legislation calling for a 27.5 percent tariff on all imports from China in the absence of more currency reform was "ill-conceived," according to Xinhuanet via ChinaView. What's more, he extended that observation/warning from Beijing, an odd but otherwise practical locale given the political/economic context at the moment.
The global economy, in short, may be more dependent on consumerism and free trade than you think.
Posted by jp at October 17, 2005 9:14 PM
i think mr snow misses a key element of domestic PRC politics - economic growth is allowed/fostered so that the totalitarian political system can continue to exist, and the puppetmasters in beijing are pretty keen on not letting their arrangement get out of control - if the chinese consumer becomes as indebted (ie. fiscally unstable) as the G7 average consumer, then they'd have TWO reasons to endorse general upheaval since by doing so they'd have a good chance to repudiate their personal debts *and* clear out the totalitarian attic - most indebted G7'ers don't abhor their govt/political system, as much as i think the chinese do
Posted by: franko at October 18, 2005 12:59 PM
...as an investor I will not bet against the consumer. My observations are that "they" can't not (buy more stuff). I have found plenty of upside without that bet, and I, being not of that ilk, will continue to save and invest for my families future. If/when they do run out of steam, I plan to help my offspring purchase "real" assets at fire-sale prices...lo
Posted by: lotek at October 18, 2005 1:05 AM