Delusions on China

In June, China agreed to lessen control over the exchange rate value of the Renminbi in part due to pressure from the United States amidst concerns over the burgeoning trade deficit. American economists and politicians (including Obama) have postulated that China purposefully suppresses the value of their currency in order to stimulate exports by making them comparatively cheaper in overseas markets. Thus, when China allows the Renminbi to appreciate without exchange rate intervention, Chinese goods in America will be costlier relative to domestically produced goods. Americans will buy more US goods and less Chinese goods. This will purportedly assuage the growing import-export gap between China and the United States, and also stimulate domestic consumption within China. Currently, the ratio of domestic private consumption (spending by private citizens) to GDP is less than half of that in the US. China's exploding economic growth is comprised mostly of government spending, state-owned enterprises, and export growth. "Common" knowledge amongst economists is that spurring domestic consumption in China will lead to drastic increases in quality of life for Chinese citizens and instill stability in China's continuing economic growth, which needs to maintain annual gains of 8% simply to keep pace with the increasing population. Pressuring China into allowing their currency to appreciate, then, is a high priority in America.

However, this analysis, that Chinese currency revaluation is key to US and Chinese economic stability, unfortunately reflects a crass understanding of their economy. A recent WSJ op-ed, "Bashing Beijing Will Not Help Our Trade Deficit," argues that "the value of the yuan is not the main driver of the U.S. trade deficit. The wages and social safety net of Chinese workers are more important." This is on the right track, but the belief that increased wages for Chinese citizens are tenable is a pipe dream. China remains, more than most contemporary Sinologists are willing to admit, a largely state-run economy. Wage growth will come exclusively at the will of Beijing bureaucrats, not from the idealism and hopefulness of US policy-makers. To charge that we simply must increase wages in China to solve the U.S. trade deficit is akin to asserting that we should just start providing more healthcare to North Koreans in order to improve their quality of life. It's a wonderful aspiration, but pragmatically unattainable.

Pozen writes in the op-ed that "if wages rise in China, its workers would have more money to spend." And, "if wages go up in China, then the prices of its exports will rise." So, Pozen, a senior lecturer at Harvard business school, has solved all our problems: "[American politicians] should support higher wages and a stronger safety net for Chinese workers. These measures would not only help reduce the U.S. trade deficit but also would be consistent with recent efforts of China's officials to improve the living standard of its workers." And we thought cold-blooded capitalists lacked that twinkling idealism. This grand conclusion to his piece begs a question I would've hoped WSJ's editors would've demanded an answer to within the incomplete musings of the article: How do we support higher wages and a stronger safety net for Chinese workers? Perhaps a spirited letter writing campaign to Hu Jintao will do the trick.

Under the Clinton administration, we attempted to "support Chinese workers" by demanding wage increases, strengthened workers' rights, and crackdowns on human rights abuses as precursors to our approving China's admission to the WTO. Ultimately, though, we agreed to forego annual evaluations of our trading relationship with China, relinquish bargaining power over human rights abuses, and adopted China as a permanent trading partner. This gave China free reign over the US economy, as we substantially reduced tariffs and allowed Chinese companies, fueled by low-wage, indentured servitude cost advantages, to flood the US market with abundant, inexpensive goods.

Unfortunately, this favor wasn't reciprocated. US companies wishing to enter the Chinese market face stringent controls over how their business can be operated. China's most effective means of exerting influence over American companies in China is selective enforcement of the law. The way in which Chinese business law is written means that, essentially, in order to do business in China, a company will be violating a whole host of regulations. Companies that follow the Beijing dictums find themselves free from enforcement of China's amorphous blob of business regulations. However, when Beijing is displeased with a company, they swoop in with a variety of fines and punitive measures. China even went so far as to arrest four Australian executives working in Beijing. When US and Chinese values clash, American companies wishing to remain in the Chinese marketplace must placate China. In China, American companies operate entirely within the confines of the interests of Beijing.

For example, Cisco "is the worldwide leader in networking that transforms how people connect, communicate and collaborate." How did they make their money in China? By designing and implementing the firewalls that restrict Chinese citizens' access to information, censor dissidents, and provide Beijing with the intelligence to find and make disappear those who disagree with the party line. Many internet writers and bloggers in China have found themselves placed under house arrest, banned from the Internet, and detained for years without charges.

American banks also face severe restrictions. Most are allowed only one or two branches in the country. And, there are only two foreign-owned ATMs in China. 85% of Chinese citizens don't have access to credit cards. Most have no access to mortgages or other loans. And, the property market in China is so tightly controlled alongside access to mortgages that most Chinese people have to save for 20 years, without the ability to invest or earn interest, in order to purchase a modest apartment at an exorbitant price.

My point is that China's economy is structured to extend state influence, restrict the autonomy of private enterprises, bolster state-run export industries, and force the average Chinese citizen to save an enormous portion of their savings simply to obtain lower-middle class luxuries such as home ownership, reasonable access to health care, and sufficient money for retirement. In fact, China has the world's highest private savings rate. Consider that the ubiquitous American loan: car, house, second mortgage, credit cards, and student loans. They constitute negative savings. As Chinese people have significantly limited access to loans of any kind, they are structurally forced to save more.

Back to my initial point, American policy-makers believe that supporting modest wage growth will spur domestic demand and economic freedom. However, it is clear that despite the influx of McDonald's, KFC, and other bastions of "freedom," China maintains unflinching influence over its economy, wage growth, property prices, access to loans, and business development. That wage growth, globalization, and American companies will lead China to more and more economic and political freedoms is an unfortunate delusion.