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Chinese Takeaways
Dr Cees Bruggemans
21 May 2007
Way back at school you may have been asked to solve this kind of problem: The train has two locomotives and twenty wagons, leaves Cape Town on Monday at 8am at a speed of 60km an hour for Johannesburg. How old is the train driver? Show all your calculations.
Sounds familiar? Here is a current one. Since 2000 China has grown 10% annually. In 2000, household consumption was 48% of GDP. Today it is 40%. Are you worried?
Well, yeah, scared stiff. Those Chinese folks are clearly spending less, saving more, denying mankind the benefit of exporting more to them. Indeed, China is becoming overly reliant on investment and exports. This can only end in a train smash before long.
So much for showing your detailed calculations.
Now, could we do this again? These nice Chinese people are doing us endless favours. Go figure.
First, let's forget about them spending less. An economy growing at 10% doubles its real GDP in seven years. So if real GDP was R100 in 2000, by 2007 it would be R200. If in 2000 they consumed 48%, it would have been R48. If they consumed only 40% in 2007, it would still be R80. That?s 66% more than in 2000. In contrast, South Africans will have increased their real consumption by only 45%.
So dig this. China increased consumption by two-thirds in seven years. Two-thirds!!! Half more than South Africans did in their Mother of all Booms! And everyone is crying crocodile tears because Chinese supposedly are spending less. Save those tears for the crocs which are ending up as imitation Gucci bags.
Okay, but they are clearly saving and investing more. But if the consumption share is falling, the investment share cannot keep rising. At some point they start to suffer from insufficient demand. Once they stop growing their fixed investment spending, we all end up in recession.
Not so fast. Chinese households are reducing their share of consumption in income in favour of higher saving for a reason. Their government, in making the switch from glorious socialism to satanic capitalism, decided to break the iron bowl. Market reforms of the past three decades have largely dismantled the safety net of lifetime housing, free education, subsidized health care and state pension.
Thus ordinary Chinese feel a lot more insecure about the future. As a result they wish to save every penny they can. In case of sickness, job loss, a car accident or in old age they will have some way to support themselves.
Those Chinese not consuming all income gains, preferring to save more as a share of income, are being extremely rational. They are liberally consuming more in absolute terms AND are hugely saving more, initially only in low-return bank deposits, but are now discovering the Shanghai stock market (one million new trading accounts weekly). Win-win Chinese style.
The effects ripple wider globally. Chinese businesses are investing and exporting more. They are co-opting the global consumer to help build lifestyle AND nest eggs for Chinese households.
To keep the circular flow going, China needs to invest its surplus savings overseas. Mankind is only too pleased to absorb and blow these supplementary savings inflows on their own consumption, creating Chinese export markets, keeping the circular flow intact.
Instead of the Chinese doing the extra consuming, they are inviting global consumers to do so on their behalf while they focus on saving, investing, exporting and growing rich first. Makes sense?
Only recently China became the world's largest exporter. Its current account surplus has grown to $250bn annually. Can this keep expanding for a while? It probably can, China's exports being dispersed rather than cloudburst concentrated, beloved of Japanese 1970s trade tactics.
Despite US protectionist noises, a strongly growing world economy can accommodate lots of trade displacement before the game is really up. At 10% annually it will take China another seven years to double real GDP to $5 trillion, and another seven years to $10 trillion, by which time the US economy will have grown to $20 trillion, Europe's to $15bn and Japan to $9bn. A lot can happen inside China through 2020.
Even if slower US growth shrinks its trade deficit, China is expanding the global trade imbalances. Recovering US growth next year will happily participate in this, especially its consumers.
South Africa's consumers don't suffer from Chinese-style insecurity, abstinence or US-type slowing. Redistribution bias is driving our enormous consumption hunger, in turn feeding fixed investment needs. As to saving and exporting, these are exotics. Much less fun than simply absorbing global surplus capital and orgy.
A lot more capital may come our way for the time being, accommodating both our consumer urges and investment surges, with the Rand firm, inflation suppressed, interest rates low and asset markets advancing.
Our policymakers face the worst of all political dilemmas, getting cake and having to eat it too. By the way delicious food, those Chinese takeaways.
Original article published at www.fnb.co.za.
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