Wednesday, March 11, 2009

From the World Factory to the World Market

Although the plunge of export are already hitting China hard, my middle-class friends in Shanghai are still surprisingly optimistic. They work for big international corporations, and they are normally negligent of the workers in the manufacturing sector who are affected most by the recession. They firmly believe that China will do much better than the other countries in this crisis, why not, the government promised a 8% growth GDP.

The government is indeed doing a lot to energize the economy. The huge stimulus package will probably indeed provide a growth in GDP. But the GDP growth will mainly come from the constructions of more roads, airports and office towers, which will not provide enough jobs or truly lift people's standard of living. The investment in infrasture will increase China's production capacity even more, with the demand from foreign consumers sharply decreasing, where can all the goods made in China go?

The American consumers' seemingly insatiable appetite was supported by the asset bubble, from financial assets to real-estate, which has finally bursted. Now many Americans will finally learn to live within their means. This change already has a clear impact on China: China's famous trade surplus has decreased 88% in Febuary from January.

The reason my middle-class friends haven't felt the pain yet is they are not part of the world factory. Instead, they mostly work for global corporations that see China not just as a production site but also as a promising market. These global corporations often are reluctant to cut their investment in China because the Chinese market still has a lot of potential to grow while the consumption in the developed world is likely going to shrink for a long time. But the fate of China as the world market depends on whether it can truly raise the people's spending ability.

The domestic consumption in China has been notoriously weak even in China's boom years. Although China became the second largest market in the world for luxury goods, it's only the small amount of bureaucrats and enterpreneurs that gain strong purchasing power. Most people are reluctant to spend because their income grows slower than China's GDP, they are worried about the high cost of health care, medicine, housing and the lack of social safety net. That's why the overall saving rate in China is so much higher than that of America. This will not change easily. My optismistic middle-class friends should realize that their fate depends on whether China can indeed become a strong market, which in turn depends on whether the wealth and privilege they enjoy can be spreaded to their low class fellow citizens. The only way for China to pull it self out of recession is to adjust the wealth distribution and give people more sense of security through better welfare, the people who have been producing everything for the world should be able to consume what they produce too.

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