The China Economic Miracle

Is the economy of China going to overtake the economy of the United States as the world’s largest economy? I can’t answer that question and neither can anyone else. However, in order for each of us to reach our own conclusion (or not) and make investment decisions, it is certainly beneficial to understand as much as we can about what is going on over there.
 
To that end, here is some information to supplement last week’s article:
 
China’s plan has been to increase domestic consumption to drive their economy, thereby lessening the dependence on foreign consumption. This means they want their own people buying the products produced there so they don’t need to depend on people in other countries to buy their goods.
 
Their domestic consumption only accounts for 35% of GDP right now. That means that 65% of their economy currently depends on foreign consumption. Most of their foreign consumers have been westerners…people in North America and Western Europe. We know what’s going on in the United States and we hear almost daily about countries on the brink of bankruptcy in Western Europe.
 
People in the West have less discretionary income than they used to have. For a while, that was good for China because these consumers were forced to buy cheaper goods from China rather than buying the more expensive goods produced in the U.S. and Europe. But now, as more people have been unemployed for longer than occurred during the Great Depression, people are having to cut back even more. They are giving up most, if not all, discretionary spending. They don’t need the latest iPhone, mp3 device, or eReader. They must focus more on their needs, not their wants.
 
Interestingly, the state-owned enterprises and organizations in China that appear to be very successful and profitable only successful because the government subsidizes them.  They have access to cheap credit or free capital from the government. If access to cheap credit, free capital, tax subsidies, or monopoly rents were cut off, they would be losing money and, eventually, they would fail.
 
What this means for the Chinese consumers of the products or services produced by these favored enterprises is that they have to pay a lot for low quality. They pay a lot because there is nowhere else for them to go to buy these goods and services… there is no competition for their business. The quality is low for the same reason: there is no competition to produce the product or service.  Who could compete with a company that gets all this financial assistance from the government?
 
This is just one way the Chinese consumer is repressed. They pay more for what they need from domestic businesses, thereby reducing the amount they can spend on 1) other things to improve their quality of life, 2) more and better food, and 3) renting a place to live in a better neighborhood.
 
Some people, including my brother, like to buy things that are made in America. When people do this, they stimulate the U.S. economy, thereby maintaining or creating jobs for Americans. This is a great idea as long as the items made here are not prohibitively more expensive than the items made in China. Even if it is more expensive, you may decide the quality warrants a higher price. This is the prerogative of those who can afford to choose to pay more for a product made in the U.S.A. vs. a comparable product of slightly lesser quality made in China.
 
A side effect of buying goods made in America is that there will be less money from China flowing back here to fund our government. If there are fewer dollars going to China to purchase their goods, Chinese exporters and businesses won’t have dollars to invest in US Treasuries. That means there will be less money available in the U.S. to help the homeless, the people living on social security, and the people on unemployment, etc. If you don’t understand what I’m talking about here, go take a look at my previous article, “China is the U.S.’s Biggest Creditor – How We Got Here.”
 
The other way to pay for these programs is with massive money printing. That is already being done and will continue indefinitely into the future. If foreign creditors quit buying our Treasuries, this will be ramped up even more as the only way to fund our government. Is this a better way to take care of the people who are dependent on the government…just print the money?
 
With money-printing comes inflation and even hyper-inflation. This hurts the people who have worked their whole lives and saved so that they could live comfortably off their savings. They didn’t want to depend on the government taking care of them during retirement, but now, in spite of all their efforts, they cannot live off of what they saved. Do you see how everything is interconnected? There are no simple answers.


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