export substitution

The meta argument over China tends to degenerate into a world domination/inevitable collapse duopoly, and this seems to be reflected in commentary on China’s role in the current economic crisis: China’s either going to save the world with its incredible foreign currency holdings or it’s going to be final nail in the coffin of the global economy.

The problem with the first part of this analysis is that it gives no reason why China should prop up the global financial system. What, specifically, does China get out of it? The weakness of both parts of the argument is that they assume that China is so irrevocably entwined in the global economy that it has no other options. Yet that reflects China’s dominant position in manufactured exports, not the position of the Chinese economy as a whole.

I’ve argued before that it’s a pay for play deal. China’s willingness to invest in the rest of the world is bound up with the rest of the world’s willingness to invest and to buy its stuff. If this wanes, then it can choose to spend its money on promoting internal consumption. Most analysts say that the Chinese middle classes – ie, the consuming classes – amount to about 200 million people. That leaves a reserve army of consumption of over a billion.

Anyway, the results are in. China Law Blog has a translation of a report from Caijing, China’s version of the economist, which says the following:

The government's main priority will now be to introduce policies to prevent a hard landing and this will be the focus of the meeting of Communist Party leaders in November. Caijing notes that because of the US financial crisis a prolonged slowdown in export growth is to be expected. They suggest policies to strengthen domestic demand are the best and most likely option for the government. In particular they propose: 1. expanding medical insurance and constructing a rural health care network; 2. increasing the provision of affordable housing; 3. an end to control of food prices combined with food subsidies for poor people; and 4. a tax cut for middle income families to help boost domestic consumption. With these policies, GDP growth could be increased by 1.5-2% - enabling China to achieve GDP growth in 2009 of 8.5%-9.5%.

This is not yet government policy, though Caijing does operate as a kind of external brain of the Chinese economic apparat. One thing worth noting here is that housing and medical expenses are major drivers of domestic saving in China, savings which in the past have been converted into dollar holdings. Taxpayer funded healthcare and more public housing will tend to redirect that saving into consumption. And with less money around for dollar conversion, China’s going to be a good deal more choosy about what US policies it cares to underwrite.

Comments

[CharlieMcMenamin]

So, if the West is to be pulled out of recession from China's continuing growth we're going to have to do a bit more than just sit back and offer them the deeds to the family silver? We're actually going to have to go and help them build 'domestic consumption'?

What's the Mandarin for 'Auf Wiedersehen Pet' ?