This past month, I have been researching the economic news about China as it relates to supply chain issues. In some ways, I feel like a doctor who has been examining a patient for general health concerns, chronic illnesses, and even potential fatal disorders, as evidenced by the surfacing symptoms over time.
I cannot X-ray the patient and get a truly perfect picture because China is a communist country, and has only told the doctor what he's supposed to hear. So, with that in mind, let me say what I think may be some of the critical issues that need attention.
China has a truly excessive surplus in export trade. It's just now starting to slow down due to the worldwide economic recession in progress. That means more is going out than coming in.
In terms of resources for these exported-trade goods, in many cases, China is importing the materials from other countries. That means, in order to keep their export trade at the current rate, they have to import the same amount of materials going forward. But China wants to reduce their export surplus, and this could potentially reduce their import of goods, unless they consume more of the goods they produce.
To reduce its trade surplus, China has adopted some policies, such as lowering import tariffs, withdrawing tax rebates for some export products, and taking steps for the gradual appreciation of the Yuan. But China needs to make greater efforts to lower its savings rate, extricate itself from the investment and export-driven growth model, and develop into a consumption-led economy.
Concerning the savings rate, China now has the additional burden of dealing with a society where the households are saving 52 percent of their income. (The rest of the world's savings averages about 19 percent.) China has to change that savings mindset in order to increase consumer spending in the country. One of the reasons the household savings rate is so high, is that the Chinese people are concerned about long-term healthcare issues and retirement income.
China has an underdeveloped Social Security system with rising costs for healthcare. Younger generations are also sending their aging parents to convalescent homes. Consequently, more money is saved for this eventual contingency. Wu Yixue, a contributor to China Daily, made the same argument in an article titled Encourage spending, not saving. Here's an excerpt from the article:
As investment and exports lose steam to drive China's economic growth further, the government's top priority is to boost domestic demand to maintain economic growth. An excessively high savings ratio and households' reluctance to spend will eventually lead to overproduction.
Overproduction means factories will have to slow down, and that means layoffs. The jobless rate will go up, and individual incomes will be impacted. Lower-income citizens will heighten their insecurity about the future, and the savings rate will increase via incomes of other members of the working families.
China is also experiencing the phenomena of younger, educated generations not wanting to take low-wage factory positions. The middle class is growing with the promise and expectation that goods will be available for this enhanced level of lifestyle.
China recognizes the need to make the blue-collar working class feel more important, and more highly esteemed in their society. The announcement from the 18th Congress was that by 2020, the wages for labor will be doubled.
Keep in mind that the actual state of China's economy is a moving target. China has about a 25 percent debt-to-GDP ratio, and trillions of dollars in surplus. They can bail themselves out of some pretty high doctor bills, and improve their economy's immune system with some very strong political treatments.
For October of this year -- compared to a year ago -- factory output rose 9.6 percent, while retail sales jumped 14.5 percent, indicating that domestic demand was holding up. Could these changing savings percentages be the beginning of a recovery?
In the larger scheme of things, we know more about a country's economic health looking back rather than looking forward. We can't use today's snapshot for tomorrow's prediction, but as an armchair doctor, I can be pretty sure that China will not expire anytime soon, nor will it fail to focus its reforms with its entire population's concerns in mind.
More of the money at the top will be distributed, economically stimulating all strata of society, to make sure that long-term growth is sustained. How would you feel if your boss promised you a 13 to 15 percent raise, per year, for the next 7 years? Stimulated?