In an effort to maintain its share of the export market, China has decided to depreciate its currency. (In the past, its loose peg to the dollar kept it artificially low as the dollar dropped against the other currencies. Now the dollar is appreciating, making the Chinese currency—the yuan, or renminbi if you prefer—stronger against the rest. That dampens demand for Chinese goods, which become more expensive.) Brad Setser explains the ramifications:
The absence of real appreciation in the past undermines China’s case for reacting to the recent renminbi move by allowing the renminbi to depreciate rather than by doubling down on efforts to stimulate domestic demand. China has by far the world’s largest current account surplus. The latest World Bank report argues, I think correctly, that this surplus should persist next year even as exports slow. China will benefit more than most from the recent large fall in commodity prices. If China is unwilling to accept that its exports will slow as the global economy slows, and instead tries to offset dollar strength by weakening the renminbi against the dollar – or it tries to offset renminbi appreciation with export subsidies – everyone else will face additional competitive pressures.
If I’ve understood this correctly (and I had to read it several times), China would rather intensify its competition for foreign market share than let global economic adjustments enhance domestic demand. The state is futzing with the yuan so its people won’t shop more.
A few weeks ago, I wondered about the future of Chinese consumerism before, figuring that the state had its reasons for impeding it and the ideological forces consumerism would unleash. This NYT story explores the current ideological dispensation for the Chinese—“tenacious thrift”—and takes at face value the government’s efforts to stimulate demand. From this perspective, the challenge is to overcome the paradox of thrift.
Government analysts are looking to consumers, especially the country’s hundreds of millions of high-saving peasants, to pick up much of the slack. “If we can boost people’s confidence and they spend more money, it will not only be beneficial to China but it will help stabilize the world’s economy,” Zhu Guangyao, the assistant finance minister, said last week.
But getting people to spend more, especially in the face of an economic slowdown, may be a tall order. Consumer spending makes up 35 percent of China’s G.D.P., and that number has been dropping since the 1980s, when it stood at 50 percent; consumer activity in the United States, by contrast, is responsible for more than two-thirds of the economy.
As an American, I find this hard to believe, since the desirability of spending and owning are second nature to me. They seem instinctively preferable. But of course, those instincts are my inheritance; it took a century of hard marketing work and a culture that gives pride of place to persuasion. Capitalism seems by necessity to nurture this consumer psychology; it requires that needs expand to foster perpetual growth. It requires us to regard the expansion of needs as a spiritual enrichment of our lives. But needs can only expand when they must suck up higher wages, which aren’t taking off in China yet. And judging by these anecdotes, the Chineses have yet to shift their moral outlook toward spending:
Mr. Dang and his wife, Zhang Fengxia, 52, are the apotheosis of Chinese thrift. They do not use banks — “better to keep money at home,” Ms. Zhang said — and the couple’s biggest expenditure was a used tractor they bought for $1,200 a few years ago. Everything else is set aside for their retirement and for potential medical costs.
Asked if she would use a credit card if one were given to her, Ms. Zhang looked confounded. “What’s a credit card?” she asked, adding, “We have everything we need.”
Xing Xiuqin, 60, bragged that she managed to stash away 80 percent of her income before retiring. “Old people just need one outfit,” she said. “You should save everything for your kids.”
Contrast that with the baby-boomer philosophy, as discussed in yesterday’s post. To reiterate, boomers “have raised overscheduled spoiled children, moved up the corporate ladder by pushing paper rather than making things, lived above their means in order to keep up with their neighbors, bought whatever they wanted using debt, and never worried about the future. Over optimism, unrealistic assumptions, selfishness and conspicuous consumption have been their defining characteristics.”