March 4th, 2009
By David Goldman
My longtime colleague Uwe Parpart, now chief Asia strategist at Cantor Fitzgerald in Hong Kong, has argued all year that the Chinese economy will avoid recession thanks to aggressive intervention by the Chinese government. Today’s 6.2% surge in the Shanghai Composite in response to the likely increase in the existing stimulus package bears out the China bulls. This optimism has spilled over into commodity prices and raw materials stocks worldwide.
What’s the difference between infrastructure spending in China (stocks up 20% year to date) and infrastructure spending in the US (stocks down 20% year to date)? China needs infrastructure; the interior of the country remains horrifically backward and spending on infrastructure feeds rapidly into productivity, just as the huge infrastructure spend in the coast had a massive effect on productivity. The US could use some repairs, but putting a few hundred billion dollars into the hands of construction unions won’t change life in the United States.
The US was invited to take part in the $120 billion Asian currency stabilization fund created last month, and turned the opportunity down — again, epic stupidity on the Cecil B. DeMille scale (Ridley Scott for you youngsters). Stabilizing the dollar against the Chinese yuan (and prospectively against other currencies in the region) could be the first step in a Sino-American economic partnership.
Francesco Sisci, La Stampa’s Asia Editor, and I argued that America’s road to recovery ran through China last November:
Recovery requires a great change in direction of capital flows. For the past decade, poor people in the developing world have financed the consumption of rich people in America. America has borrowed nearly $1 trillion a year, mostly from the developing world, and used these funds to import consumer goods and buy homes at low interest rates. The result is a solvency crisis of the American household, which shows up as a solvency crisis for financial institutions. If we reckon the retirement needs of households as a liability, the household sector is as good as bankrupt.
No recovery is possible unless American households can save, and they cannot save in an economic contraction when incomes spiral downwards. To save, Americans must sell goods and services to someone else, and a glance at the globe makes clear who that must be: nearly half the world’s population, and most of the world’s capacity for economic growth, is concentrated in China and the Pacific Littoral.
China’s economic problem is the inverse of America’s: China has achieved fast rates of growth at the expense of huge disparities between the prosperous coast and the backward interior, as well as excessive dependence on foreign markets. China’s policy response to the economic crisis is far more radical than Washington’s. Rather than attempting to patch up the situation and restore the status quo ante, China plans to spend nearly a fifth of its gross domestic product on an internal stimulus focused on infrastructure in its interior. Severe execution risk attends the Chinese proposal, and markets remain to be convinced.
China can reduce the execution risk of its great economic shift towards home consumption, and America can solve its savings problem, through a grand partnership. This partnership need not be exclusive to America and China, but it must be founded on America and China, two of the world’s largest economies. India and the other Asian economies should be encouraged to join this partnership. A great deal has been written about prospective conflict between China and the United States, but very little explanation is offered as to what issues might arise between China and the United States. China and America have far more to gain from cooperation than from conflict.
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