Fallout: The Financial Crisis

Economy rebalancing China-U.S. trade

Marketplace Staff Nov 13, 2008
Fallout: The Financial Crisis

Economy rebalancing China-U.S. trade

Marketplace Staff Nov 13, 2008


Kai Ryssdal: Phrases like capital flows and insolvency frameworks can be tricky to wrap your brain around. But debt imbalances and how they happened become much easier to understand if you define your terms the right way — by talking about iPods and credit cards instead. Global trade’s not a one way street. Somebody’s got to sell before we can buy. And most often that seller is China.

China plays a huge part in this country’s consumption and borrowing binge, while until fairly recently Chinese consumers haven’t been buying much of anything. But Chinese savers plus Western spenders might add up to trouble for both sides.

To explain, Marketplace’s Scott Tong starts in southwestern China.

Scott Tong: Yunnan province is home to Wang Ji. He’s a 28-year-old office worker and amateur rock climber. Every month, Wang saves nearly 30 percent of every paycheck. Wang learned to be thrifty from his folks, in the bathroom.

Wang Ji: When you are done the washroom thing, you just press the flush, right? That’s it. But my parents think, ah you can save some money. Normally they do not use the flush.

Save water, save money, you get the idea.

Wang: My parents always told me, if you want to save the money, you have to save it everywhere.

Wang’s a great saver, but by definition it also means he’s a bad spender. Here’s why it’s bad. [tape of rap song] Let’s take MP3 players as an example. This is one of Wang’s favorite rap songs. Since consumers here don’t buy enough iPods, Chinese factories have to export most of them. In fact, the government gives those factories special “help” — cheap land, cheap energy and other subsidies.

Economist Frank Song is with Hong Kong University.

Frank Song: So that adds to the competitiveness of Chinese products. So those things were produced at an artificially cheap price and sold to the industrialized countries.

This developed into a kind of economic co-dependency. China got addicted to selling stuff, and Europe and America got addicted to buying. Now, here’s where it got worse.

When China ships out exports, it gets a big stack of foreign currency in return.

Michael McCormack: It’s more than $1.9 trillion.

Michael McCormack is with the consultancy Z-Ben Advisors.

And it has to find a home someplace. You can’t leave it lying around. A lot of it has gone into purchasing U.S. treasuries.

Translation: the U.S. dollars you spent on your iPod went to China, and then did a U-ie. They recycled back in the form of loans, which meant easy money for U.S. borrowers.

McCormack: Whether it’s through mortgages, whether it’s through credit cards. The U.S. consumer thought, 2.5 percent for ten years? Why not, I’ll have a go.

But this whole imbalance hasn’t been all good for China, either.

Song: And now we realize this is hurting us, as well

Again Frank Song of Hong Kong University. He says as China overproduced, it also over polluted.

Song: So you damage your rivers; you damage your beautiful environment; you damage your air qualities etc. You are basically promoting your growth at the cost of your future generations.

If there’s any silver lining, the unsustainable relationship may have ended, since global trade has cratered. The U.S. now needs to live on less consumption, and China has to retool as well, and wean itself off exports. So, here will future growth come from?

That brings us back to Wang Ji, the rock-climber. He and his wife drop 30 bucks at a Shanghai restaurant, which is exactly what Beijing wants to see: consumption, American style. Wang is a saver, but he sure sounds willing to defect.

Wang: As a young people, you know, the most important thing is life. Enjoy your life.

His wife next to him cradles an expensive purse. It’s Coach brand. Inside that purse sits a credit card that her mom and dad don’t know about. Good start.

In Shanghai, I’m Scott Tong for Marketplace.

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