BARON LAUDERMILK - 12 OCTOBER 2011
The world has silently envied China’s incredible economic progress since the late 1970s. Westerners cringed with jealously when China came out as the world’s new economic engine after the United State’s economy tanked in 2008. China’s newly built capitalist economy guided by a one-party system is impressive, even for people who despise the Chinese government and its radical polices. To the average Joe, China seems to be building cities as large as New York city every year. And it seems that China’s bull market economy will be charging into the future without any problems.
Even at many U.S. universities, it appears that the Chinese students are the most affluent people around. They seem to be the new Joneses. At Ohio University, the Chinese students have reaped the benefits from China’s economic miracle. Many students stare in awe when they see a young Chinese student cruising in a brand new Mercedes Benz through the forests and Appalachia of Athens, Ohio. I have heard American college students say, “Those Chinese people are so lucky, their economy is making all the Chinese people rich.”
Unfortunately, the Chinese undergraduates in Western universities, whose’ families typically come from high government positions or state-owned industries, do not begin to represent the whole Chinese population. In Shanghai (average annual incomes are much higher than in almost every other city in China) , the salary of a average Chinese family just reached $10,000 a year in 2011. Earning this income, even if a family saves two- thirds of it, would still not enable to the family to send their child to the West. So the questions become, are the middle class and lower class Chinese people seeing this new wealth to the extent Westerns think they are? How is inflation affecting their savings? Are their wages rising in proportion with the economic gains? What is preventing Chinese people from buying up Western goods?
There is no doubt that since China’s entrance into the globalized world people are better off than they were before 1978, under Mao Zedong’s leadership. The unemployment rate in China is relatively low compared to the developed nations and wages are going up. Coastal factories in Beijing, Shanghai, and Guangzhou are popping up every day, and minimum wages are skyrocketing. Surprisingly, and contrary to what many people believe, an overwhelming number of factories are raising wages because they are having difficulty finding full-time employees. Luckily, much of the rise in wages on China’s coast are incrementally and surely trickling out to all the different regions, including Tibet and Xinjiang, two of China’s poorest provinces. So yes, the Chinese people are seeing a rise of wages across the country, but the average salary in China is still low compared to the United States and European standards. The average wage in southern China is only about 75 cents an hour.
But China’s low employment rate and rising wages do not mean Chinese people buy many of the new goods and services that are typically found in the West, such as cars, homes, laptops and smart phones, because Chinese people save a huge portion of their money. Why are they saving their money when the economy is booming? Here are five good reasons: (1) China’s volatile market puts off investors. To be more specific, savings interest rates are low. (2)The rise of inflation is much higher than saving account rates (3) The soaring price of food. (4)The lack of a dependable social net. (5) The rise of housing prices.
The Chinese Communist Party (CCP) is keeping interest so low that it cannot keep up with China’s rising inflation. The New York Times interviewed a couple in Jilin, China, who could not afford to own a home even though they made $16,000 a year, which is much more than the national average. This partly due to the fact that Chinese savings account rates are only three percent while China’s inflation is over six percent. The couple in Jilin, as with millions of other Chinese households, are skeptical of China’s unstable stock market, so they save more than two thirds of their money.
Food prices are soaring. The prices of pork, vegetables, edible oil, flour and even rice are all seeing drastic rises, making households’ budgets tight. Chinese people cannot spend their money on new gadgets and clothes when more than half of it is going towards food. Inflation is not the only reason that is pushing up the price of food. Flooding in southern China is wiping out important crops. A flood in Zhejiang province in June 2011 damaged more than 241,600 hectares, and 432,000 hectares in total have been affected by flooding across the country. The constant rise of prices is making Chinese people stash as much money as possible until the market indicates stability. Currently, there are no signs that food prices are going to decline in the near future. Despite the CCP’s price controls that were implemented in November 2010, the increase in food prices will not end any time soon.
One would think that as the Chinese economy develops, as China buys trillions of U.S. reserves, and as the Chinese government modernizes its military, that it would also funnel some of its new money towards its people in a social safety net. In the last three decades, the CCP eliminated its, “Iron Rice Bowl” socialist policy, which guaranteed people a steady job and retirement benefits, and instead shifted its economy to a more individualistic, take-care-of-yourself type of economy. This has forced Chinese people, even those reaping the prosperity generated by China’s economic boom, to take care of their aging parents, and to save for their own retirement.
Homes throughout China, especially its largest cities, are as expensive as in London and Tokyo. IMF figures demonstrate that a 70- square meter home in Beijing costs 20 times the average households’ income. A survey done by the People’s Bank of China in September, 2011, found that 76% percent of residents saw housing prices as too high, and a large portion of them believed that the prices would keep rising. The possibility rising housing prices across the country will not persuade its Chinese to spend more money on foreign goods. To the contrary, the very idea that housing prices may rise in the near future will compel many Chinese people, young and old, to save money.
The above five reasons why Chinese people are not spending money shows that the economic boom has not allowed the majority of the population to enjoy its benefits. Actually, China’s middle and lower classes are paying for the wealthy elites to live their extravagant lives. The average Chinese couple’s saving account rates are low so the banks can funnel that money into real estate. Inflation is high for the average person, it does not affect the government officials or corporate leaders as much. The lack of a social net increases the feeling of insecurity in the people, but keeps taxes on businesses low. And housing prices are making it virtually impossible for someone earning an average wage in Beijing, Shanghai or Guangzhou to purchase a home, but real estate speculators are becoming rich. Ninety-nine percent of Chinese people are paying for the other one percent to do whatever they want, and buy whatever they want. This situation appears to be very similar to that of the United States.
If the Chinese Communist Party (CCP) can find a way to encourage its people to spend, it will kill several birds with one stone. It will alleviate the West’s anger that China’s government and people save too much and don’t buy international products, and it will also mitigate the protest and dissent against the CCP growing among struggling households, a problem the CCP desperately wants to solve.
The CCP can increase spending by building China’s middle class. It can do this by allocating more funding to its social net to secure children and elders at the minimum.
A health care system which covers children and elders will allieve working young and middle aged workers’ worry about their children’s and parents’ health care, so they will spend more money on consumer goods. The CCP must ensure its people that housing, food and education prices are stable, and will not see random price hikes in the near future. The majority of Chinese people save a huge portion of their money to purchase a home, but if housing prices could be lowered people could spend more money on products, thus encouraging domestic spending across the board.
Finally, it is important that the CCP focus on increasing wages in both the private and the public sector while controlling the rise of inflation. If the CCP can secure a confident middleclass, the lives of average Chinese people will become drastically better. This will calm the West, bring security to the Chinese people, and even bring some legitimacy to the CCP regime.
The world has silently envied China’s incredible economic progress since the late 1970s. Westerners cringed with jealously when China came out as the world’s new economic engine after the United State’s economy tanked in 2008. China’s newly built capitalist economy guided by a one-party system is impressive, even for people who despise the Chinese government and its radical polices. To the average Joe, China seems to be building cities as large as New York city every year. And it seems that China’s bull market economy will be charging into the future without any problems.
Even at many U.S. universities, it appears that the Chinese students are the most affluent people around. They seem to be the new Joneses. At Ohio University, the Chinese students have reaped the benefits from China’s economic miracle. Many students stare in awe when they see a young Chinese student cruising in a brand new Mercedes Benz through the forests and Appalachia of Athens, Ohio. I have heard American college students say, “Those Chinese people are so lucky, their economy is making all the Chinese people rich.”
Unfortunately, the Chinese undergraduates in Western universities, whose’ families typically come from high government positions or state-owned industries, do not begin to represent the whole Chinese population. In Shanghai (average annual incomes are much higher than in almost every other city in China) , the salary of a average Chinese family just reached $10,000 a year in 2011. Earning this income, even if a family saves two- thirds of it, would still not enable to the family to send their child to the West. So the questions become, are the middle class and lower class Chinese people seeing this new wealth to the extent Westerns think they are? How is inflation affecting their savings? Are their wages rising in proportion with the economic gains? What is preventing Chinese people from buying up Western goods?
There is no doubt that since China’s entrance into the globalized world people are better off than they were before 1978, under Mao Zedong’s leadership. The unemployment rate in China is relatively low compared to the developed nations and wages are going up. Coastal factories in Beijing, Shanghai, and Guangzhou are popping up every day, and minimum wages are skyrocketing. Surprisingly, and contrary to what many people believe, an overwhelming number of factories are raising wages because they are having difficulty finding full-time employees. Luckily, much of the rise in wages on China’s coast are incrementally and surely trickling out to all the different regions, including Tibet and Xinjiang, two of China’s poorest provinces. So yes, the Chinese people are seeing a rise of wages across the country, but the average salary in China is still low compared to the United States and European standards. The average wage in southern China is only about 75 cents an hour.
But China’s low employment rate and rising wages do not mean Chinese people buy many of the new goods and services that are typically found in the West, such as cars, homes, laptops and smart phones, because Chinese people save a huge portion of their money. Why are they saving their money when the economy is booming? Here are five good reasons: (1) China’s volatile market puts off investors. To be more specific, savings interest rates are low. (2)The rise of inflation is much higher than saving account rates (3) The soaring price of food. (4)The lack of a dependable social net. (5) The rise of housing prices.
The Chinese Communist Party (CCP) is keeping interest so low that it cannot keep up with China’s rising inflation. The New York Times interviewed a couple in Jilin, China, who could not afford to own a home even though they made $16,000 a year, which is much more than the national average. This partly due to the fact that Chinese savings account rates are only three percent while China’s inflation is over six percent. The couple in Jilin, as with millions of other Chinese households, are skeptical of China’s unstable stock market, so they save more than two thirds of their money.
Food prices are soaring. The prices of pork, vegetables, edible oil, flour and even rice are all seeing drastic rises, making households’ budgets tight. Chinese people cannot spend their money on new gadgets and clothes when more than half of it is going towards food. Inflation is not the only reason that is pushing up the price of food. Flooding in southern China is wiping out important crops. A flood in Zhejiang province in June 2011 damaged more than 241,600 hectares, and 432,000 hectares in total have been affected by flooding across the country. The constant rise of prices is making Chinese people stash as much money as possible until the market indicates stability. Currently, there are no signs that food prices are going to decline in the near future. Despite the CCP’s price controls that were implemented in November 2010, the increase in food prices will not end any time soon.
One would think that as the Chinese economy develops, as China buys trillions of U.S. reserves, and as the Chinese government modernizes its military, that it would also funnel some of its new money towards its people in a social safety net. In the last three decades, the CCP eliminated its, “Iron Rice Bowl” socialist policy, which guaranteed people a steady job and retirement benefits, and instead shifted its economy to a more individualistic, take-care-of-yourself type of economy. This has forced Chinese people, even those reaping the prosperity generated by China’s economic boom, to take care of their aging parents, and to save for their own retirement.
Homes throughout China, especially its largest cities, are as expensive as in London and Tokyo. IMF figures demonstrate that a 70- square meter home in Beijing costs 20 times the average households’ income. A survey done by the People’s Bank of China in September, 2011, found that 76% percent of residents saw housing prices as too high, and a large portion of them believed that the prices would keep rising. The possibility rising housing prices across the country will not persuade its Chinese to spend more money on foreign goods. To the contrary, the very idea that housing prices may rise in the near future will compel many Chinese people, young and old, to save money.
The above five reasons why Chinese people are not spending money shows that the economic boom has not allowed the majority of the population to enjoy its benefits. Actually, China’s middle and lower classes are paying for the wealthy elites to live their extravagant lives. The average Chinese couple’s saving account rates are low so the banks can funnel that money into real estate. Inflation is high for the average person, it does not affect the government officials or corporate leaders as much. The lack of a social net increases the feeling of insecurity in the people, but keeps taxes on businesses low. And housing prices are making it virtually impossible for someone earning an average wage in Beijing, Shanghai or Guangzhou to purchase a home, but real estate speculators are becoming rich. Ninety-nine percent of Chinese people are paying for the other one percent to do whatever they want, and buy whatever they want. This situation appears to be very similar to that of the United States.
If the Chinese Communist Party (CCP) can find a way to encourage its people to spend, it will kill several birds with one stone. It will alleviate the West’s anger that China’s government and people save too much and don’t buy international products, and it will also mitigate the protest and dissent against the CCP growing among struggling households, a problem the CCP desperately wants to solve.
The CCP can increase spending by building China’s middle class. It can do this by allocating more funding to its social net to secure children and elders at the minimum.
A health care system which covers children and elders will allieve working young and middle aged workers’ worry about their children’s and parents’ health care, so they will spend more money on consumer goods. The CCP must ensure its people that housing, food and education prices are stable, and will not see random price hikes in the near future. The majority of Chinese people save a huge portion of their money to purchase a home, but if housing prices could be lowered people could spend more money on products, thus encouraging domestic spending across the board.
Finally, it is important that the CCP focus on increasing wages in both the private and the public sector while controlling the rise of inflation. If the CCP can secure a confident middleclass, the lives of average Chinese people will become drastically better. This will calm the West, bring security to the Chinese people, and even bring some legitimacy to the CCP regime.
RSS Feed
