I agree that the dollar is going to get stronger, which will further exascerbate our trade deficit.
This is from the NY Times, and discusses deflation in China due to overcapacity and lack of domestic consumer demand. Seems to me that the Chinese have little choice but to devalue their currency, and pity the folks who have passbook savings accounts:
nytimes.com
By MARK LANDLER
EIJING -- China's top leaders fled the stifling heat of
Beijing last week for their annual retreat at a seaside
resort, leaving behind a city swirling with propaganda about
the crackdown on a spiritual movement known as Falun
Gong.
But while the Communist Party has mounted a relentless
media assault on the group, which it outlawed on Thursday,
economics rather than politics are likely to occupy the
leaders as they gather in the tranquil resort of Beidaihe.
Specifically, analysts here say they will have to confront
China's economy, which is sputtering, and a reform effort
that is in danger of stalling.
"The attack on Falun Gong comes at a time when they have
so much more to worry about," a party functionary in
Beijing said. "We should be concerned about developing the
economy. There's a risk that this will distract everyone's
attention."
In particular, Beijing must figure out how to rebuild the
confidence of battered Chinese consumers. For 21
consecutive months, consumer prices in China have fallen.
That is because, in economic terms, China is in a
deflationary spiral, which means that consumers who are
worried about their futures have stopped buying things.
The deflation has been aggravated by a huge glut in
production capacity. Too many factories are making too
many goods, a lot of which do not appeal to China's jaded
shoppers.
"It's a very worrying set of circumstances," said T.L. Tsim,
an independent consultant on Chinese politics and economics
in Hong Kong. "Once deflation takes hold, it is very hard to
shake off."
Tsim said the downward spiral in prices had slowed China's
once-torrid economic growth and could hobble it further. It
could also derail the radical reforms of China's bloated
state-owned industries that Prime Minister Zhu Rongji
announced with much fanfare in the spring of 1998.
Although China said its economy grew 7.8 percent last year,
economists say the real figure was closer to 4 percent. Even
the official estimates confirm that growth has slowed each
year since 1996.
Maintaining robust growth is crucial in China because with a
population of 1.3 billion that expands at 1 percent a year, the
country must add at least 7.5 million jobs a year just to
absorb the people entering the labor force. And that does
nothing to alleviate the existing unemployment rate, which
economists estimate at 10 percent in urban areas and 30
percent in the hinterland.
Zhu's reform of state industries will necessitate closing down
hundreds of inefficient state-owned companies, which could
throw millions of workers on the streets. The prospect of
these layoffs -- in addition to a loss of benefits and subsidies
as Beijing dismantles its Communist welfare state -- has left
many Chinese people deeply insecure about their future.
"People used to have very little money in their pockets, but
most things were allocated by the government," said Ding
Junfa, deputy director of the state Administration for
Domestic Trade. "Now people's expectations are changing.
They are putting money aside."
The flowering of spiritual movements in such an atmosphere
is not surprising. The popular discontent that flows from a
torpid economy supplies the kindling for groups like Falun
Gong, whose followers draw solace from a blend of
Buddhism, Taoism and breathing exercises.
The government apparently reacted so strongly to the
unexpected emergence of Falun Gong in April because it
recognized the group's success as a symptom of a deeper
social and economic malaise.
There are other reasons Chinese people flock to these sects,
of course -- not the least that after two decades of a more
open society, the Communist Party's values no longer seem
particularly relevant to many Chinese. But at least some
analysts said that people's fear of economic upheaval
appears to be one driving motivation for turning to such
groups now.
"Under Mao Tse-tung, people felt everything was handed to
them. There was no competition," said Dai Qing, a
commentator in Beijing. "Since the Deng Xiaoping era, there
has been more and more competition. People feel they have
no control over their future, especially older people."
Ms. Dai said one reason Falun Gong thrives is that it
promises to improve the health of practitioners by harnessing
traditional Chinese breathing and meditation exercises,
known as qigong. Such remedies may provide some comfort
at a time when the state no longer provides free health care.
"Nowadays people have to pay 70, 80, 90 percent of their
medical expenses," Ms. Dai said. "But many people find it
impossible to pay such large costs, so they turn to other
ways of staying fit and healing themselves. That's why Falun
Gong and other types of qigong have so many adherents."
In addition to those seeking spiritual nourishment, people are
expressing their insecurities in a more tangible way: They are
stashing their paychecks in the bank. The savings rate in
China is roughly 42 percent of household income, one of the
highest in the world. And it is rising as consumer spending
weakens.
By Western standards, consumer spending in China still
looks fine. For a rapidly-developing country, though, the
trend is disturbing. Officials said the growth in consumer
spending had tapered off steadily in recent years, from 10.2
percent in 1997 to 6.8 percent in 1998 and 6.4 percent in the
first half of this year."
Evidence of the new parsimony -- and abundant
overconstruction of new stores -- abounds at the glittering
shopping malls that line Beijing's Changan Avenue. At the
Henderson Center, a multilevel temple to consumerism that
opened last year, a mere handful of shoppers drifted past
boutiques that trumpeted clearance sales the other day.
Wang Taochun hurried past the stores. "I'm like everyone
else," said Wang, a 24-year-old clerk at a computer firm.
"How much I spend depends on how much I earn. Right
now, I'm not earning enough."
A similar scene unfolded at a nearby department store.
Although color television sets were selling at deep discounts,
a sales clerk confided that she would be lucky to sell one a
day. Last year, she said, she was selling eight a day. Next to
the showroom, boxes of new sets were stacked up three
deep.
A 65-year-old retired doctor who would give only his
surname, Zhou, peered at a set that was selling at a 25
percent discount. "I think the price is going to go down even
further," he said, "so I'm going to wait a while before I buy
anything."
Zhou says he is more likely than younger consumers to
replace his television set because he is living on a reliable
pension. Young people, he says, have to weigh major
purchases carefully because neither their jobs nor their
pensions are secure.
The oversupply of television sets in China has set off such a
price war that eight manufacturers of television tubes
recently agreed to suspend operations for two months to
reduce their stockpiles.
"There was a vicious cycle of lower and lower prices and
less and less in profits," said a sales manager at one of the
manufacturers. "We hope this will have some effect, but it's
going to take a long time to solve the basic problems."
The most intractable problem is that there are simply too
many factories churning out everything from refrigerators to
air conditioners to cars. Camera factories, for example, are
operating at less than 20 percent of capacity, according to
government statistics. Even companies that produce China's
once-ubiquitous mode of transportation, the bicycle, are
running at no more than half their capacity.
The glut of capacity is a result of the foreign money that
poured into China in the mid-1990s, leading the economy to
grow at a furious pace. Many of those dollars flowed into
hapless ventures or speculative schemes that are now losing
money. One of China's largest state-owned companies,
Guangdong International Trust and Investment Co., declared
bankruptcy in October, leaving dozens of foreign banks
holding bad loans.
Some economists contend there is little the government can
do to ease price deflation, since it is caused as much by the
surfeit of supply as by the lack of demand.
Until now, Beijing has focused on reviving consumer
demand. It has plowed billions of dollars into vast
infrastructure projects, cut interest rates, announced plans to
raise salaries of civil servants by 30 percent and introduced
tax credits to promote exports.
In recent months, the efforts have taken on an air of
desperation. The state is encouraging more families to send
their children to private colleges so that the parents will dig
into their pockets for tuition. And last month, it began singing
the virtues of investing in the stock market.
The campaign, promoted in official publications, prompted a
flood of purchases, which drove up China's two main stock
exchanges, Shanghai and Shenzhen. The shares promptly
plummeted after Taiwan and China began a bitter row over
defiant remarks by Taiwan's president, Lee Teng-hui.
"Talking up the market was extremely risky," said Shawn
Xu, chief of research at China International Capital Corp.
"Investors may hold the government responsible if the
market crashes."
Like other economists, Xu said China could stimulate
consumer demand only by supporting its private sector. To
do that, he said, the government must overhaul its
debt-ridden state banks and open its capital markets, which
are still off limits to many private entrepreneurs.
He acknowledges that this is no easy task. Two decades
after Deng Xiaoping began transforming China from a
planned economy to a market economy, the country is
entering the most painful and perilous chapter of its
transformation.
"Zhu Rongji is dealing with the things that Deng Xiaoping
didn't want to deal with," said Andy Xie, an economist at
Morgan Stanley, Dean Witter in Hong Kong. "That's why
this is so difficult." |
