China’s economic picture

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China’s economic picture is not as rosy as it might appear on first glance. The income gap between the urban rich and the rural poor is growing. And as correspondent Mary Kay Magistad reports, since China can no longer count on US consumption to drive growth, its time for China to rethink its export-driven economy.

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KATY CLARK: In China, at least, prosperity almost seems to be a permanent condition.  Growth even during this year of global economic crisis is expected to top eight percent. But that’s only part of the picture.  Dig beneath the rosy surface of China’s economy and you’ll find some thorny problems.  The World’s Mary Kay Magistad in Beijing did just that.

MARY KAY MAGISTAD: This short block spans the chasm between those in China who felt and didn’t feel this year’s financial crisis. Real estate developer Jung Pung Hue [PH] says, “What crisis?”  His real estate investments have gone up 50% this year. But another guy walking on this block, Jah Wang Tao [PH] says he’s feeling a bit of a pinch.

TAO: [In Chinese]

MAGISTAD: Jah says he runs a chain of manicure and pedicure shops that cater to foreigners, and business is way down this year. He’s cut back on non-essential purchases but he wouldn’t say he’s hurting.  A woman named Gwo Ping [PH] is. She’s bundled against the bitter cold on this block roasting sweet potatoes over coal and selling them to passers by for thirty-five cents each.

PING: [In Chinese]

MAGISTAD: Gwo says it’s been a bad year for her. The cost of sweet potatoes and coal have both gone up about 20%, but the price to customers has stayed the same.  She says she makes about a $150 a month. Not much in Beijing, but better she says than she’d do in the poor mountain village she’s from.  People like Go Ping are like the canary in the coal mine for China’s leaders. They know the income gap between the urban rich and rural poor is growing fast, and they fear that high rural unemployment could lead to major unrest. So, this year’s economic strategy has been to throw money at infrastructure projects, and create jobs. And that’s pretty much worked. But China’s leaders and their advisors realize this is only a temporary fix.  Than Mehn [PH] is the Deputy Secretary General of the State Council Think Tank.  He said recently on state run TV that China must rethink its export driven economy.

MEHN: That structure has to be changed.  One reason is because the U.S. economy, world economy in the next few years is very unlikely it will fully recover slow growth. And secondly, from a China’s domestic point of view, we should not too much depend on the external market. It should be more growth, more benefit to the local citizens.

MAGISTAD: The tricky part is getting Chinese consumers to spend more and doing it quickly enough to make up for American consumers reining it in.

MICHAEL PETTIS: That’s really key for China if consumption doesn’t surge, then GDP growth has to slow down significantly.

MAGISTAD: Michael Pettis is a Finance Professor at Peking University and former head of Emerging Markets at Bear Stearns.

PETTIS: If China can’t count on excess U.S. consumption, then Chinese consumption growth becomes more important than ever. And I’m worried that some of the infrastructure spending may actually reduce future consumption growth domestically.

MAGISTAD: That’s partly because the money spent on infrastructure could have gone to strengthening China’s minimal social safety net so Chinese consumers don’t feel they have to save 20, 30, even 50% of their income just in case.  Pettis also says that infrastructure projects ultimately cost the consumer.

PETTIS: And they’re usually paid for and they’re always paid for by households in the U.S. typically in the form of taxes.  In China typically in the form of indirect taxes such as very, very low interest rates on their savings deposit.  And if you force households to pay for non-economic investment, you are going to reduce future consumption.

MAGISTAD: Greer Wanja Bao [PH] cautioned again this week that China’s economic recovery is not yet stable. Hong Kong Chief Executive Donald Jong also warned yesterday in Beijing that he’s pessimistic.  He expects another economic downturn by mid year and Hong Kong’s economy is closely tied to Mainland China’s. These sober assessments may come as a surprise to American’s who view China as an unstoppable economic power to which the United States now comes begging.  Some Chinese media have played up this image, but it’s not that simple. China’s leaders may grandstand against what they say or the irresponsible U.S. fiscal policies that got the world into this mess, but they also know they’ve got an economic mess of their own to sort out at home with limited time and no easy answers. For The World, I’m Mary Kay Magistad in Beijing.

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