Back to Beijing
If only the Chinese would shop (almost) like Americans.

Wednesday, November 29, 2006

TWO MONTHS after a high-profile visit to China, Treasury Secretary Henry M. Paulson Jr. is planning a December return -- this time accompanied by Federal Reserve Chairman Ben S. Bernanke as well as a handful of fellow Cabinet members. The visit is the first in a series of biannual meetings and reflects Mr. Paulson's conviction that high-level intergovernment contacts can help promote policy breakthroughs. It's a worthy effort, but there's no certain payoff. U.S. officials have spent the past few years urging China to rein in its trade surplus, which causes an imbalance in the world economy as well as impatience in Congress. But China's surplus has nonetheless ballooned defiantly.

China's trade surplus reflects an extremely high savings rate: The Chinese are saving so hard that they don't buy what they make and instead export it. Taming the trade surplus must involve shifting China's economy from saving to consumption. But despite repeated promises from its top leaders to move in this direction, China has done nothing of the sort. As of 2005, the Chinese consumed only 38 percent of their gross domestic product (GDP) -- less than in the 1990s and less than every other country, according to Nicholas R. Lardy of the Peterson Institute for International Economics. By contrast, India consumes 61 percent of GDP and the United States consumes an excessive 70 percent.

China's policymakers could stoke consumption if they wanted. They have experimented with modest tax cuts and aim to reduce corporate saving by requiring state-owned firms to pay dividends, starting next year. But they have not taken the step that would make the biggest difference: Raising the government's spending on social services, which would directly boost the government's own consumption and have some effect on households, since one reason for high private savings is the absence of a public safety net. Nor has China allowed its currency to rise, a move that would help to ease the trade surplus. Although the yuan has gained modestly against the dollar over the past year, it has fallen against the currencies of other trading partners.

China has an interest in boosting consumption, so in theory Mr. Paulson should be pushing on an open door. The high-savings model depends on foreigners' readiness to buy ever more Chinese exports, but this will eventually trigger a protectionist backlash. It promotes capital-intensive growth, which is not the most effective way to create jobs for Chinese workers. And the path of capital-intensive growth tends to be energy-intensive, which is one reason China's coal consumption has shot up by two-thirds since 2000 and why China is home to 16 of the 20 cities in the world that score worst for air pollution. Yet all these arguments for a more consumption-based growth model have long been understood by Chinese technocrats. Change has been blocked by a combination of vested interests and political caution.

The United States has an interest in seeing the technocrats prevail. The environmental fallout from capital-intensive growth affects global warming, and China's manipulation of its currency and suppression of consumption undermine public faith in the fairness of globalization. Mr. Paulson is right to press these points to the Chinese. The question is whether China takes its global responsibilities seriously enough to listen.