China's Too Busy Bailing Itself Out To Bail Us Out Of George W. Bush's Incipient Republican Depression

Rice costs less and works just as well, especially in a recession

If Geithner and Summers and the rest of Obama's economic braintrust is counting on China to bail us out of the recession and keep us from sliding into Depression, we're in bigger trouble than we think we are. I've been reading a fascinating book by China booster Robyn Meredith, The Elephant and the Dragon: The Rise of India and China and What It Means for All of Us. China's explosive growth in recent years isn't all that the media has puffed it up to be, although they are certainly investing more in their infrastructure than anyone else-- including far more than the U.S. But in terms of creating a viable middle class that would be a market for American goods... Well, they've come a very long way, but they're not there yet, and certainly not enough to help us out of the current mess. In fact, the current mess may be far worse there and they'll need all the resources they can get to keep up with their own growth plans-- and stave off the kind of social and political instability China's ruling establishment fears (and loathes) most. In fact, their own Stimulus package was put into place while Republican and Blue Dog obstructionists were tying President Obama's hands and holding him back from doing anything to keep the U.S. economy from continuing to spiral downward. The results for China are very positive so far.

[A] reality check shows that despite trade deficits that alarm the West, a high percentage of China's much ballyhooed economic muscle belongs to foreigners. A large portion of the frighteningly lopsided trade deficit can be traced to good made [cheaply by poorly paid workers] by Western companies in China, then shipped home for sale. China's world-beating exports are indeed thriving, but only four of China's top twenty-five exporters are Chinese companies. Foreign companies and their joint-venture partners produced 88% of China's high-tech exports in 2005. In practice, "Made in China" often really means "Made by America in China" or "Made by Europe in China." China's most profitable business activities are out of the hands of mainland Chinese. China, it seems, has not been invited to its own coming-out party.

Whereas the global part of the Chinese economy-- the part dominated by American and other foreign companies-- is flourishing, the Chinese-controlled portion has an uncertain future. China must transform itself further if it is to reap the full rewards of its own economic rise. More than half of China's incredible 10% GDP growth comes from government and foreign direct investment. If you strip that away, China's growth rate is closer to the American growth rate. China's phantom GDP is fine as long as the heavy investment continues, but it will cause a painful recession if the investment stops. China spent a whopping $201 billion on infrastructure in 2005 alone, with much of the infrastructure supporting exports as well as creating jobs for Chinese construction workers. Foreign investment, which hit $67 billion in 2007, pays mostly for new factories being built in China by multinational corporations or by Hong Kong, Taiwanese or other Asian companies that sell to them. The numbers give China an illusion of strength, but the nation's economy is not as strong as it appears.

Indeed, luring Western businesses to China has cost China hundreds of billions of dollars. Chinese government investments pay for many of the new highways, power plants, office buildings, railroads, and other infrastructure being built furiously in China. The money for this comes primarily from loans from Chinese banks, plus some government-issued bonds, most of which are sold to Chinese banks. The bank loans have created a problem: China's banks are broke, and the government is having a hard time cleaning them up. Ernst & Young "conservatively" estimated that the Chinese banking system had $911 billion in bad loans in 2006, six times the magnitude of the American S&L crisis.

...As Western companies found in the mid-1990's, the miracle growth of Chinese incomes is partly a real force for the future and party exaggerated. A tiny slice of the Chinese population had already gotten extremely rich. In a single generation, Mao's nation of former peasants has spawned 320,000 millionaires. This group, and others with high incomes, has become a bonanza for luxury-good companies... Glitzy malls in Shanghai are filled with deserted luxury stores, but once every few days a man will visit from a distant Chinese city like Wuhan and spend $25,000 on purses, shoes and clothing for his wife or girlfriend, keeping those deserted stores operating at a profit... In the past decade China has become the third-largest luxury-goods market in the world after Japan and the United States... [But] while China's big spenders balloon the market for luxury goods, overall incomes remain low. Chinese officials predict that China's annual per capita GDP level will rise to $3,000-- but not until 2010. Even as most of China's 1.3 billion people have watched their incomes rise dramatically, the majority of Chinese people remain poor; they are just less poor than they were before. Per capita disposable income in the countryside, where most Chinese live, was just $400 in 2005, compared with an average $1,300 in cities. Less than 8% of Chinese babies wear disposable diapers. Toddlers wear trousers called kai dang ku, which have a large slit at the bottom. That's messier but far cheaper. [Someone should alert Louisiana Senator David Vitter.]

The fortunes of Chinese companies mirrors those of Chinese citizens-- a small proportion is unthinkably rich and sophisticated. But the vast majority is poor. Some Chinese companies are making lots of money in China, even some still owned by the Communist government. A few of the biggest state-owned enterprises, like PetroChina, China Mobile, and China Telecom, are very profitable. But most Chinese companies are shaky, despite the nation's overall progress.

Yesterday's L.A. Times ran a piece on the front of the Business Section about how American fast food companies are running into tough times as the Chinese recession takes root. Hard as it may be to understand this but in Asia, restaurants like McDonalds and KFC are actually considered quasi-luxury dining. Chinese consumers are realizing that the food, which was always billed as being "hygienic" (they use refrigerators and don't tolerate rats as much as other establishments) is unhealthy and overpriced.

In the U.S., fast-food chains often thrive in tough times. But not so in China, where Western quick-service food isn't the cheapest stuff in town and, in target markets like Shanghai, there's too much competition. Plus, a growing number of consumers see it as unhealthful.

"Western fast food is still not cheap enough," said Yee Mei Chan, a group-account director at Millward Brown's office in Beijing.

In a recent survey, the marketing research firm found that 78% of Chinese consumers were feeling some effect from the global financial crisis. About half said they were likely to cut down on eating at Western fast-food restaurants.

...Like many retailers in China, including Wal-Mart, McDonald's cut prices recently, saying it wanted to do its part to keep China's economy growing. Its new "value meals" cost $2.42, a saving of up to one-third for combos such as a double cheeseburger, medium-size French fries (or cup of corn) and a Coke.

A far bigger and more familiar and nutritious meal in a local fast food restaurant will cost around $1.00. And many Chinese just like rice more.