China's Dilemma: Invest at Home or in US Stimulus
Xu Kuangdi, the powerful former mayor of Shanghai (1995–2001), was, along with former party chief and President Jiang Zemin and former Premier Zhu Rongji, part of the team responsible for China's economic takeoff. He spoke with NPQ on a recent visit to California.
NPQ | Henry Paulson, who just stepped down as United States Treasury secretary, has argued that America's financial crisis came about in part because of the vast amount of liquidity made available to US credit markets as a result of China using its vast reserves—Chinese savings accumulated from the trade surplus with the US—to buy US Treasury bills and securities. That kept long-term interest rates down and fueled the credit bubble.
Do you agree with this analysis?
Xu Kuangdi | I totally disagree with Mr. Paulson. That is like saying you are too fat because my cooking is too good! The problem is not that the Chinese people are saving too much, but that Americans were spending too much.
The real problem for the American economy, in my view, resulted from (former Federal Reserve Chairman) Alan Greenspan reducing the interest rate too much back in 2002. When money is too easy, it is too easy for people to be irresponsible: They get in trouble by borrowing more than they can afford. As China tries to stimulate its own economy, making money too cheap would be a mistake there as well.
NPQ | All told, we may end up spending nearly a trillion dollars on a fiscal stimulus to revive the US economy upon which China's export growth, in turn, largely depends. Because of the current "flight to safety" into US Treasury bills, their interest rates are near zero.
China has about more than $1 trillion in reserves, which President Obama hopes to borrow at this low rate. Wouldn't it be better for China to use that money to invest in its own lagging economy instead of at such a low rate in US debt?
Xu | I am not responsible for China's finances. It is not my cup of tea. But I don't think anybody should be investing in something with such a low rate of return. For China, it would be better to stimulate the economy at home.
Having said that, it is also clear that we live today in a "global village." We are all in this economic crisis together. So, China, like everyone else, needs to balance its own interests with keeping the world economy going. We all have to consider the bigger picture.
NPQ | How much will the export-oriented Chinese economy be hurt by the US downturn?
Xu | Despite what many think, less than 3 percent of China's annual GDP growth comes from the trade surplus with the US. The rest comes from investment and domestic consumption. So, even if China loses 2 percent of its GDP growth from exports falling to the US, we can still grow at a decent rate.
NPQ | China has announced its own $600-plus billion stimulus package. Is that already in motion? What does it consist of?
Xu | Yes, it is already in motion. One of the biggest components is a high-speed train between Shanghai and Beijing, a very labor-intensive project that will add productivity to the whole economy by easing transport links in the future.
We are also rebuilding in the earthquake zone so damaged last year as well as updating infrastructure by embarking on construction of a whole series of regional airports. Especially in the rural areas, social welfare and health care are being beefed up. Also in the more rural zones, consumers can now get rebates on the purchase of electronic appliances.
The tax credit for second apartments and home mortgages has been expanded. There are also credits for purchasing more fuel-efficient cars.
NPQ | Will China ever embrace the Western model of democracy?
Xu | Recently I was speaking to a top US leader who also asked this question. I asked him: "What is democracy?" He said, "One man, one vote." But, where does one man, one vote lead in a society where the middle class is still relatively small compared to so many poor people? In Palestine, it produced Hamas. In Venezuela, it produced Chavez.
China already experimented with mass democracy during the Cultural Revolution, and it was a catastrophe. Do we want some young Red Guard standing on the table today, harassing entrepreneurs and trying to turn back the market economy?