Today’s U.S.-China Economic Parallel

The New York Times is running a series of stories on the Chinese (NYSE:FXI) economy; the second of which came out a few days ago. There are quite a few surprising pieces of information in this one, as the view from the West is a great middle class is emerging in China, as labor wage arbitrage drives tens of millions of jobs away from developed economies and into theirs. But some of the statistics were interesting to say the least – seems like China (NYSE:FXI) is having a very similar issue to the United States where even as the economy grows, a disproportionate amount of the spoils are going to the capital (or political) class rather than the labor class. Actually that is not the only similarity – see this passage

the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation.

It’s quite a lengthy article, worth the read – I’ll bring over some of it here.

Under an economic system that favors state-run banks and companies over wage earners, the government keeps the interest rate on savings accounts so artificially low that it cannot keep pace with China’s rising inflation. At the same time, other factors in which the government plays a role — a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to keep saving anyway, against an uncertain future.

Indeed, economists say this nation’s decade of remarkable economic growth, led by exports and government investment in big projects like China’s high-speed rail network, has to a great extent been underwritten by the household savings — not the spending — of the country’s 1.3 billion people.

This system, which some experts refer to as state capitalism, depends on the transfer of wealth from Chinese households to state-run banks, government-backed corporations and the affluent few who are well enough connected to benefit from the arrangement. Meanwhile, striving middle-class families like the Wangs are unable to enjoy the full fruits of China’s economic miracle.

“This is the foundation of the whole system,” said Carl E. Walter, a former J. P. Morgan executive who is co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” “The banks make loans to who the Communist Party tells them to,” Mr. Walter said. “So they punish the household savers in favor of the state-owned companies.”

It is not just China’s problem. Economists say that for China to continue serving as one of the world’s few engines of economic growth, it will need to cultivate a consumer class that buys more of the world’s products and services, and shares more fully in the nation’s wealth.

But rather than rising, China’s consumer spending has actually plummeted in the last decade as a portion of the overall economy, to about 35 percent of gross domestic product, from about 45 percent. That figure is by far the lowest percentage for any big economy anywhere in the world.