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October 03, 2004

China and Housing Prices

Michael Blowhard writes:

Dear Blowhards --

Bossy and know-it-all twits they may be, but The Economist's editors and writers still manage to fill the magazine's pages with fascinating and often eye-opening facts. This week's issue contains a substantial piece about savings rates and housing bubbles, as well as a package of pieces about China's business and trade prospects. I noticed a couple of interesting connections. Globalism on the march?

First, savings rates and the housing bubble.

  • "America's net national saving rate, the share of income that Americans are putting aside for their future, has fallen to a record low."

  • "The gap between [U.S.] income and spending has been financed partly by income-tax cuts, but also by saving less and by borrowing. Thanks to low interest rates the price of assets, especially homes, has risen steeply, which has made households feel richer and encouraged them to spend."

  • "Despite low interest rates, households' total debt-service as a proportion of income is already close to a record high ... The average saving rate has plunged from 12% to less than 2% over the last two decades."

  • "Average house prices in America have risen by 40% in real terms since 1995 ... The increase is twice as big as in America's previous booms in the late 1970s and the late 1980s, making this the country's biggest house-price boom in recorded history."

  • "The average ratio of house prices to incomes is already at a record level, yet people are still buying homes in the unrealistic hope of large future price rises."

And now, China and its role in leading us down this particular primrose path:

  • "The Chinese government invests a large chunk of its export earnings in [U.S.] Treasury bonds, helping to finance America's current-account deficit. This keeps American interest rates low and so supports consumer spending. In essence, China is buying dollar assets to ensure that Americans can afford to keep buying its exports."

  • "The recent decline in jobs in American manufacturing has coincided with a big increase in America's trade deficit with China, which reached $124 billion last year."

  • "[China] is the largest receipient of foreign direct investment, as multinationals have moved operations to China to take advantage of its low labour costs and huge domestic market. It is the new workshop of the world, producing two-thirds of all photocopiers, microwave ovens, DVD players and shoes, over half of all digital cameras and around two-fifths of personal computers."

Sounds to me like one of these countries is conducting its affairs pretty shrewdly. Too bad it isn't America.

The Economist's website is here.



posted by Michael at October 3, 2004


All my life I've been reading dire warnings about American's low savings rates, their indebtedness, America's unfavorable balance of trade with the rest of the world, the low rankings of American students relative to other nation's students (admittedly another topic) etc., etc. And yet the American economy continues to be the engine pulling the world forward and American innovation outstrips that of any other nation or region.

So mark me down as sceptical.

Posted by: ricpic on October 4, 2004 10:56 AM

I am with Ricpic on this one.
I was just about to comment that I think that I have been reading this story since I became really aware of houses -- say 1972 when I bought my first one.

There may indeed be a problem but I have been hearing about it for so long that I am deaf to it.

Also. Isn't paying off debt for a very large capital object e.g. a house, very much similar to saving?

In both cases one is directing capital to a specific purpose and accumulating. No?

Posted by: David Sucher on October 4, 2004 11:59 AM

Not always, David.
If (when?) the housing bubble bursts, yours, say, 800,000 paid off house (pre-burst estimated value 1.2 mln) will cost only 600,000 on a new "buyer's" market - than far from saving you actually loose 200,000. Just sayin'.

Ricpic, I too like positive thinking; nevertheless our scientific/innovation advantage is due mainly to the smart (in the past) immigration policy. As an example, let me quote from my son's Styuvesant H.S. site:

Facts about the school:

*Stuyvesant's student body numbers 3,200 kids?

* 20,000 kids take the test each year for 750 places in the freshman class at Stuyvesant?

*30% of the incoming freshman class are immigrants to the United States, and an additional 20% are first-generation Americans?

*the average SAT scores of its students are 693(v) and 734(m)?...

And it is one of the best public schools in the country, 100% of graduates go to [again] best colleges. Imagine the average figures.

Posted by: Tatyana on October 4, 2004 1:24 PM

I've never understood the "low savings" criticism as I believe that investments and capital purchases (i.e. home equity) do not figure into what is deemed "savings". My wife and I live well below our means, have no credit card debt, and set aside 20% for our 401k plans and other investments. Yet, I understand that we have little to no "savings" as we don't let our money rot in a bank account paying 2%.

As to the previous post of how home value fluctuations can wipe out household wealth, this is undoubtably true. But, still, official measures of the savings rate show no distinction between someone who spends an extra $300 a month to pay his mortgage down quickly versus someone who blows it at the track.

Now, all that being said, is the average American overextended financially? Probably. But, I would love to see an intelligent discussion of the real savings+investment rate of Americans.


Posted by: Robert Holzbach on October 4, 2004 3:23 PM

Somebody in Washington. sometime, defined a "savings rate" that doesn't include the primary method Americans use to save, home equity. Was this a mistake, or a forced error.? The history of this odd definition should reveal much. I don't think we could google this, smells like FDR's work to me.

Posted by: Ripper on October 5, 2004 8:15 AM

Actually, what I found neato about all this was the fact that China's apparently doing its best to help keep our interest rates low, thereby encouraging us to buybuybuy the products they're making, which of course we once made ourselves ...

Posted by: Michael Blowhard on October 5, 2004 9:00 AM

Another angle, China's actual savings rate is lower than ours because Chinese probably still can't actually own their homes.

Posted by: Ripper on October 5, 2004 9:17 AM

The question that keeps coming to mind is what would happen to the US economy if, as a result of a tiff (like the US helping Taiwan defend itself against a Chinese invasion), China decided to sell all its bonds?

It would hurt China, of course, but they have alternate methods of keeping the populace in line (and a popular war always helps).

Anybody have a pointer to a *realistic* portrayal of the consequences? I'm curious whether China now has a non-nuclear way of obliterating the US economy, or whether despite everything, it would merely be an unpleasant blip.

Posted by: Tom West on October 5, 2004 9:39 AM

"urban land in China is owned by the State...Individuals, including foreigners can hold long-term leases for land use."

No home ownership, they can't invest in long term land value. So their actual savings rate could be is much lower than ours.

Posted by: Ripper on October 5, 2004 7:41 PM

I'm not quite as pollyannish as David. For one thing, when engineering skills (and drive) can be had at 20% of the cost, how long will American engineering and innovation be as dominant? Especially since American (and European) companies are now off-shoring design and technology development. I really believe separating research and development from actual manufacturing begins to cost one. Why do we assume an American firm tied to Chinese manufacturing will always be able to out-think a Chinese firm that taps cheap engineering talent and a more intimate, first hand knowledge of manufacturing?

On the other hand, if we collapse, we drag the whole world down with us. That's a less conspiratorial reason for theinking the Chinese are keeping us afloat. However, even here, what happens when (and it'll happen sooner than we think) the Chinese economy no longer needs the US as much (or at all). Their middle class is growing pretty rapidly.

I tell people with kids: Make sure your grandkids learn Mandarine. It will be the Chinese 21st century.

Posted by: Brian Miller on October 5, 2004 11:53 PM

Brian, may be there is still hope for us non-linguists to be content with only English if we try to solve the problem from a different end.

Business will always try to lower the production cost by cutting the price of the components of it. If cost of, say, assembly labor can't go down in this country business will cut down on research and engineering.

What if instead of cheapening highly qualified engineering and research labor (if we agree it's much more cost- and time-consuming to become scientists and engineers than assembly workers) we eliminate unions? Skewed and unrealistic labor costs will be determined by market laws, plumbers and carpenters aren't going to be paid in same range as PhDs and engineers with 20 yrs of experience and our general production costs will be lowered making it beneficial enough for the big business to invest in in-country manufacturing.

But I think you wouldn't like the idea...

Posted by: Tatyana on October 6, 2004 10:15 AM

Ripper is blowing his land value point way out of proportion. 1. Money is fungible; houses and land ain't. That's why they call it money. That's the whole point. Houses and land are based on location location location, they're particular, unique, and not worth squat if you don't find a buyer. Money on the other hand, travels a whole lot better. And it's a heck of a lot easier to find takers. It's also quite divisible, which makes finding the takers a bit easier too. 2. Governments can tax and take land and houses with much less trouble than money. You can move money, hide it. You can't hide a house and a farm. You can take your money with you to some other jurisdiction. You can't take the land. So the Chinese have less ownership rights than Americans. So what? What if the US changes the rules a little bit? There are towns in the midwest giving using eminent domain to let Wal Mart build; cities using it to build stadiums. 3. US housing might be a bad investment anyway. Have you seen the suburbs lately? You have to drive everywhere; the newest houses are huge, take a lot of space and energy. A lot of good farmland has been paved over. And now $50 a barrel oil. The party's over dude.

Money can't buy everything it's true/
but what it can't buy, I can't use/
now give me money/
that's what I want....

4. And another thing; the suburbs ain't capital investments like factories are.

Posted by: Chris on October 6, 2004 10:22 AM

Ripper, there is no land ownership in China as ithere was none in former SU, and so you're right - people's actual savings' rate is much lower than ours.
But the savings go to the owner of the land (AND the manufacturing, AND the military AND the agricultural production, etc) - to the Chinese government.
Who redistribute it per "People's interest", as in bigger military and military research...

Posted by: Tatyana on October 6, 2004 11:21 AM

Ripper, there is no land ownership in China like there was none in former SU, and so you're right - people's actual savings' rate is much lower than ours.
But the savings go to the owner of the land (AND the manufacturing, AND the military AND the agricultural production, etc) - to the Chinese government.
Who redistribute it per "People's interest", as in bigger military and military research...

Posted by: Tatyana on October 6, 2004 11:22 AM

john quiggin has written about this here, here and here :D

i'd just add that while china has been "doing its best" to fund US deficits, japan has been doing about twice as much (pp.13-14) and a bit more lately besides! [breakdown]

Posted by: glory on October 6, 2004 2:46 PM

I am always skeptical of "rates" since they are percentages and not hard numbers. If the savings rate in 1940 was, say, five percent and the average annual income was 1200 dollars that's an average savings of 60 dollars per household per year.

Today, with the average annual income above 40000 dollars, well, you figure it out. Even a savings rate of 1/2 of one percent is greater than a five percent rate in 1940.

Bottom line? More money in banks & s&l's than ever before, more money to loan to businesses and individuals.

Posted by: Allan on October 7, 2004 12:44 AM

hey, i was just reading this article by martin wolf in the FT about "this year's 'World Development Report' among the most important the World Bank has ever produced," which seems to basically take hernando de soto's position in 'the mystery of capital':

It is about how to make market economies work. This grand theme is hidden in the less than racy phrase "investment climate".* The arguments and evidence are as wide-ranging as the theme. The report is based on two big research projects: surveys of the investment climate that now cover 26,000 businesses in 53 countries; and the "doing business" project, which identifies obstacles to business in 130 countries. The result is a fascinating document.
Governmental failure is the most important obstacle business faces. Inadequate enforcement of contracts, inappropriate regulations, corruption, rampant crime and unreliable infrastructure can cost 25 per cent of sales (see chart). This is more than three times what businesses typically pay in taxes. Similarly, when asked to enumerate the obstacles they face, businesses list policy uncertainty, macroeconomic instability, taxes and corruption at the head of the list. What do these have in common? Incompetence and malfeasance by governments is again the answer.
What then is to be done? The report stresses, rightly, that a better investment climate is not necessarily the one business wants. Incumbents want neither taxes nor regulations but do desire barriers to new competitors. Yet taxes are needed to finance the activities of the state, while regulation is required to curb environmental or other damage. Moreover, competition is the engine of progress. What companies want is, in short, often the opposite of what the economy needs.
In many developing countries, the requirement is not less government but more and better directed government. What does this involve? Four requirements are listed: a reduction in the "rent-seeking" that affects all countries but mars developing countries to an extreme extent; credibility in the making and execution of policy; the fostering of public trust and legitimacy; and the tailoring of policy responses to what works in local conditions.
One of the conclusions the report rightly draws from this list is that reform is not a one-off event but a process. What is involved is not just discrete and well-known policy changes (such as lower tariffs) but the fine-tuning of policy and the evolution of institutions. This is why, it suggests, the credibility of the government's journey, as in China, may be more important than the details of policy at each stage along the way.
Turning these broad objectives into specific policy is a tricky business. The Bank describes its core recommendation as "delivering the basics". These are: stability and security, which includes protection of property (see chart), facilitating contract enforcement, curbing crime and compensating for expropriation; better regulation and taxation, which means focusing intervention where it is needed, broadening the tax base and lowering tax rates, and reducing barriers to trade; better finance and infrastructure, which requires both more competition and better regulation; and transforming labour market regulation, to foster skills, while avoiding the counterproductive interventions that so often destroy employment in the formal sector.

wolf then goes on to note that much of this is beyond the direct purview of the bank and why development is so difficult in the first place.

the relevant point for this discussion being that there's a good reason why some countries that could otherwise use the capital export it to the US instead for safe-keeping despite the relatively low returns. so hope that the US collectively deploys that capital more effectively and for positive real returns :D


Posted by: glory on October 7, 2004 2:52 AM

ah, oops! that would be...

*A Better Investment Climate for Everyone, World Development Report 2005 :D

Posted by: glory on October 7, 2004 2:58 AM


I don't see how unions are the bete noir of the American economy, like you do. And, I'm not sure that a PhD of Comparative Literature SHOULD be paid that significantly more than a good, skilled plumber. It's not JUST unions that drive up costs for the skilled trades-its the recent bias (one you share, it appears) that only college educated "professions" have any merit. Since CEOs and corporations "conspire" with one another wherever possible and in indirect ways to fix prices (and compensation packages at the executive level), I have no problem with unionized plumbers doing the same thing.

As for U.S. manufacturing returning if we just start paying our masses starvation wages (what you really mean), well, an American can never starve at the level of desperation of a Chinese rural migrant (or now, a Vietnamese eager to work for 1/3 the Chinese rate). I doubt that any Western country can win the race to the bottom

Posted by: Brian Miller on October 7, 2004 11:55 AM

Oh, I won't be so sure, Brian. If you add customs, shipping, paperwork, warehouse storing, etc charges (not counting bribes on all levels) to the wages of desperate Chinese rural migrant (btw, what animal is that? if he's rural - he lives in a countryside, if he's migrant- he's a city dweller in my book)- it might turned out more profitable to use unqualified (I stress) labor at home.

It's interesting to come across an example of what my Scientific communism' professor in "rural" Russia 20 yrs ago called "historical vulgar marxism" in internet-era America.
1. You have no problem with thieves at the bottom if there are thieves on top - highly moral position, and very practical, too. Gives you ground, for example, to write bad checks or cheat on your taxes - why, if people on top all doing it, I can too.

2. You call me biased against uskilled labor. Another marxist dogma; yea, proletariat is always right, unlike these intellectual leeches stuck to workers' shoulders. Being there, you don't even imagine for how long - and what endless variation on this theme I can perform for audience pleasure...

As someone who's been working in different capacity, skilled and unskilled, on heavy truck factories, flower shops, in architectural firms and machine-tools design outlets I can tell you if there one thing as axiomatic as existence of sun and stars it is a simple logic that the product/service should paid for (before market kicks in) according to the amount of labor and preparation necessary for production.
If somebody demands to be paid $10 ph. for breaking down carton boxes (I kid you not, I can give names on request) because that's the minimum his union will allow; and highly skilled full-time managing editor job pays you $15 (see this), who is being paid "starvation wages"?

You might find it strange (or biased), but I believe in equal opportunity. If one segment of labor force being paid in accordance with prevailing market prices, and another segment's wages are artificially constructed, I call it unfair. If a person spent 15 years studying, which requires heavy intellectual labor and it lands him a 10 hrs a day job with high level of legal responsibility, without overtime pay, 1 week vacation and no sick days and another whose training lasted 10 months earns same salary, works 6 hrs a day, has 3 mandatory coffee breaks in addition to lunch and 2 months required vacation (and who CAN NOT BE FIRED) - I call it exploitation. (and guess, who is a carpenter in my example?)
OK, I have to stop: I'm not a union member and there is no laws prohibiting my employer from firing ME...

Posted by: Tatyana on October 7, 2004 3:35 PM

Oh, sorry, I forgot - the Vietnamese! The one willing to work for 1/3 of the Chinese wages.

Funny how this turned out- all the stink American lefties raised at the time of the Vietnam war to prevent US from liberating the country of Soviet-model economy (and Soviet "advisers") - and now, when they got their wish and Vietnam became ...what it became, they advocate America keep using unskilled desperation-level Vietnamese labor for peanuts rather than normilise our own labor market...

Posted by: Tatyana on October 7, 2004 4:30 PM

Well, tatanya: what does "normalize" really mean: impoverish everyone except those with the resources (often family income and time) to spend 10 years studying some arcane profesison that can't be easily outsourced? Again, using my example, becoming a good carpenter or plumber often requires significant time, energy, and even intellectual labor. I am not so willing to dismiss these individuals, especially since they arguably provide more benefit to society than my mythical professor-or your lawyer example (if I am guessing what you mean). I won't engage in lawyer bashing, but lawyers are far bigger parasites on productive enterprise than unions.

As for the dismissal of my argument that collusion at the top excuses collusion (via unions) at the bottom: in a morally perfect world, of course not. But, unionization rates have been falling at the same time as CEO salaries and benefits have been skyrocketing. Why should the union guys give up their rackets? They are a shrinking minority, anyway, and I'm unsure why you see unions as such a big factor.

As for Vietnam-I don't have an easy answer to your argument, I was just pointing out that the rush to the bottom is eternal. There will always be someone more desparate and free flowing capital to exploit that desparation.

Not everyone can be a genius PhD with 15 years of education. That does not mean that 80% of the population (or maybe 95%) should be "normalized" to Third World levels. Is unmitigated free trade/pure capitalism so important that it is worth impoverishing the country (or at least most residents)? I'm not so sure.

Posted by: Brian Miller on October 8, 2004 3:30 PM

Funny how this turned out- all the stink American lefties raised at the time of the Vietnam war to prevent US from liberating the country of Soviet-model economy (and Soviet "advisers") - and now, when they got their wish and Vietnam became ...what it became, they advocate America keep using unskilled desperation-level Vietnamese labor for peanuts rather than normilise our own labor market...

Posted by: 沥青 on October 27, 2004 7:09 AM

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