Affordable Housing Institute : US

In the weeks and months to come, you will hear much wailing about Chinese policy this and Chinese economic pressure that – and there’s no doubt that China’s economic policy now has a powerful effect on America’s – but let that not blind you to the curious (and potentially hopeful?) interdependency that appears now to exist economically between America and China:

 

To America, from China — 1922

 

The Klein-bottle contortions of economic time and space between America and China are explored in an intriguing interview in Seeking Alpha:

 

The dollar rises in the East? Rick Newman

 

Think American workers have it bad? It’s worse in China.

 

I’ve documented this.  China’s property markets are crashing far worse than ours are – and as our recent experience shows, crashing property prices foretell a dramatic economic slowdown.

 

You may not know that by scanning the headlines. Late last year the Chinese government passed its own stimulus package of about $600 billion, to meet its target of 8% GDP growth. That’s right, 8%. That would be outlandish growth here, where the economy is now shrinking, not expanding.

 

But in China, that’s barely enough to keep a restless workforce employed. And the government might not be able to make its 8% target. Unemployment is soaring, and there’s even a possibility that economic woes could lead to angry public protests like those that preceded the 1989 Tiananmen Square massacre.

 

There was a flicker of decency … and then there was a massacre

 

Since Tiananmen, America and China have become deeply linked to each other.

 

In the 1960s, I remember a Piet Hein grook:

 

Coexistence/ Or no existence

 

Piet Hein: lived to be 91

 

Although he was speaking of geopolitics, the principle applies equally well to geo-economics.

 

Americans, obviously, buy a huge amount of imported Chinese goods—about $340 billion worth in 2008.

 

That’s a lot even in Obama-budget-deficit terms!

 

Much of the cash that flows back to China gets invested in U.S. government securities, which helps keep U.S. interest rates low.

 

As I pointed out in Filling a Sieve, capital cycles, and as we’ve seen in Slums: a wealth-extraction machine, capital always finds its best investment, and communities need continuous capital reinvestment.

 

I hold trillions of your paper in my red-gloved hands

 

That’s happening now with China, either in our debt or in equity:

 

China even invests directly in American firms. In 2005, Chinese computer maker Lenovo (LNVGY.PK) bought IBM’s PC division for $1.75 billion. In 2007, the Chinese government bought a $3 billion stake in the Blackstone Group, the American private equity firm.

 

We Americans have a habit of selling at the top J.

 

Historian Niall Ferguson, author of The Ascent of Money, even conflates the two nations as one: Chimerica.

 

Niall Ferguson at Harvard Commencement

 

Since the two countries are so closely linked, I asked Wei Li, a business professor at the University of Virginia’s Darden School of Business who also teaches at the Cheung Kong Graduate School of Business in Beijing, for an update on the Chinese economy, and how changes there are likely to affect the United States.  Excerpts:

 

How is the global recession affecting China?

 

The outlook for China is very grim. Much more grim than for the United States. There are two main drivers: Housing and exports.

 

Ten years ago there was a housing shortage in the cities. But now there’s a housing glut.

 

The glut exists at the market’s top end – affordability remains an enormous challenge.

 

One reason is there’s very little opportunity to invest elsewhere. That led to lots of speculation. It’s mostly urban. In rural areas, you still build your own house.

 

In rural environments, housing can be created without money, because land has minimal cash cost and you can use found materials and your own labor to build it.  Urban housing always costs money – and as we’ve seen before, the richer the society, the better its housing finance ecosystem, the longer the chunk of our future we’re willing to pledge in order to secure the home that we want.

 

Is the housing bust in China worse than in the United States?

Housing in China is a much bigger deal than in the United States because people just started buying. For many Chinese they were first-time homeowners.

 

\When tenure options are limited and housing is in short supply, such is our lust to own a home that we over-reach – and the tighter the supply, the greater the over-reach.

 

Prices haven’t really fallen yet, but they have to.

 

If they don’t let prices fall, something else has to adjust. Either the price falls or quantity adjusts. If the quantity goes to zero, nobody buys refrigerators or tiles, or hires electricians or architects.

 

We have to keep supply and demand in balance

 

The bust has been going on about one year now, and accelerated since the last quarter of 2008.

 

A housing price bust always precedes a big economic contraction.

 

Cut housing prices and watch demand shrink

 

What about exports?

There’s been a double digit decline. For every 1% rise or drop in U.S. consumption, Chinese exports go up or down by 10%. The effect is 10 to 1.

 

So with consumption down in the U.S. by about 2% or 3%, you mean that exports in China have fallen 20% or 30%?

That’s right.

 

Couldn’t keep up the payments

 

If exports are dropped, the Chinese economy will slow, and if that happens, then Chinese unemployment will rise, and with it Chinese unrest.

 

The unemployment rate in the United States is 8.1% right now. Is it higher in China?

According to Chinese Academy of Social Sciences (CASS), the unemployment rate in urban areas in the end of 2008 was 9.4%, significantly higher than official jobless rate of 4.0%. It’s probably higher now, since the Chinese economy experienced a marked slowdown since the last quarter of 2008. In addition, in 2009, 6.1 million college graduates are looking for jobs. These figures all underestimate the severity of unemployment in China. The unemployment stats count only jobless rate in urban areas. When rural migrants cannot find jobs, they often return home and subsist on their land.

 

To keep people employed, China will need to keep exporting – which may mean it’ll keep buying dollars to keep the American economy humming, so as to keep consuming the goods on which Chinese prosperity depends.

 

Will I keep buying your paper?  That depends, mon capitaine

 

Can’t the Chinese government pull the old levers of a command economy, crank up spending, and keep people employed?

 

That’s what people may think, but the Chinese economy is so much bigger than the government can control. If you think U.S. consumers are scared, Chinese consumers are equally scared, if not more. Stocks in China are down 60%. The new middle class who owns multiple apartments is living on a lot of borrowed money. They’re in very bad shape.

 

As an asset class, housing is the most resistant to price drops … but in turn, that means people become economically immobile as they cover their housing-consumption-cost deficits.

 

At least I’ve got security of tenure

 

Houselocking is a real phenomenon, one that will complicate the world’s recovery.  Rental flexibility is a strategic national resource.

 

Some people worry about the fact that the Chinese government owns several trillion dollars worth of U.S. government securities. You know the argument: If the Chinese sold their holdings the U.S. economy would collapse.

 

For the Chinese to sell, who would buy?  American interest rates would rise – and probably, American currency would inflate.  The Chinese hold so many dollars that if they sell too many too quickly, they risk killing the market for their own assets.  They’re caught in their excessive liquidity even as we’re caught in our excessive illiquidity.

 

Maybe I’ll even buy your uniforms, Jean-Luc

 

China could conduct economic warfare against America. People worry about China buying Treasuries, but for China, they don’t have a choice. There’s really no place else they can put their money. To say that China is somehow controlling the U.S. economy is laughable.

 

Pretend for the moment that China and America were two adjacent US states.  The one with excess liquidity would be desperately looking for a place to invest; the one with illiquidity would be desperately seeking capital.

 

Each of us complements the other

 

In global terms, China has no potential investment partner other than the US remotely close in scale and attractiveness.  And we have no liquidity provider other than China remotely close in scale and attractiveness.

 

Can it be that I need you, mon ami?

 

We need each other, whether we like it or not.

 

So with China in tough shape, will Chinese influence fade?

I think Chinese influence will still grow, but it has to be different. The Chinese approach used to be, speak softly and make a lot of money. That’s not working any more. The system is flawed. If China wants to continue to benefit from globalization, China needs a voice.

 

Might the best economic safety be rational interdependence, where each of us is stronger when the other succeeds, and each of us relies on all of us acting in our rational self-interest?

 

Or am I being Pollyanna?

 

As Star Trek’s Q himself said, “You don’t get it, do you?  The trial never ends.”

 

“See you around – out there!”

 

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