China's response to the crisis: Will we all be soon speaking Chinese (我们快能用汉语说话了吗？)?

China's current leaders may not be warm and cuddly fellows, but when it comes to economic and social policy, they manage, more often than not, to do the right thing. This includes fairly recent reversals of some very bad policies enacted during the 1990s by the country's previous leadership. And now, in order to respond to the current economic crisis, China will institute a massive stimulus package that dwarfs what is being proposed by the Obama (奥巴马) administration.

After China's economic growth (经济增长) slowed dramatically last fall, the Government announced that it would spend an estimated 4 trillion RMB, or $586 billion, over the upcoming year on a wide variety of infrastructure and social welfare projects. That's an enormous sum for any country, but especially for one whose GDP is still less than half that of the United States. And that figure has more recently gone up to over $800 billion.

I should say a brief word or two about how economists typically go about comparing the GDPs of different countries, as it's not as simple a matter as one might think. You could, of course, calculate China's GDP in dollars simply by using the current dollar-RMB exchange rate. If that's done, the country's GDP amounts to $3.3 trillion.

However, this approach overlooks the fact that the cost of living here, particularly for non-traded services, is much lower than it is in the US. For example getting a haircut in the next door hair salon costs me 15 RMB, or just under $3 at the current exchange rate (back in Henan, I spent under 10 RMB). In the US even a basic, no-frills haircut costs at least $11-12. Failing to take such price differences into account seriously understates Chinese living standards and, by extension, the country's GDP.

International economists adjust for such differences by using the so-called purchasing power parity (PPP) formula. This idea takes into account the lower cost of living and adjusts it as if all income is spent on local goods.

Thus the long-run PPP equilibrium exchange rates between currencies will often differ from their short-term nominal rates. In fact, when viewed in this way, the RMB remains substantially undervalued—perhaps by as much as 50 percent—against the greenback, even after its recent appreciation. According to information I shagged off the internet, calculating China's GDP using a PPP approach, just about doubles the above figure, to $7.1 trillion.

So it can be inferred from all of this that China’s GDP is probably higher than $3.3 trillion. Of course, PPP is a long-run theory. Moreover, Chinese wages are also much lower than in the US and other developed economies.

Finally, one should also be cautious about the official Chinese economic data. For example, I recall hearing a year or so ago the government suddenly announce that it had underestimated the size of the retail sector. Anyone who lives here can't help but notice all of the small mom and pop stores, little restaurants, and the like in Beijing and other Chinese cities. Thus China's retail sector certainly is enormous. So after the State Planning Commission re-calculated its size, it substantially boosted its estimate of China's GDP.

So China's GDP is probably somewhere between $3.3 and $7.1 trillion. But even if we accept the latter high figure, the Chinese stimulus package is still much greater relative to the national economy than the one being proposed by Obama. The $800 billion plus that will be spent next year represents over 10% of China’s GDP. By contrast, Obama’s $800 billion stimulus package—it may get a bit larger over the next few months—is spread out over the next two years and accounts for just 2.5-3.0% of the US economy's estimated $14 trillion plus GDP.

To be sure, some economists argue that the $800 billion figure for China's stimulus package is a bit high, noting that some of this spending was already in the budget. However, shaving a $100 billion or so off the Chinese spending figure still leaves China's stimulus package much bigger than the US stimulus package when measured against the size of its economy.

Moreover, payroll and business tax cuts account for a good chunk of the Obama stimulus package. In fact, word has it that funds for mass transportation projects, which American could desperately use more of, is being reduced to make room for these tax cuts.

The problem with doing this is twofold. First, there's no guarantee that people will spend these tax cuts or rebates. In fact, given the uncertainty about employment, better off consumers are more likely to save this extra cash for a rainy day, rather than spend it. And with consumers reluctant to buy things, especially expensive big-ticket items, it's unlikely that businesses will use their tax breaks to expand production by hiring more workers.

China's stimulus package, on the other hand, is driven entirely by government spending. While much of this money will be spent on infrastructure projects—expanded subways, railways, bridges, airports, and the like—some of the funds will be spent on social welfare projects. In particular, the government has made continuing to improve rural health care a key priority (a major effort to do this was started a few years ago as part of the “New Socialist Countryside” initiative [社会主义新农村]).

Compared to the US, the Chinese Government has several key things going for it in its efforts to stimulate its economy. To start with, even though tax revenues have fallen rapidly since this fall, China's national debt remains small, particularly compared to America's. Since the latter ballooned during the last eight years, mainly on account of tax cuts, the Iraq War, and big increases in overall defense spending, Louis XV’s famous comment, “Apres Moi L'Deluge,” is a fitting epitaph for George W. Bush's Presidency.

Not only is the Chinese Government in a better position than its American counterpart to spend money, it also has, when it comes to building infrastructure, a lot more “shovel ready” projects on which money can be spent. For example, here in Beijing work will be accelerated on three new subway lines being built within the city. The same goes for several lines that will connect Beijing with outlying cities, such as Changping.

Recent historical experience suggests that spending money on these projects will help boost China's economy. After the 1997 Asian financial crisis broke out, the Chinese Government earmarked large sums to accelerate construction of the country's huge highway and toll road system. This move is seen as playing a large role in maintaining economic growth in 1998 and 1999.

The Chinese Government also has much more leverage in the monetary policy area. Indeed, as recently as last summer, China's Central Bank (中央银行) was raising interest rates in an effort to cool down the economy. Now that it has confronted, practically overnight, the opposite problem, the Central Bank has significantly reversed course. However, according to one article I shagged off the internet, monetary policy here is still just “moderately loose” and thus still has some traction.

By contrast, the Fed in the US has cut interest rates to practically zero, so it can't lower borrowing costs any further. But despite these efforts and the rapid increase in America's money supply, banks are still reluctant to loan money and credit remains scarce. In other words, the Fed is pretty much shooting blanks at the moment.

Moreover, the fact that banks in China are state controlled gives the government enormous leverage over the financial system. For example, before the current crisis broke out, China's Central Bank required banks to hand over nearly 1/5 of their deposits. The Central Bank used this money to buy foreign bonds, especially US Treasury Bills, in order to prevent the RMB from appreciating and harming Chinese exporters.

Now, however, China's Central Bank is reducing these long-standing requirements on Chinese banks. It is instead pushing them to lend more money within China. In particular, banks are being ordered make more loans to small and medium-sized industries—precisely the ones that have been hardest hit by the downturn in exports.

America's recent banking bailout provides the US Government with the opportunity to exercise similar leverage over the financial system. The US Government could now, as Roosevelt did during the height of Great Depression, when a third of the banking system had effectively been nationalized, demand that financial institutions lend money in return for receiving help from Washington. Of course the Bush Administration resisted, mainly for ideological reasons, any attempt to tie strings to its $700 billion TARP bailout plan. Hopefully, Obama will reverse course here.

To be sure, Obama will face intense political pressure to limit the size of his fiscal stimulus plan in the face of long-term fears regarding US budgets deficits and rising national debt. However, the US Government does have one remaining trump card to play here, namely the continued willingness of foreigners to loan money to the US. While China's appetite for US debt appears to be diminishing—readers can refer to Keith Bradsher’s excellent January 8th NEW YORK TIMES article on this matter—investors in the troubled Euro zone are still eager to snap up US Treasury Bonds and securities.

The fact that the US is able to continue to find foreign lenders for its debt is one thing setting it apart from Asian countries in the late 1990s, Argentina in 2000, and the new financial basket cases on the euro-zone's periphery, Ukraine and Latvia. Another key difference is that unlike these countries, the US debt is denominated in its own currency. Thus a falling greenback, which would boost American exports and stimulate the economy, will not increase the size of the US debt.

America's budget deficits will certainly have to be addressed some time in the future. Continued large-scale borrow from foreign lenders also will also undermine the dollar’s position as a reserve currency over the long-run. However, at the present moment, the greenback is actually appreciating against other currencies.

Indeed, as former IMF chief economist and now Harvard Professor Ken Rogoff puts it, with more than a little touch of gallows humor, “The more we screw up, the more the world seems to like us.” And long before this financial crisis, my former UCLA colleague turned chaired Harvard professor, Jeff Frieden, argued that the dollar's future as a main reserve currency is uncertain at best (this outstanding scholar and all-around mensch's musings on the latest crisis can be accessed at http://www.bigthink.com/user/jeff-frieden). Finally, addressing America's immediate and very severe economic crisis should now have priority over long-term worries regarding the dollar's future as an international currency.

Thus Obama should emulate China's boldness when it comes to devising a stimulus plan for the US economy. As his own chief economic adviser, Larry Summers, has declared, “In this crisis, doing too little poses a greater risk than doing too much.”

Even though the US doesn't have all that many “shovel ready” infrastructure projects to spend money on at the moment, a strong case can certainly be made for long-term spending in this area. And over the short-term, money could go to help people in need, particularly ones who've lost health insurance, and assist America's financially strapped states.

Indeed, as I write these words, my home state of California faces a $41 billion deficit, or half of the state's total annual revenues. In a very short time, California will literally go broke and unable to pay its bills. The tax increases and spending cuts needed to close this gap certainly won't do Golden State's economy, which already has one of the highest unemployment rates in America, any good.

I suspect that if Obama errs on the side of caution while China forges boldly ahead with its economic stimulus, then the long American Century will give way sooner rather than later to the Chinese Century. I want to emphasize that such a prospect doesn't disturb me as much as it might disturb other Americans. But if it does happen, all of us might want to begin learning a bit of 汉语. Or, as was asked in the title for this post, 我们快能用汉语说话了吗?

The Chinese characters used in this post, along with their Romanized spelling (Pinyin) and tones are listed below. A number 1 indicates that the character has a flat tone, a number 2, a rising tone, a number 3, a falling rising tone, a number 4, a falling tone, and a number 5, a neutral tone.

我们快能用汉语说话了吗 (wo3men1kuai4neng2yong4han4yu3shuo1hua4le5ma5).
奥巴马 (ao4ba5ma3) Save for the fact that the first character, 奥, is pronounced like the “ou” in “ouch,” this is actually a pretty good transliteration of “Obama.” It's certainly better the Chinese characters for President Bush's last name, 布什, which sounds like “Boo Sure.” The senior is Bush is just called 老布什, or literally “old Bush.”
经济增长 (jing1ji4zeng1zhang3) The first two characters mean “economy” while the other two mean “growth” (in this kind of sentence).
社会主义新农村 (she4hui4zhu3yi4xin1nong2cun2) The first four characters comprise the Chinese word for “socialism”, while the fifth character means “new”. The last two characters can mean both “countryside” and “rural/farming village.”
Apres Moi L'Deluge: My historically knowledgeable readers—and those who can speak some French—will know that this statement in English is “After me, the Deluge.” Louis XV wasn't much of a monarch, but he could see pretty clearly the direction France was heading after his death. Epitaph in Chinese is 墓志铭 (mu4zhi4ming2).
中央银行 (zhong1yang1yin2hang2) The first two characters is one way of saying “central” in Chinese, while the latter two is the Chinese word for “bank.”

I'd like thank my good colleague (同事; tong2shi4), 姚玲玲 (yao2ling2ling2) and 路红艳 (lu4hong2yan4) for helping me with some of the above vocabulary.