Wu Guangqiang

    MANY have been baffled by certain unexplained phenomena. Here are a few typical ones: Why are prices of some goods much higher in China than in developed countries and areas? Are Chinese really as well-off as they appear to be? Is there an unbreakable Chinese asset bubble? Why do Americans have so much debt and where has all the money gone?

    It has been a while since Chinese shoppers began to flock overseas to snap up goods ranging from designer items to jewelry, and from luxurious houses to private aircraft. A handful of Chinese spendthrifts have made the world believe that everyone in China has deep pockets. It’s a daily scene for armies of mainlanders to march to Hong Kong on shopping sprees, as they have found imported goods there are significantly cheaper.

    There are two questions: “Is the average Chinese really so wealthy?” and “Why are consumer goods more expensive in China than they are overseas?”

    Yes, Chinese people are much better-off today than they were decades ago, but no way are they as rich as they appear to foreigners. It’s a matter of percentage and misunderstanding. Consider China’s huge population. Even a small fraction of it, be it rich or poor, will be a large total. Supposing 2 percent of China’s population travel overseas every year and 5 percent of the travelers are wealthy, there will be a total of 1.3 million powerful buyers. If each of them spend US$10,000, the sum will be a whopping US$13 billion, a sum sufficient to boost a medium-sized nation’s economy. So it’s a question of sheer size. The majority of the Chinese still live from hand to mouth. The conspicuous consumption of some Chinese has amplified the illusion.

    As for the high price of consumer goods in China, fundamentally, it is an inundation of liquidity and an oversized foreign currency reserve that have produced the inflating asset bubble. Other factors such as the unreasonable cost of logistics, caused by exorbitant road tolls and various fees and charges levied on manufacturers and transporters, have combined to push up prices. Essentially, it’s a manifestation of economic imbalance and structural flaws, which call for immediate correction.

    Two relevant questions are whether there is an asset bubble in China and whether the bubble will burst. In fact, they are of reciprocal causation, that is, if there is a bubble, its snapping will be inevitable. Everyone who knows the facts can judge for themselves. In Beijing, the price-to-income ratio of the average home is 36; compared with 18 in Singapore, 12 in New York and just 5 in Frankfurt.

    The bubble is there, but it seems unlikely to burst for now. The authorities are between a rock and a hard place. Since many local governments are relying heavily on land sale and home sale for their revenues, a tumbling housing market may mean a hard time for them, and major banks have been hijacked by skyrocketing property prices. So, unless the authorities pull something out of the hat, the bubble will keep inflating. Nevertheless, prevention of the bubble bursting will cost us dearly.

    Since China’s fate is so tightly tied to that of the United States, considering the facts that China is America’s biggest foreign creditor and that a large proportion of Chinese products is shipped to America, Chinese people are concerned about America’s economic and political situations as much as they care about their own country’s. One of the biggest confusions about the United States is why such a rich country should borrow so much money at home and abroad. And where has all the money gone?

    Here is the big picture. As of Oct. 30, 2010, the Total Public Debt Outstanding of the United States was US$14.32 trillion and was approximately 98 percent of calendar year 2010’s annual GDP of US$14.66 trillion. Each citizen’s share of this debt is US$46,171.00.

    The answer is simple. Both the government and the people of the United States are unconcerned about the future. They take the prayer “God bless America” seriously. Where has the money gone? The government never has enough funds to keep the world’s largest military force, to fight numerous wars across the world, and to keep the mammoth country running. And the economy is still too infirm to generate enough revenue. So the only way to keep the pot boiling is to borrow more money. Only this God character knows when the debts can be paid off.

    Traditional Chinese wisdom always thinks it the best policy for individuals and countries to live within their means. Any attempt to live beyond one’s means may bring temporary satisfaction, but the consequence will always be disastrous and fatal.

    (The author is an English tutor and a freelance writer. He can be reached at jw368@163.com.)