New America Media
Editor's Note: Chinese people, generally not known for their free spending, need to open up their wallets if China and the rest of the world want to turn the economic crisis around, writes NAM contributor Rong Xiaoqing.
My mom was very proud last August when she watched the Olympic opening ceremony on TV in my hometown Shijiazhuang, a city three hours from Beijing by train and now, unfortunately, perhaps known best outside China as the home of the tainted-milk scandal. "I feel I was watching it with the whole world," she reported excitedly in a phone call afterwards.
The world is still watching China with her, and this time, the focus has moved from the "Bird's Nest" to her wallet. For whether my mom, and hundreds of millions of people like her, can be persuaded to open their wallets may make a huge difference, not only to China's wellbeing but also in the world's ability to begin to pull out from the economic crisis this year.
My mom, a 63-year-old retired textile factory worker, is one of 1.3 billion Chinese whose lives are more or less defined by a traditional Chinese culture in which saving and frugality are rooted as deeply as anything portrayed in the Olympic opening ceremony. The 50 percent savings rate in China played a significant role in the accumulation of China's wealth and prosperity in recent decades, and has been envied by many economic experts in the United States, where the saving rate has been below 1 percent in recent years.
But virtue in one era can be a problem at another time. Now, the world's economy is on a downward spiral, dragged down by the fallout from the credit binge by consumers and the finance industry's recklessness in the United States. Whether the recession in much of the world turns into something even nastier – even a 1930s-style depression – will depend partly on whether China, the world's third-biggest economy, can hold up by shifting the engine of its growth nimbly from exports to domestic demand. Private consumption only contributes 36 percent of its gross domestic product currently, compared with 70 percent in the United States.
The Chinese government seems to have fully realized it, hence its announcement of a $600 billion economic stimulus package, focusing on infrastructure and including various tax cuts, plus a series of interest rate cuts since September.
But judging by my family, they are going to have a tough time persuading ordinary Chinese to spend more.
When the most recent interest rate cuts were made last November, my mom was dismayed. She had a certificate of deposit for 100,000 yuan (about $14,000) maturing on that day. "I wish it had matured a day earlier so I could redeposit it with the previous rate," she told me later.
Nevertheless, she re-deposited the whole sum with the new, lower rate. And then she went to the local supermarket to wait in a long queue with hundreds of people to buy pork belly, which was being sold at a 50 percent discount. The supermarket, of course, is hoping that shoppers will buy some other things at full price after being drawn in by a few discounts, but as Wal-Mart has learned over the past few years, in China, there are many like my mom who will wait three hours to buy the pork belly and only the pork belly. It is a matter of pride for her.
My dad, a 64-year-old retired high school teacher is, if anything, more careful with money. Try and buy a cheap pair of Chinese shoes – at a third of the cost in the United States and expect to face his ire. Join him on a taxi ride – expect him to barter the driver into cutting the charge.
Perhaps my mom and dad are part of a generation that will never change its habits. But what about the younger Chinese?
Well, the omens aren't so good when you look at the spending behavior of my cousin Yu, a 33-year-old college lecturer. When he and his wife, also a college lecturer, bought their first apartment last week, they paid the lump sum of 400,000 yuan all at once, with half from their own savings and the other half borrowed from their parents, interest free.
"It just doesn't feel good to owe the bank so much money and to give it back so much more than we get from it," said Yu. He said some of his young colleagues have to borrow money from the bank to buy a house, but that's only after they have exhausted the resources from family and friends.
Not that the world didn't realize how tough the task is to get Chinese people to spend. In fact, some economists think that relying on cutting interest rates is a pure fantasy. They argue the only way to turn it into reality is for China to build a thorough social safety net that could assure people they would be taken care of when they are old, sick or unemployed so they don't have to save so much.
While this may be helpful, it is far from enough to change the nation's habits.
A look at the Chinese immigrants in the United States, whom I have been covering for seven years as a reporter for a Chinese language newspaper, shows why. These are people who largely enjoy access to the same social welfare as all Americans, but their savings rate is still much higher than average Americans. This makes the Chinese-dominated neighborhoods a natural magnet for banks.
Take New York's Chinatown. The 15 percent to 20 percent saving rate there attracts more than 20 banks (with more than 40 branches), contributes to $7 billion in deposits (as of June 2008), and makes it one of the most bank-heavy areas in the city.
And the savings habit also insulates the community from being hit too hard by the economic meltdown. "Chinese people won't borrow more than 75 percent when they buy a house, and when they borrow, they save up quickly to pay back the loan," said Thomas Sung, president of the Abacus Federal Savings Bank , which opened in Chinatown in 1984. He says the bank's mortgage default rate is less than 0.5 percent, compared with the 3.6 percent average nationwide.
Sure, one can argue that residents in Chinatown are more likely to be self-employed gift shop owners or street vendors who, unlike the general workforce, don't have 401Ks and other corporate benefits. Therefore they feel more pressure to save than average Americans.
But a closer look at my family once again casts doubts on the theory. Take my cousin Zhong. As a computer software engineer who got his master's degree in the United States, Zhong has been working for banks and corporate giants, like ADP and IBM, and makes six figures. His wife, a transportation planning specialist who earned her Ph.D in the United States, makes a similar amount.
The couple has lived in Florida, Ohio and now New Jersey since they immigrated 22 years ago. They bought houses in each new location and have kept their financial principles every time. They have never taken out mortgages for more than 15 years, and their monthly mortgage payment has never exceeded 30 percent of one salary. "I need to save the rest of our income for the future," said Zhong, who is 42.
But what about the safety nets in the United States? "The stock market easily wipes out your 401K, and the U.S. Social Security system has been overburdened. What if, when I retire, it collapses overnight like Lehman Brothers?" Zhong asks.
His worries sound reasonable given the events of the past year. They resonate with the "what ifs" from my parents that have peppered my entire childhood and continued into adulthood. They fixed their lives on one after another hypothesis of hardship to tell me why I could not get a new toy, a new bicycle, a new TV set or a family vacation.
Mind you, many of these occasions happened before the 1990s when layoff was an alien word in China, retirees were entitled to full benefits, and houses, health care and schools were all free, courtesy of communist China. But they were far from worriless. Among their what-ifs are natural disasters, political havoc, wars, and paying for my sister and me to come to the United States for higher education.
Now, most of my parents' what-ifs have either not happened at all or are not as costly as they thought. For example, my sister and I both got our master's degrees in the United States but all on full scholarships.
As a result, their bank accounts are larger then they expected. But they have shown no sign of stopping saving. "What if one day you lost your job? We'll have to support you, won't we?" is a newly created what-if for them these days.
What has shaped the savings habit of my parents, my American-educated cousin and many other Chinese people worldwide, is not exactly the insufficiency of the social safety net. The key may be found in "The Analects of Confucius," the 2000-year-old Chinese cultural bible.
The book documents words from an ancient poem to tell people to be prudent—"as if you were standing at the edge of a cliff or walking on a thin layer of ice." These words have since influenced generations of Chinese.
In the book that compiles his letters to his son and influenced many people in my generation, Fou Lei, a famous Chinese intellectual, told his son Fou Ts'ong, a successful Chinese British musician who had just gained his first success overseas, "After all, we are all disciples of Confucius. On the high tide of our life, we should all feel we were standing at the edge of a cliff or walking on a thin layer of ice."
But it's not like there is no way to have the Chinese open their wallets. My mom gave it some thought on the way from one supermarket to another on her bargain hunt and offered a suggestion: to distribute all future bonuses and wage increases in shopping coupons with expiration dates. "I would definitely spend them in time even if I don't need to buy the things they want me to buy. I won't waste," she said.
But then again, she might not need to go to the shops again for some time after a binge like that.