(SOUNDBITE OF SONG, "ROLLING IN THE DEEP")
ADELE: (Singing) There's a fire starting in my heart...
(SOUNBITE OF ARCHIVED RECORDING)
HARUHIKO KURODA: The challenge, the problem faced by many emerging economies in Asia is now inflation. In many countries, inflation has already reached double digit or close to double digits.
(SOUNDBITE OF SONG, "ROLLING IN THE DEEP")
ADELE: (Singing) See how I'll leave with every piece of you. Don't underestimate the things that I will do. There's a...
DAVID KESTENBAUM, HOST:
Hello, and welcome to PLANET MONEY. I'm David Kestenbaum.
JACOB GOLDSTEIN, HOST:
And I'm Jacob Goldstein. Today's Friday, March 11. And that was Asian Development Bank president Haruhiko Kuroda - I hope I'm pronouncing that right - that you heard at the top of the show talking on CNBC.
KESTENBAUM: On the show today, China has a new five-year plan for its economy. That plan, surprisingly, let's put the brakes on. Let's slow down. We are growing too fast. But first, the PLANET MONEY indicator.
GOLDSTEIN: Today's PLANET MONEY indicator - 46.3 billion. The U.S. trade deficit was $46.3 billion in January. And if you dig into the numbers here, what you see is U.S. exports have been growing steadily month after month. They grew again between December and January. This is good news for our economy. But U.S. imports are growing even faster. So, of course, when imports grow faster than exports, the trade deficit gets bigger. And, in fact, what we see is between December and January, the trade deficit grew by about $6 billion.
KESTENBAUM: And economists would generally say that the planet would be a more stable place if the world's biggest economy, ours, didn't continue this big trade deficit month after month, year after year.
GOLDSTEIN: Yeah. That's - it's a big part of these global imbalances that everybody is sort of perpetually worried about.
KESTENBAUM: So if you look into the numbers, what, by the way, are we importing so much more of now?
GOLDSTEIN: Well, really, there are two big drivers here. One of them is oil. And in January, we saw a big jump in oil imports not only because we were importing more oil, but also because the price of oil went up, right? So the value of our oil imports went way up.
The other big driver, not surprisingly, is stuff from China. In January, we bought $25 billion worth of stuff from China. They bought $7 billion worth of stuff from us. So there's a big trade deficit we have with China.
KESTENBAUM: All right. Thank you, Jacob. Let's do the show.
GOLDSTEIN: OK. Last Saturday, Chinese Premier Wen Jiabao gave a speech in the unbelievably large Great Hall of the People in Beijing. This is an annual speech, something like our State of the Union address here in the U.S.
KESTENBAUM: Except that it is a lot longer. Premier Wen spoke for two hours straight. One reporter wrote that it was like a test of bladder control.
GOLDSTEIN: (Laughter) And this speech was actually special even for these speeches because Wen was laying out China's new five-year plan, basically explaining how the Chinese government hopes to steer the economy over the next half-decade. And, you know, the very existence of a five-year plan, it really speaks to this huge difference between the U.S. and Chinese economies.
KESTENBAUM: In the United States, the whole idea of a five-year plan - right? - it would seem sort of crazy because - all right, our government is deeply involved in our economy in a lot of different ways. But the general philosophy here is that we try to let the market do its thing. We leave it alone where we can in most places.
GOLDSTEIN: And China - yes, China, for its part, clearly has embraced markets and aspects of capitalism. But the government there clearly still has this idea that it's going to strongly try to shape and direct the economy. This will actually be China's 12th five-year plan. They go all the way back to Mao.
KESTENBAUM: It is not an understatement to say that the future of the global economy really hinges a lot on what happens in China. It is just so big - a billion people, you know, who not long ago were almost completely in poverty. And it's going through such dramatic and sudden change.
GOLDSTEIN: Right. I mean, China is now the world's second-biggest economy. And basically, any global issue you can name, it really turns a lot on China - you know, the price of oil and global environmental issues and even the U.S. economy. All of these things are deeply tied now to the fate of the Chinese economy.
KESTENBAUM: What you often hear is about how amazing China's growth has been. But Premier Wen Jiabao - when he spoke, he actually dwelled for a bit on the problems in China.
GOLDSTEIN: We talked about this with Eswar Prasad. He's been following these five-year plans and how they worked out for a while now. He used to be the head of the China division at the International Monetary Fund. Now he's a professor of economics at Cornell University. And he says the plan when sketched out, it's kind of surprising.
ESWAR PRASAD: It's a remarkable document. It's probably a unique example of a country saying in its five-year plan that it would actually like to reduce growth at a time when virtually every other economy is thinking about how to increase growth.
KESTENBAUM: How much slower does it say we want to grow?
PRASAD: The plan basically says that China would like to grow at 7 1/2% in 2011 and at 7% over the next five years on average. And if you compare that to the fact that they've been growing, even during the crisis, at rates of about 8 1/2 to 9% and on average about 10 to 11% over the last decade, it's a pretty significant step down.
KESTENBAUM: I'm trying to imagine President Obama saying we're hoping we can only grow at one-quarter percent next year...
KESTENBAUM: ...Instead of two or three. Why does China think growing too fast is a problem?
PRASAD: The report identifies a number of problems with the sort of growth they've been accomplishing. It's tremendous in terms of bottom-line growth. But it's creating a lot of environmental damage. It's not generating many jobs. Much of the benefits of this growth are not going to the average household because household incomes as a share of national income are dropping. How much households consume and how much that contributes to GDP is falling.
In addition, growth is not balanced across the provinces, with the coastal provinces doing very well and the interior provinces not sharing in this growth. The big goal laid out in the five-year plan is to, quote, unquote, "rebalance" growth and make it more sustainable. So let's parse that. Basically, rebalancing growth means trying to reduce the reliance on investment for growth and also make the economy more self-dependent rather than relying on exports.
GOLDSTEIN: So if - so what does that mean? When you say, make the economy less reliant on investment for growth, what does that mean in simple terms?
PRASAD: So what has happened in China is that the Chinese saving rate is very high. Households save a lot. Corporations save a lot. The government saves...
KESTENBAUM: An enormous amount, right?
PRASAD: It's enormous. So Chinese households now save about a third of their income. And that saving rate has actually been increasing over time, which is sort of remarkable for an economy that is growing so fast. You would think if you anticipate that incomes are going to be higher in the future, what do you do? Logically, you should be borrowing against that future income and consume more. But instead, the Chinese are saving a lot more. And most of these savings of Chinese households in particular go into the banking system. The banking system, which is largely owned by the state, then funnels this into investment. A lot of this money goes to state-owned enterprises, which do some relatively good investment. But not a lot of this investment is very effective.
GOLDSTEIN: So a household saves up money, puts that money in the bank - typically, a state-owned bank. Then the state-owned bank will lend money, perhaps, to a state-owned company to, say, build a factory or build a road. Is that right?
PRASAD: That's exactly right. So the banks are lending to state enterprises, which have monopolies in certain sectors - like cement, hard glass, steel and so on - where there is a lot of demand right now because China is on this big investment and infrastructure-building binge.
KESTENBAUM: Roads, bridges there. But you do read stories about entire cities that are built and unoccupied, like, entire cities - just apartment buildings, stores, everything - but sort of empty. No one's really moved into them yet.
PRASAD: That's exactly right. A lot of this investment has also gone into real estate, and including building buildings which have houses or apartment units that cannot be afforded by the general population. So it is a curious dichotomy because there is a scarcity of good housing in China. But at the same time, the sort of housing that's being built is not being built in the right places and is very often being priced out of the reach of the common household. So there is this enormous disconnect that's in many other things in the Chinese economy. Now, the key issue here is that no matter what happens with this investment, whether it's productive or not, it adds to the bottom line in terms of GDP growth. So GDP growth looks fantastic.
KESTENBAUM: Because you've built a building, and you've paid some workers. And that's great. That shows up in GDP. However, if the building is empty, that's a problem down the road.
PRASAD: That's exactly right. And the problem is that China has had this pattern of growth where investment has accounted for more than half of overall GDP growth over the last decade or so. Now, intrinsically, this is not such a bad thing. Because China has a lot of people, in principle, like any other developing economy, it's short of capital when it has a lot of people. So investing more, building up more capital, should be great for the economy. The problem, again, is that they are undertaking a massive amount of investment that is largely financed through the state-owned banking system, which is not necessarily giving the money to the most productive projects or the projects that can generate employment. And because households are getting less of the fruits of this overall growth, you end up with private consumption declining.
GOLDSTEIN: So private consumption means money spent by ordinary people.
PRASAD: That's exactly right. The share of private consumption GDP in China is about one-third. By contrast, in the U.S., it's above two-thirds. And in most other economies, it's somewhere in the range of 50 to 75%.
GOLDSTEIN: So if households are getting less of the fruit of the economy, who is getting more of the fruit of the economy?
PRASAD: A lot of this money is going to the owners of capital. Now, if you think about an economy like the U.S., ultimately, people are the owners of this capital. You hold shares in GE. So GE does well. Your share price is going to go up, and you'll share in the fruits of GE's growth. It turns out that all the stock ownership in China that exists, it's not as widespread as one might think. So a lot of this is going to the people in power, so to speak, who are able to, essentially, get the money from this economic growth. And it's a very uneven distribution in China. The plutocrats and the rich are able to do better and better because they own the capital. So you do have average incomes rising very fast. But at the same time, the disparity in incomes is rising more and more.
And not only are households getting less of the fruits of this growth. They're getting more concerned about the economy because it is an economy that is becoming increasingly more market-oriented. And this means that the social safety net that used to function through the state enterprises - because the state enterprises used to be the primary source of employment - and they provided health care, housing, education subsidies and so on. And now the Chinese government, recently enough, is trying to harden the budget constraints on the state enterprises. So now people are being thrown more and more into this market economy where there is job uncertainty. So they end up saving a lot more.
KESTENBAUM: So what are they going to do about the high savings rate?
PRASAD: So what the government is trying to do is basically tell people that, first of all, they will provide better health care. Second, if people in this market economy get laid off, they will improve the social safety net to take care of people when they are unemployed, for instance. And the hope is that this sort of measure will encourage people to save less if there is a good social safety net beneath them to protect them when they are elderly or when they get laid off.
KESTENBAUM: So the government is saying, I know you've been putting away a lot of money, an enormous amount of your income because you don't know what the future's going to hold and you want to make sure you have money in case there's some emergency. We're telling you in case of emergency, the government is going to be here for you. We are going to help. You don't need to sock away quite so much money.
PRASAD: That's exactly right. And this feeds into another of their priorities which is to reform the banking system, because one of the key issues in China is that households save a lot, put a lot of this money in the banking system, and what do they get for it? In inflation-adjusted terms, the interest rates that they get are actually negative because the Chinese government puts a cap on deposit rates that banks can pay. Why do they do this? Because they don't want the banks to compete for deposits. They want to have control of the banking system.
GOLDSTEIN: That's an awful thing. You deposit money in a bank, and it basically slowly evaporates - right? - over time.
PRASAD: Yes. And this is - even in normal times in China, it's been happening that for a number of years now, this inflation adjusted return on bank deposits has been either very small or negative. This is not such a good deal for the average consumer. So the Chinese consumer is working incredibly hard largely to finance U.S. consumption and a lot of inefficiency in the Chinese system itself. So one just wonders one day whether the Chinese worker who's working incredibly hard at relatively low wages isn't going to say, wait a minute. Does this really make sense? Here I am and all my compatriots are working so hard, and we're not seeing the benefits. The party bosses seem to be doing quite well. The owners of the capital, the tycoons seem to be doing quite well. And here we are doing better than we were in the past, but I don't see the benefits of all of this growth coming down to me.
KESTENBAUM: And are you saying that the five-year plan suggests that the party leaders recognize, are worried about this issue that you're raising?
PRASAD: They're very worried. It's this longer-term worry, but the plan is also very clear about what the short-term priority is. And in the next year, their biggest priority is to control inflation. That is a huge concern for them, especially because it feeds into these broader concerns about social instability. Why? Because the poor tend to get hit much harder by inflation, especially because a lot of the inflation has been coming from food price inflation.
Now, in a developing economy like China compared to the U.S., a lot more of the average household's consumption basket gets spent on food. It's about 30 to 40% compared to about 10% in the U.S. And what's more, the poorer you are, the more you spend on food compared to other things because you need to survive. And food price increases, therefore, really hurt the poor. And that is a big concern to the Chinese. In fact, this is one reason why they've been very, very cautious about letting any reporting about what is happening in the Middle East filter into China - because there is a concern that it could have a spillover effect because inflation, especially food price inflation, is one of the key problems facing China and many other emerging markets right now.
GOLDSTEIN: What does the five-year plan say about how they're going to deal with inflation?
PRASAD: They're going to take a couple of measures on the supply side. They want to improve agricultural policies to improve procurement. China also got hit by a drought recently which certainly hasn't helped. And of course, worldwide food prices have been going up. But again, the issue is that as China becomes a richer economy, the consumption needs are shifting towards more proteins rather than cereals and grains.
KESTENBAUM: Meaning people are eating more meat.
PRASAD: They want to eat more pork, for instance, and pork prices are a particularly sensitive issue in China. This is happening again in many other emerging markets like India. People are shifting away from cereals towards high-protein foods, including meats. So the demand is rising very, very fast. And the problem is that supply hasn't quite kept up.
KESTENBAUM: You've been in China recently?
KESTENBAUM: When you're there, can you tell? Does it feel like it's growing too fast?
PRASAD: It's hard to tell what too fast would mean. If you're stuck in a traffic jam in Beijing at rush hour, then you say, yes, this country could afford to have a few less cars, and maybe the city is a little too packed. And in most of the industrial areas, the amount of smog is enormous. So in that sense, it's a very, very costly approach to growth. On the other hand, one argument might be - if you're growing fast and the pie is expanding so much, you can take care of many of these problems. And in fact, that's been the approach until recently. Make the pie grow very fast. And so long as the pie is growing, you can redistribute some of it and use some of it to deal with any problems that arise. But now there is a recognition that perhaps those problems are becoming very large and should get a much greater priority than just growth, per se.
GOLDSTEIN: So that's what's striking to you about this five-year plan?
PRASAD: That's exactly right. And it's a very, very clear message to the average person on the street in China. We feel your pain. It may not be great pain because you're still doing quite well, but we understand that the fact that the economy is doing so well and many people are doing extraordinarily well while you're not seeing the full benefits of this growth - that, we understand, gives you some pain, and we're going to try to deal with it.
KESTENBAUM: So should we see this really as a letter from the government to the poorer people of the country?
GOLDSTEIN: Is that what this is...
PRASAD: To a large extent, yes. It is a clear recognition that there are problems that have been caused by growth and that more growth alone will not solve those problems. So it tells the people of China very clearly, we understand that growth so far has been very important to our economy, but our economy has now reached a stage where we need to make sure that we take care of all these attendant problems caused by growth and make sure that you understand that this growth is going to benefit you.
(SOUNDBITE OF SONG, "ROLLING IN THE DEEP")
ADELE: Rolling in the deep - tears are gonna fall, rolling in the deep. You had my heart...
KESTENBAUM: Jacob, you know when I was planning my trip to India, India also has these five-year plans. And you read them, and they say the same things, you know, year after year. You know, we need inclusive growth. We recognize this is a problem. Actually, there is another interpretation of Wen Jiabao's speech in this five-year plan, which is that the number when they say we would like lower growth, maybe they're just trying to set lower expectations.
GOLDSTEIN: So they can come back and say, hey, we beat our expectations - good news.
(SOUNDBITE OF SONG, "ROLLING IN THE DEEP")
ADELE: You're gonna wish you - the scars of your love remind you of us. They keep me thinking that we almost had it all.
GOLDSTEIN: All right. We will put a link to Eswar Prasad's new book, "Emerging Markets," on our blog, npr.org/money.
KESTENBAUM: And we'll also put a link to Premier Wen's speech. Fortunately for those of us who don't speak Mandarin, we found a version in English. Also as always let us know what you think. You can send us email - email@example.com. I'm David Kestenbaum.
GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.
(SOUNDBITE OF SONG, "ROLLING IN THE DEEP")
ADELE: And you played it - tears are gonna fall - to the beat. Rolling in the deep. We could have had it all, rolling in the deep. You had my heart inside your hands, but you played it with a beating. Throw your soul through every open door. Ooh - count your blessings...
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