Reader Mailbag: “Two words for delusional China bulls: PER CAPITA”

“A system of capitalism presumes sound money, not fiat money manipulated by a central bank. Capitalism cherishes voluntary contracts and interest rates that are determined by savings, not credit creation by a central bank.”

-Ron Paul

We got some good feedback from our article on Friday. Below are a few reader comments and our responses. Enjoy. (And keep the comments coming.)

Reader Mailbag


Per capita income, per se, as a gross economic factor, may mask important on-the-ground factors that influence the quality of daily life: access to cheap local food, access to low-cost medical care, low cost of public education that enables, perhaps, future economic opportunity.   

Having a higher per-capita income that is “eaten up” by high taxation, high medical care costs for both basic and advanced services, high fees for quality education, and high costs for the basics of living: shelter, food, etc., raises the question of what is true “personal income.”  

So, a hundred million or so Americans can buy the latest iWhatever: but all the factories, and all the jobs, and all the manufacturers of all the components for the iWhatever are located in … China.  

And China “sits on” a hoard of great national surplus wealth created by export vs. import trade earnings: how that wealth will be “spent:” that, for this writer, is … the question.


There are a couple good points here; I’ll hit them as them come …

Per capita income is not a perfect indication of “on-the-ground factors that influence the quality of daily life.” But it certainly is an indication of the wealth of a country (and to a large degree the ability of individuals to perpetuate wealth); perhaps better than the total GDP and comparison of GDP growth rates.

Plus, the figures in the article and chart are based on PPP (purchasing power parity) which seeks to account for some of the “on-the-ground” factors.

To the point about the manufacturing of technology components, China does assemble and export a very large portion of high-level goods; but China has a much smaller role in the actual design and production of the components it assembles. A majority of the components found in China’s high-level exports originated in other countries, very much so in neighboring Asia. While this suggests that China is not the growing technological and R&D powerhouse many claim it to be, there is no denying the point you made about the jobs being in China.

Jobs assembling high-level goods in China may not be at risk of implosion, but a generally smaller appetite for consumption is going to hit jobs in other areas of China. That also likely means the “hoard of great national surplus wealth” will not be accumulating as quickly. China’s FX reserves declined in the fourth quarter of 2011 for the first time in more than ten years.  And it does beg the question you asked: How will that wealth be spent?

If China fails to make this transition, how can China expect to rebalance their dangerously lopsided economy? The powers-that-be inside China understand this problem; many would like to see progress in this transition, as ultimately it will reduce China’s dependence on the West, which has to be a primary goal of China.  But there is major pushback from those inside China – from the princelings and other well-placed individuals benefitting from the current model at the expense of the average citizen, so this will be a wrenching transition.  The transition can flow from voluntary measures or Mr. Market will force it upon them.   Which brings me to …


It is the low per capita numbers that makes China powerful! That means the govt is still in the driving seat, and it can still leverage the low human capital cost.  

If China has higher per capita numbers and become more democratic, China will slow down.


The low per capita numbers and China’s growth are common patterns in emerging markets; on a relative scale they begin from a lower base.   Granted, China has broken the EM mold a bit, given the dramatic breadth and speed of its growth.  However, the bulk of that dramatic growth started around 2000 area, when the US Fed decided it was time to create free credit for all (Greenspan emergency interest rates) and the US encouraged the symbiotic relationship of US dollars, for Chinese stuff, leading to recycled dollars back into the US financial system to continue the game of free credit.  That has ended–it was called the Credit Crunch.

China during the past cycle has also benefited from labor arbitrage i.e. becoming a massive global manufacturing platform through leveraging the low human capital costs.. I’d argue that the foundation is shifting and making this dynamic less feasible on two counts: 1) Wages are rising in China, making production there less attractive; we are seeing reports that global manufacturers are increasingly finding it makes sense to stay at home, or shift some manufacturing elsewhere;  and 2)  It is why we started this dialogue, as we think growing social unrest is pressuring Chinese officials and elites in such a way that they will need to give ground to these demands and begin to enrich Chinese citizens in ways they so far have been able to avoid. 

This we think will be a good thing for China in the long run, but the blowback from those in power who stand to lose from a new economic arrangement could make this period extremely difficult and will lead to slower overall economic growth than is now anticipated. That is the point. Continuing on the current trajectory may mean avoiding a slowdown; but it will also mean delaying the inevitable by propping up an unsustainable system. We’ve made a similar point when discussing the US; only it is the other side of the coin. As US policymakers continue to focus on building an economy dependent on consumption/demand, they promote a system that is overly reliant on debt and deficit spending and not enough on savings and investment.

Surely the Communist Party leaders and princelings who have been getting wealthy on the current system don’t want to let go; but as time passes, we don’t believe they will have a choice.  The only question in our mind is how long they can delay the inevitable.  So far, they have done a very good job of that and hints of possible easing again we think show a rising degree of desperation (very similar to Bernanke’s desperation as he manipulates money and credit to a degree even we didn’t expect).


In the US, 1% of the population own 38.3% Wealth 20% of the population own 85% Wealth.  That I suggest would be China under the Mongol Emperors.


Indeed, the US is not without its own form of princelings. Those heavily connected to the shadow and fractional reserve banking system that thrives on credit creation in the financial economy, while the average Joe in the real economy suffers and those so-called “businessman” who tout their brilliant strategy, while raking in massive favors from their cronies in government would be an example of US princelings.   The byproduct of current fiscal and monetary policy in the US is an enriched upper class and a propped up lower class at the expense of a strapped middle class. Consider the fact that increasing numbers of US citizens are on welfare highlights this problem. 

While central planners and their brethren in the US pull the strings of the financial system so they may line their own pockets, the central planners in China call the shots so that its citizens do not become empowered and threaten their power or control over the so-called “capitalism with Chinese characteristics”–what a bunch of nonsense.