Recession reveals how closely U.S. and China are linked economically

By SCOTT CANON
The Kansas City Star

The warehouse at Top Innovations on Troost Avenue is stocked from ceiling to floor with boxes of infomercial wonders of steam.

Gadgets for cleaning and shining and making wrinkles disappear just like that. And each shiny metal and plastic gadget is made in China.

Company president Benny Lee’s trip to five Chinese cities last month revealed the recession on full display. Half-empty hotels. Shuttered factories. An exodus of workers from coastal manufacturing hubs.

“You can feel it,” he said. “They have too much of everything” — raw materials, production capacity, people seeking wages — “and having too much of something is usually a problem.”

The old cliche: When the U.S. economy catches cold, the rest of the world comes down with pneumonia.

The wheezing from America and China — the world’s largest economy and its largest work force, respectively — shows just how contagious globalization has made our economic ills:

•Low mortgage rates here are possible in part because China still buys U.S. debt.

•As construction faltered across the United States and the rest of world, Chinese steel exports were halved.

•China Southern Airlines delayed taking two 777 freighters, so Boeing Co. may not get its money until next year.

•The last quarter of 2008, worst ever for U.S. toy sales, hurt deeply in China, where 4,000 toy plants are closed.

•Beijing’s purchases of U.S. Treasuries give Washington the cash for its expensive economic Band-Aids — which could make America a healthy buyer of Chinese goods again.

“The idea that global economies are somehow immune from what’s going in other parts of the world — that’s over,” said Gus Faucher at Moody’s Economy.com

2 percent off
Yet the nations’ symptoms of economic flu are not the same.

Start with growth. China’s market socialism has sprouted like kudzu since the late 1970s, with gross domestic product rising annually by 9 percent or more for decades running.

But the U.S. real estate bubble burst and Wall Street buckled, and the West’s seemingly infinite consumption that powered China’s growth became painfully finite.

“They took a very major hit,” said Robert Weil, author of “Red Cat, White Cat: China and the Contradictions of ‘Market Socialism.’ ”

“They had counted on growth to absorb the new labor coming into the workplace. Then the growth went away.”

China’s GDP for the last six months is estimated at 6 percent. In the United States, 2 percent would be good news, but China is another matter. It needs it at 8 percent just to stay even with the work force.

So more than 20 million workers have been laid off in the past year — compared with 5 million in the United States.

Some results: wages driven down again and unrest in some cities, but a new competitiveness for factory orders.

Beijing was shocked in February when its exports fell 25.7 percent from a year ago.

As a result, the Chinese seem eager to deal, Lee said, promising firm prices — almost unheard of a couple of years ago.

Xikar, a Kansas City firm that buys lighters from a Chinese factory, says the same.

“Now we’ve seen the speed and the flexibility, their response to changes, get much better,” said co-founder Kurt Van Keppel. “All of a sudden, we’re very important to them.”

Savings vs. stimulus
In Beijing, as in Washington, the government has ordered up an economic stimulus package.

Prime Minister Wen Jiabao, sounding like Mao Zedong channeling Franklin Roosevelt, said: “Confidence is more important than gold or money.”

Announced in December, a $586 billion, two-year stimulus package for roads, railways, the power grid and such is to keep Chinese workers busy.

Beijing will invest some of its vast surpluses in a fledgling government health-care system — to try to free up savings as much as offer a social service.

Most Chinese limp by without any health insurance or retirement plans. So they squirrel away money for later needs.

Households there save from a third to half of their annual earnings. (Until recently, U.S. savings rates were near zero.)

“You can’t suddenly get people to change their spending habits,” said Rajan Menon, a professor at Lehigh University. “That’s why they needed the stimulus package.”

Finger-pointing
Former Treasury secretary Henry Paulson in part blamed the crisis on the Chinese savings mania, saying it drove down global interest rates and led to investors searching for better-yielding but riskier places to park their wealth.

U.S. leaders also have long pointed to China’s artificially cheap yuan and lopsided trade balance. Even as Americans bought less in March and exports to these shores fell 12.6 percent, China still posted a $10.2 billion monthly surplus.

On the other hand, Beijing accuses America’s aggressive capitalism for the global credit mess. It feels burned by seemingly safe but now shrunken assets on Wall Street and in mortgage giant Fannie Mae.

Last month, Wen publicly called for assurance against U.S. deficits-driven inflation in the future: “To be honest, I am a little bit worried.”

Some economists fear what would happen if China backed away from U.S. securities. Washington would have to tempt other buyers with higher interest rates, and inflation could run wild.

Others discount that threat, saying Uncle Sam is simply too large a creditor to tamper with.

Said Weil: “They need us, too. We’re their best customer.”