When she gets sick, Li Enlan, 78, picks herbs from the woods that grow nearby instead of buying modern medicines.
This is not the result of some philosophical choice, though. She has never seen a doctor and, like many residents of this area, lives in a meager barter economy, seldom coming into contact with cash.
"We eat somehow, but it's never enough," Li said. "At least we're not starving."
In this region of southern Henan Province, in village after village, people are too poor to heat their homes in the winter and many lack basic comforts like running water. Mobile phones, a near ubiquitous symbol of upward mobility throughout much of this country, are seen as an impossible luxury. People here often begin conversations with a phrase that is still not uncommon in today's China: "We are poor."
China has moved more people out of poverty than any other country in recent decades, but the persistence of destitution in places like southern Henan Province fits with the findings of a recent World Bank study that suggests that there are still 300 million poor in China - three times as many as the bank previously estimated.
And yet China is lending the US hundreds of billions of dollars. In The Atlantic, James Fallows has an excellent look at the Chinese side US-China economic relationship. He writes:
Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.
Any economist will say that Americans have been living better than they should—which is by definition the case when a nation’s total consumption is greater than its total production, as America’s now is. Economists will also point out that, despite the glitter of China’s big cities and the rise of its billionaire class, China’s people have been living far worse than they could. That’s what it means when a nation consumes only half of what it produces, as China does.
Neither government likes to draw attention to this arrangement, because it has been so convenient on both sides. For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden. But because of political tensions in both countries, and because of the huge and growing size of the imbalance, the arrangement now shows signs of cracking apart.
In terms of the national income accounts, it is quite simple - negative NX for the US means that C + I + G > Y, and the opposite is true for China. To the extent that China's low consumption reflects high investment, it is arguably doing some good for its future. The trade imbalance - and concomitant financial flow, as China receives financial assets in return for the goods it sells to the US - is harder to rationalize.
The concerns about inflation don't really make sense to me - inflation is (usually, mostly) a monetary phenomenon, and China's policy of keeping its currency weak entails inflationary printing of yuan to buy dollars (and in turn, they have to use "sterlization" to try to restrain the inflationary consequences). Allowing the yuan to rise more quickly would be deflationary, because it would lower the price of imported goods. It is true that a higher consumption share of GDP would increase demand for consumer goods and this would tend raise their prices, but it would also induce a shift of resources into producing these goods. If China let its currency appreciate more and increased consumption, the Chinese people would be able to enjoy more of the fruits of their own labor as well as more imported goods.