U.S. Urges China To Save Less Buy More.

In the article "U.S. Urges Chinese to save less, buy more" authors Neil King Jr. and James T. Areddy use several facts relevant to macroeconomics to present U.S. Treasury Secretary John Snow and his strategy of encouraging Chinese domestic consumption as a solution to the problem of the United State's growing trade deficit with China. One fact mentioned is that spending by Chinese consumers is extremely low compared to other countries. Its domestic savings rate--when household, corporate and other deposits are included--is at around 50% which is the highest of any national economy. The savings rate, also known as the Marginal Propensity to Save (defined as a change in saving induced by a change in income), is an important macroeconomics topic. Another fact presented is that China is on pace to rack up a trade surplus with the U.S. of over $200 billion, up from $162 billion in 2004. Also, on October 13, 2005 the Commerce Department announced that the gap in trade with China grew to 4.65% to $18.47 billion from July to August. The trade gap is an issue addressed by the macroeconomics topic of Balance of Trade. A third fact presented is that China dropped the yuan's fix to the dollar, and let it appreciate in value by just more than 2% in July. China allowed some appreciation to the yuan after pressure from the U.S. to assist in efforts to close the trade gap. The effects of the appreciation of the yuan are described in the macroeconomics topic of exchange rates. Another fact introduced is that China does not have a significant pension system or healthcare funded by the government. These issues deal with China's fiscal policy, an important macroeconomics topic. A fifth fact presented is that China has had some success in encouraging consumerism. By lifting a regulation reserving the ownership of cars for businesses and the government, many more automobiles are being purchased by individuals, spurring spending. This government regulation is addressed in the macroeconomics topic of supply-side economics. The last fact exhibited is that details of a plan drafted by U.S. Treasury Secretary John Snow to jumpstart consumer spending in China included: allowing foreign securities firms to set up independent subsidiaries in China, and setting up credit rating services to improve access to car loans and credit cards. In addition, long-term goals included were cutting the personal income-tax rate, and diverting more money from fixed-asset investments in factories and buildings to social programs such as social security and pension plans. The plan that Mr. Snow intended to present dealt with the macroeconomic topic of fiscal policy.

2. Theory Review and Analysis

The first fact mentioned is that China's domestic spending is very low compared to other economically developed countries. As previously stated, China's Marginal Propensity to Save is at around 50%. According to macroeconomics, the Marginal Propensity to Consume, which is defined as the ratio of the change in consumption spending to a given change in income, is equal to 1 - MPS, which means that at the current national income level, the Chinese people are only spending 50% of their income. A low spending rate can be attributed to many factors. One such factor is the expectations of price changes. If people expect the prices of goods to be cheaper in the future, their current consumption will drop. Another factor that can be attributed to a low spending rate is credit and interest rates. Many durable goods (defined as goods expected to last at least a year) are bought on credit, and if credit is not readily available or if interest rates are unattractive, then the purchase of expensive durables will drop, dropping the MPC. A third factor that can contribute to low spending rates is taxation. If taxes are raised by the government and an individual's income remains the same, then the individual's MPC will go down. The second fact mentioned is that China is on pace to rack up a trade surplus with the U.S. of over $200 billion, up from $162 billion the year before. In macroeconomics, a trade surplus is determined in a Balance of Payments (defined as an itemized account of a nation's foreign economic transactions) in the Balance of Trade section. Balance of trade is the difference between the value of a nation's merchandise exports and its merchandise imports. In this case, China exports much more than it imports from the United States. A third fact presented is that China dropped the yuan's fix to the dollar, and let it appreciate in value by just more than 2% in July. The macroeconomics topic of exchange rates addresses this issue. As stated before, the United States has a trade deficit with China which is growing at an increasing rate. In a free market, if the U.S. was importing a great amount of product from China, demand for Chinese yuan would go up, eventually causing the yuan to appreciate in value against the U.S. dollar. This appreciation would then make Chinese products more expensive to U.S. importers and U.S. products cheaper to Chinese importers. This appreciation/depreciation of currencies would not necessarily bring the U.S. deficit with China down completely, but it would definitely make a very significant impact. The problem that the U.S. faces with China is that Chinese commerce officials have decided to peg the yuan to the dollar. A pegged exchange rate is one which is legally determined--only the government can change it, it is not determined by a free market. And because Chinese officials have pegged the yuan to the dollar at an artificially low rate, the yuan will not appreciate no matter how much the demand for it increases. Chinese officials let the yuan appreciate by a small amount after pressure from the U.S., but U.S. Treasury Secretary John Snow is trying to avoid more "arm twisting" by working with Chinese officials to encourage more spending from the average