Fortune: Can America Compete

[bhchao]

Ambitious Americans who think about these things want to be managers of engineers rather than engineers themselves.

I disagree. When I worked in the Bay Area in 2000, ambitious Americans worked side-by-side with engineers from India, China, and Bay Area grads as engineers themselves, not as managers.

Nothing wrong for an American to be ambitious, neither is it wrong for a Chinese to be ambitious in the same manner.

[gato]

See this article

http://www.washingtonpost.com/wp-dyn/content/article/2005/07/31/AR2005073101163.html

A Chinese City's Rage At the Rich And Powerful

Beating of Student Sparks Riot, Looting

By Edward Cody

Washington Post Foreign Service

Monday, August 1, 2005; Page A01

CHIZHOU, China --

Liu's bicycle and Wu's shiny four-door sedan collided, sending Liu crashing to the ground. Almost immediately, witnesses said, Liu, 22, and Wu, 34, began arguing over who was at fault. In the heat of the dispute, they said, Liu damaged one of Wu's side-view mirrors, prompting Wu's muscular bodyguards to burst from the car and beat the skinny young man senseless, leaving him bleeding from his mouth and ears.

The beating, part of a minor traffic incident on a slow Sunday afternoon, ignited a spark of anger. The spark became a riot, evolving over eight chaotic hours into an expression of rage against the Chinese Communist Party's new fascination with businessmen, profits and economic growth.

After they saw what happened to Liu, Chizhou's self-described "common people" rose up against what they perceived as their local government's willingness to side with rich outside investors against Chizhou's own. By the end of the evening, 10,000 Chizhou residents had filled the streets, some of whom torched police cars, pelted overwhelmed anti-riot troops with stones and looted a nearby supermarket bare.

But the riot here, like a growing number of flare-ups in other Chinese cities, was in fact directed against the flourishing alliance of Communist Party officials and well-connected businessmen that runs Chizhou. Before calm returned to the streets, the disturbance had become a political rebellion against the increasingly intimate connection in modern China between big money and Communist government.

"When anger boils up in your heart so long, it has to burst," said a Chizhou man who was part of the crowd that night.

As the Communist Party strives to continue the swift economic growth that has become its new ideology, the official partnership with private business has generated resentment among those left behind: farmers whose fields become industrial parks, workers whose socialist-era factories go under, youths with assembly-line jobs at $60 a month.

[bhchao]

China has one of the highest savings rate in the world; while many Americans save very little and often live paycheck to paycheck. Credit card debt is a major problem in the US.

This shows a difference between the two cultures regarding saving money. My dad used to remind me constantly when I was in college about the importance of thrift and saving for the future, to contribute at least 10% to 401k, and avoid taking any lump sum distributions from 401k when switching employers.

A lot of the money that Americans spend are money that was indirectly lent to them by China. In other words they are spending borrowed money from overseas without saving much.

The high savings rate in China is good for Chinese citizens especially given the pension shortfall the government has. This contrasts with the US, which also has a pension crisis, except that American citizens are not saving as much as their Chinese counterparts. So the severity of the pension shortfall in China is offset in some degree by the high Chinese savings rate (correct me if you think I'm wrong). Saving for the future is very important, however I think the high savings rate in China may be a liability for the Chinese economy since consumer spending is directly tied to demand, and demand drives a free-market economy.

When people start buying more, the increase in revenue allows companies to pay their workers more, and we could see a rise in wages in China.

Although this is not necessarily true, there could be a bigger spike in living standards in China if people had more available money for domestic consumption. (excluding those already in savings)

By The Christian Science Monitor

August 3, 2005

The personal savings rate hits its lowest rate since 2001 as Americans put their faith in the rising value of their homes.

Americans have stopped saving for a rainy day.

Instead, they are living paycheck to paycheck, depending on credit cards to get them through emergencies, and hoping that the rising value of their homes will give them a retirement nest egg.

This personal economic chasm is showing up in the national savings rate, which has been declining for years. Tuesday, the Commerce Department reported that the personal savings rate fell to zero in June, the lowest since a one-month buying binge in the aftermath of the 9/11 attacks. The United States is on track to record a savings rate for the year below 1%, which would be the lowest since the depths of the Great Depression, when the rate turned negative.

The nation's paucity of savings is raising alarms from the Federal Reserve to consumer watchdogs, who worry that the nation is counting on foreign savings to maintain a spendthrift lifestyle. Some groups are cranking up advertising campaigns to try to remind Americans that they don't need to participate in every sale.

And there are now high-level suggestions that the tax system needs to be changed to encourage savings instead of spending.

"In two generations it seems that we've lost the culture and habit of savings," says Nancy Register, of the Consumer Federation of America “There's so much marketing pressure to spend and buy and have instant gratification. And if you can't buy it now, put it on your credit card."

Last week, Federal Reserve Chairman Alan Greenspan warned that the low savings rate is impairing the nation's long-term economic prospects. An improved savings rate would provide investment money for businesses, which would create jobs, he said.

Though Americans' savings are falling, their net worth is rising in large part because of soaring home prices and some improvement in the stock market, economists say.

Various calculations

People spend 6% of all housing market gains and 2% of their stock market gains, says Anthony Chan of JPMorgan Asset Management in Columbus, Ohio. "When you have massive capital gains, you get people spending more, pushing the savings rate down," he says. In fact, other analysts contend the situation may not be as dire as the official statistics indicate. That's because when the Commerce Department calculates the savings rate, it doesn't include things like capital gains and investments in pension plans.

Currently, there are about $12 trillion dollars in various structured retirement accounts that are not included in the savings rate, says Dallas Salisbury, president and chief executive officer of the Employee Benefit Research Institute in Washington.

"Let's assume that you bought a home and you held it for some number of years and you had a large capital gain. That capital gain would not be calculated as savings and the taxes would be counted as an expense," says Salisbury. "So, even though you may look at it as though you have more savings than before, the Commerce Department does not."

[Outofin]

I think borrowing is not bad at all. Saving is too much a basic way to manage your money. By saving, I'm not including 401K, which is an investment. Although many fools borrow like never need to pay, credit card is indeed a fabulous service. And think about it, it's a FREE financial service. When Chinese get richer, they'll seek for more complicated financial services as well.

For ordinary people, money is no more than income and expense. But when it comes to business, money becomes capital. More money you have, more money you make. And speed matters. Say you could do 1 mil business per month. If you could expedite your moneyflow by 20%, you'll be able to do 20% more business. Another example, a soccer team has 10 players. If they run as twice fast as the other team, it's essentially a 20 vs 10 game.

I don't know for sure if the theory applies to macro economy.

[Ian_Lee]

Actually credit card is a good tool to make money if you know how to utilize them.

For instance, now most major credit card companies give you 1-5% rebate on whatever purchases. And many travel agencies give you the price difference back when you pay by credit card.

So whenever I go on a journey, I buy the air ticket one day after the credit card's billing day. So it gives me about 45 days to pay for purchase. But if the air ticket costs $1,000, the travel agency will charge $2,500 on my credit card to the airline. But they will immediately write me back a $1,500 check.

So I will have $1,500 in my bank to accrue interest, needn't to pay until 45 days afterwards, entitled to a $1 million accidental insurance and get $20-50 rebate on my next statement.

Of course, if you don't pay in full when the statement is due and are willing to pay 18% interest to the credit card company, then that is another story.

But a lot of Americans do indeed pay that hefty 18% interest. I guess it is all related to financial prudence.

[bhchao]

Although many fools borrow like never need to pay, credit card is indeed a fabulous service. And think about it, it's a FREE financial service. When Chinese get richer, they'll seek for more complicated financial services as well.

Actually credit card is a good tool to make money if you know how to utilize them...I guess it is all related to financial prudence

Credit card can indeed build up your credit history if you are a prudent credit owner. Most people cannot afford to pay in full upfront when purchasing a new car or home, and opt instead for monthly payments. If you have bad credit, your chances of getting a loan is very slim. That's why a positive credit rating is important when settling down with your significant other.

When credit cards become more common in China, hopefully it will not encourage a spending culture where young adults utilize credit to spend beyond their means. I am not a big credit card user, and prefer to use debit/check card. That way the money is automatically deducted from my account.

If no money in account, then transaction will be a no-go.

[Outofin]

I'd highly recommend using credit card. Some cards offer 5% cash back on grocery and gas purchases. Unlike those brand credit cards, which is just a way to lure you to spend more, every one must spend on food and gas, so why not use the cash back card? Also, a offer of 0% APR and no balance transfer fee is like writing a check to you. Think how much interest you pay for your car and morgage loans.

Speaking of 401K, does anyone know what would happen to my account if I move back to China? The penality is too high if I just close and get every cent out. Do I have a good way to get my money out? Can I just leave the money in the US and use it after I retire?

[beirne]

I'd highly recommend using credit card.

I wouldn't quite say "highly recommend". If you can pay off the balance EVERY month they are OK, otherwise they are fairly risky as one can fall further and further into debt.

[skylee]

I love using credit cards, and I have plenty of them (AMEX, VISA, Master). I use them to pay my taxes, groceries, transport expenses (the Octopus), and almost everything else.

I always pay back in full every month (autopay all of them so there is no forgetting), so I don't pay any interest at all. And I frequently get some sort of discount through various types of promotion (my friends call me the walking VIP card), and I also get to accumulate plenty of mileage points for flight tickets redemption (am a mileage freak).

[bhchao]

Speaking of 401K, does anyone know what would happen to my account if I move back to China? The penality is too high if I just close and get every cent out. Do I have a good way to get my money out? Can I just leave the money in the US and use it after I retire?

The best way is to have your employer directly rollover your 401k into an IRA account.

Don't let your employer mail the check to you and then have you deposit it into your IRA account yourself. Otherwise your employer is required to withhold 20% and send the remaining 80% to you in that check.

If you ask your employer to perform a direct rollover from their trust account straight into your IRA account, you will not get hit by the 20% withholding.

You can withdraw money from your IRA without any penalty once you reach age 59 1/2.

[gato]

Speaking of 401K, does anyone know what would happen to my account if I move back to China? The penality is too high if I just close and get every cent out. Do I have a good way to get my money out? Can I just leave the money in the US and use it after I retire?

There's one small complication. It may not be worth considering, but just in case. It would seem that the 10% cut is rather painful. But you should also keep in mind that profit from stock trading (i.e. capital gains) earned by a foreigner residing outside the US is not subject to US tax. Thus, if you do an early withdrawal, you'll need to pay the 10% penalty. Plus the entire amount withdrawn will be tax as earned income (treated same as your salary). But afterwards, if you invest the money in US stocks and tell your broker that you're no longer living in the US, you won't have to pay any US tax on the profits you earn.

If you don't go the early withdrawal route, any future distribution from a traditional IRA will still be taxed as earned income, but by then you might be in a very low tax bracket because you won't have much US income. Many people avoid having that potentitally large taxable income by converting their Traditional IRA to a Roth, pay the income tax once so that any future distribution will be tax-free. People often do the Roth conversion in a year when their US-earned income is low so that they would be in a lower tax bracket.

[bhchao]

Many people avoid having that potentitally large taxable income by converting their Traditional IRA to a Roth, pay the income tax once so that any future distribution will be tax-free. People often do the Roth conversion in a year when their US-earned income is low so that they would be in a lower tax bracket.

gato is right. however if you convert your Traditional IRA into a Roth, you will need to hold the Roth account for 5 years and be at least age 59 1/2 in order for the distribution to be tax-free.

There is an exception to the age 59 1/2 rule for both Traditional and Roth IRAs. If you withdraw money from your Traditional or Roth IRA prior to age 59 1/2, you will not get hit by any tax penalty if you use those funds (up to $10,000) for purchasing your first home.

[Outofin]

Although the forum doesn't welcome short posts like "I see" and "Thank you", I must say, thank you guys for the information!

[roddy]

'Thankyou' is permitted under the 'Good Manners' exclusion - though I'm not sure when we became a financial advise forum

Roddy