Saturday 29 November 2008

Don’t Pin Hopes Too High on China

The answers are complicated but may not be what the world wants to hear or be in the best global interests.

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Guanyu said...

Don’t Pin Hopes Too High on China

Kevin Rafferty
29 November 2008

As the world economy reels from bad to worse to appalling, and economists go from talking of the “R” word (recession) to swapping stories of the Great Depression in the 1930s, eyes also turn to China and to what it might, can and should do in its newly emerging role as a global player both economically and politically.

The answers are complicated but may not be what the world wants to hear or be in the best global interests.

The Organisation for Economic Co-operation and Development, the club of the 30 rich industrialised countries, reported this week that many of the wealthy economies “are in or on the verge of a protracted recession of a magnitude not experienced since the early 1980s”. If anything, it was being optimistic.

Even on the OECD’s assumptions, 8 million more people will lose their jobs in the rich countries, and the US, Europe and Japan will all stay in recession until at least the middle of 2009, and then the recovery will be “languid”. Any sharp changes in foreign exchange rates or rises in oil prices could prolong the agony.

Policymakers have been surprised already because the financial and economic situations have worsened beyond their predictions and out of their grasp. But still the forecasters tend to look through rose-tinted glasses.

The hard truth is that, for years, western nations generally, and the US in particular, have been living beyond their means. Worse, heavily indebted governments are trying to cope by spending their way out of trouble - spending what they do not have. If it works, a bigger bill will only come later.

The long-term remedy for the west is to save more. China is the distorted mirror image, with savings rates too high and spending too low. In a perfect world, equilibrium would be reached by meeting somewhere in the middle.

Events of the past few months have demonstrated that it is a globalised world; illusions to the contrary have been shattered, as China has found. Hopes that the downturn in the west would bypass China have proved in vain as falling demand for Chinese exports has led to layoffs in factories in the Pearl River Delta and beyond, and rapidly falling growth.

The World Bank this week predicted that China’s growth would drop sharply, to 7.5 per cent next year, from the 9.2 per cent previously expected. Even so, most countries would die for a growth rate as high.

But, in China’s own case, lowered growth rates will cause rising tensions. Generally, 8 per cent is regarded as the symbolic minimum necessary to sustain employment. The World Bank’s message is that China’s high growth can only be achieved by concerted government spending.

The bank predicts that government-influenced direct spending will soar as a contributor to overall growth, and will add a full 4 percentage points - or more than half of the bank’s forecast 7.5 per cent growth next year. There will be a price to be paid, with the government account going from a modest fiscal surplus to a deficit of about 2.6 per cent of gross domestic product.

The good news is that China is on the ball, and has announced its 4 trillion yuan (HK$4.55 trillion) stimulus package, followed by the large interest rate cut this week.

China’s growth has been very lopsided and skewed in favour of the already well-off. The glitzy blocks of shops, luxury offices and upmarket apartments that line the main roads of Beijing, Guangzhou, Shanghai, Shenzhen and other cities are testament to who has benefited. Cheaper housing for the masses is less evident.

Popular pressures may encourage the government to actively remedy some of the deficiencies in its growth patterns. Workers, especially those laid off from delta factories, are making their voices heard.

Pandering to the newly vociferous workers who have tasted prosperity from industrial work but lost their jobs could be good both in stimulating the economy and in correcting one big imbalance. China’s consumption is less than 40 per cent of GDP, too low to be healthy. Lower-income groups have a higher propensity to spend, and this could have a good multiplier effect in boosting the economy.

David Dollar, the World Bank’s China director, is optimistic that the country can develop a new and healthier growth model, provided it remembers the basic principles that have served it since 1978: renewed focus on education, so that even the rural poor get at least nine, preferably 12, years of schooling; greater incentives for private investment; continuing openness to imports and direct investment; and a renewed prag-matic emphasis on infrastructure.

One important question is whether and what China can do for the rest of the world: the answer is maybe much less than outsiders would like. The best it can do is learn from history and not do what the US did in similar circumstances. Strangely, many American economists are talking glibly of a repeat of the Great Depression, without realising that, today, China is in the position that the US was then - the global manufacturing powerhouse - and the US is like an ailing Britain or faltering France.

China today is showing some worrying signs that it may try to emulate the US, not yet trashing its currency, though the revaluation of the yuan has been stopped and some economists say the US dollar-yuan exchange rate may fall to 1:7 by the end of the year (from 1:6.82 recently). But Beijing’s plans to give export tax rebates for almost 4,000 items is a worrying portent that it may try to export its way to growth, not merely a mistake globally, but risking trade wars.

It would be far better to turn the former export factories into producers for the China market and realise the dream of the market of more than a billion people, for the benefit of the Chinese by the Chinese.

Then let the foreigners compete. If they can, maybe a global balance will be achieved; if they cannot, then, next time there are global economic problems, China will be setting the pace and may not have to worry so much about problems in the west.

Kevin Rafferty is a political commentator