Monday 3 November 2008
New Financial Crisis, Old Tactics
Although it is not expected that China will be anywhere near the largest victim in the current financial blow about, it may turn out to be the largest loser of opportunities. Before the crisis, China was actively promoting industrial transformation and the growth of domestic demand. Now, with the winds whipping through China’s tangible economy, these reforms are most likely to be delayed, maybe for years to come.
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New Financial Crisis, Old Tactics
Niu Zhijing
3 November 2008
Although it is not expected that China will be anywhere near the largest victim in the current financial blow about, it may turn out to be the largest loser of opportunities. Before the crisis, China was actively promoting industrial transformation and the growth of domestic demand. Now, with the winds whipping through China’s tangible economy, these reforms are most likely to be delayed, maybe for years to come.
China’s nearly 50% savings rate and low labour costs have been driving forces for investment and export for the past ten years, but maintaining the energy consumption, overheated investment, and enlarged banking credit risk brought about at the same time has proved a difficult balancing act. Premier Wen Jiabao acknowledged at a press conference in March of 2007 that there are still enormous problems in China’s economy, which is an unstable, unbalanced, uncoordinated and unsustainable structure. The instability refers to high investment growth rate, too much credit, excessive liquidity, and foreign trade and international payment imbalances.
Since 2006, Chinese leaders have tried to adjust a huge economy relying 80% on export and investment to one driven by technological innovation and domestic demand.
Some efforts have been fruitful. Pollution emissions in some cities and provinces has been limited and the number of small, unsafe coal mines has fallen. Energy or labour intensive export businesses have been forced to close or reform. Absent the financial rumble and China might have been finding a new, so-called “scientific development” road, in line with its national interests for the future.
Reform efforts will now slow or be suspended, largely because of the world economic situation. In general, economic transition is icing on the cake after stability, but now the government’s top priority is to prevent economic growth from declining.
The reasons for decline are many, but the previous tight credit policies had began to show a negative impact. Over the first half of this year, austerity measures were in place to prevent the overheating of investment. It now appears that it also dealt a heavy blow to SMEs, small and medium enterprises, that contribute greatly to the country’s efforts towards full employment.
As for exports, the reduction of consumption in the US and Europe has had a direct and significant impact on China’s industry. According to Ministry of Commerce researchers, import and export of goods and services in the first three quarters contributed only 12.5% to the economic growth, a fall of 8.9 percentage points over the same period last year, stimulating economic growth by 1.2 percentage points, down 1.2 percentage points. In the first three quarters, China’s exports to the US grew 11.2%, down 4.6 percentage points over the same period in 2007.
According to Customs statistics, the proportion of import and export to the US fell from 14.2% in August last year to 12.7% in August this year.
It is no surprise that extensive growth is challenged in transition, and the financial turmoil has sped up the challenge. Complaining local governments and jobless workers put pressure on the central government. Beijing policy-makers adjust the strategy and return to old habits, attempts to stimulate the economy through infrastructure investment.
It is impossible to say at the moment whether this adjustment will sow disastrous seeds for China’s future economy. All that can be said is that at least it will promote infrastructure construction in a new field. Over the past 30 years, China has used successive rounds of government investment to stimulate the economy. After the 1997 financial crisis, China built its impressive highway network making use of government money, but also left the after-effects of a rush of investment into highly polluting industries and billions of dollars of bad debts in the banking sector.
Together with high-speed railway development in the coastal areas, China’s western regions and rural areas will be an important digestive strip for this round of investment. The government has recently added 750 billion yuan to the investment of 1.2 trillion for the construction of the railway network.
As for the target of 20% energy-saving and emissions reduction by 2010, Beijing is not emphasizing it. The National Development and Reform Commission, which is responsible for planning and development, has reduced the goals of energy-saving and emission reduction in Ningxia Hui Autonomous Region and Shanxi, which are two large coal-producing provinces.
The People’s Bank of China (PBoC), China’s central bank, has also given up the goal of implementing total control over bank credit. PBoC spokesman Li Chao said that in order to flexibly and effectively deal with the spread of the international financial crisis and to maintain a stable and rapid economic growth, the central bank can no longer bind the credit planning of commercial banks.
Will this round of investment leave after effect like the previous one? That would be a good bet.
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