China’s rulers facing dangerous times
By Sushil Seth
First: there is growing inflation that is eroding people’s real incomes. Already, the divide between rural and urban incomes and between rich and poor is growing alarmingly. Official figures put rural incomes at less than one-third of urban areas.
As for the income disparity between the top and poorest 10 per cent, it favors the former to the tune of 23 times. And this official estimate is believed to be grossly understated.
The real disparity, according to a Chinese economist, is 65 times that of the poorest 10 per cent.
With such figures of rich-poor divide, inflation is not only an economic problem, it is also a seriously de-stabilizing social factor.
Even though the Chinese authorities have taken measures to mop up excessive liquidity by multiple interest rate rises and increasing the deposit requirements of banks, it remains a serious problem worrying the government.
At such times, there is always a tendency to blame others. And who better to blame than the United States.
It is all the fault of the United States because of its loose monetary policies.
Although, it might as well be argued that China is the real culprit both at home and abroad.
China’s breakneck rush to corner the market for crucial commodities, like iron ore, coal, oil, food etc, is pushing up prices of these and other items all over the world.
At the same time, by keeping its currency undervalued for export advantage, it is forcing competitive devaluation on other countries.
As Michael Spencer, chief economist for Asia at the Deutsche Bank, has reportedly said bluntly, “China’s loose monetary policy is imposing inflation on the rest of the world.”
He adds, “The rest of Asia feels squeezed because US interest rates are at a zero and China won’t appreciate.”
Spencer concludes, “I assume at the end of the day they’re not really interested in rebalancing [trade surpluses] because it’s a painful thing to do.”
And: “They’re hoping against hope that they’ll get a couple of years’ more [free] kick from the US.”
All these years, by subsidizing its exports through an undervalued currency, China has done well by doubling its economy about every 8 to 10 years.
The United States grumbled all through because of its increasing trade deficit.
But as China was buying its treasury notes and bonds with its trade surpluses, the US didn’t seem too bothered with easy and plentiful access to credit from China.
China’s mercantilist policy of creating a mound of trade surpluses (now around $2.4 trillion), helped with an undervalued currency, created global economic imbalances that are still playing havoc with global economy.
But China is keen to continue until it has rejigged its economy, over the years, to rely more on domestic demand.
For China the global financial crisis came at a wrong time. The recession in the US and elsewhere seriously affected its export industry, with initial job losses of about 20 million workers.
It was able to get over it largely by its economic stimulation program and the pick up in foreign orders for its export sector.
However, the stimulation program has created its own problems. It has created the twin (interrelated) problems of general inflation and asset price bubble.
China’s poor are the most affected, especially from a hike in food prices where they spend most of their income.
The economists quibble if it will be hard or soft landing for China’s overheated economy, even though most agree that the economy is having serious problems.
Despite all round concern about the economy, even within the government, there still is enough money going around. The banks keep on writing new loans. And much of it is going into real estate and construction.
As a senior executive of a property development company, Ni Yawei, has reportedly said, “People can either put their money in the bank, and get interest rates that are less than inflation, or they can put it in property and a ‘two-directional’ return from capital appreciation and rent.”
This thinking is very much reminiscent of what brought about the sub-prime housing market crisis in the United States. Which is that investment in property has only one way to go, and that is its upward trajectory.
This sort of thinking led people to overstretch beyond their means through unsustainable borrowings.
China appears to be going through the same process.
Another analogy is the Japanese bubble of the nineties brought about by steep price hikes in real estate and stock markets.
Will China go that way? It is quite possible, even though the Chinese government will do its utmost not to let things get out of control.
Because its sole claim to some popular legitimacy is based on economic growth.
If that falters, leading to stagflation and the bursting of the real estate and stock market bubble, China will be in for real trouble.
The ruling Communist Party is paranoid about social stability. And yet its economic policies might create the conditions for precisely what it fears--- social chaos and a threat to the Party’s monopoly power.
This is precisely the reason advanced by Premier Wen Jiabao against revaluation of Chinese currency. He fears that a revalued Yuan will cause large-scale unemployment in the country. Which, in turn, will lead to social instability, posing serious problems for China’s oligarchs.
The spontaneous eruption of people’s power in North Africa and the Middle East, seeking to remove its authoritarian and despotic rulers, should be an eye-opener for the communist rulers of China.
Indeed, according to the Guardian newspaper, Chinese authorities were “censoring references to the protests in Egypt as some internet users drew comparisons with China.”
Of course, the two situations (in China and the Middle East) are not identical.
But one important common thread is that in any society subject to authoritarian rule over a long time, people become frustrated with their unresponsive rulers addicted to feathering their own nests---be it political power or economic riches or both.
Such deep-rooted corruption, absence of transparency, intolerance of political opposition, and human rights abuses in China are fertile ground for a sudden social and political eruption, triggered by a small event like what happened in Tunisia.
In the case of Tunisia, for instance, it was the frustration of a young 26-year old fruit vendor not allowed to earn his living the only way he knew, that led him to set himself alight.
In the process, he also set alight the Tunisian regime, forcing the country’s president to escape to Saudi Arabia.
And the Tunisian uprising provided the trigger for Egyptian people and now people’s power is all over the Arab world.
The example of people overthrowing or seeking to overthrow their despotic rulers in one Arab country after the other can be quite contagious.
In China, for instance, Deng Xiaoping and his political progeny have now ruled for about 30 years. The frequent reports of small and big incidents of popular protests suggest that the regime is starting to weigh on people’s nerves.
And if the economy goes into a nosedive, such fragmented cases of unrest might easily coalesce into people’s power for a day of reckoning with their rulers.
You never know when people might pick up the courage to do just that.
Ask Tunisia’s deposed president, and Egypt’s Hosni Mubarak fighting for his political life.
