How to fix China's economy?

By S.P.SETH

In the midst of global economic doom and gloom, China has attracted much attention and admiration for its impressive growth. Not long ago, China’s annual GDP was growing by over 10 per cent. Things are now slowing down but the pace is still healthy. In his speech at the recent National People’s Congress in Beijing, Premier Wen Jiabao revised down the GDP growth rate to 7.5 per cent, the lowest for a long time. In his address to China’s 3000 delegates, he detailed the problems facing the economy. He said: “Domestically, it has become more urgent but also more difficult to solve institutional and structural problems and alleviate the problem of unbalanced, uncoordinated, and unsustainable development.”

And: “Internationally the road to global economic recovery will be tortuous, the global financial crisis is still evolving, and some countries will find it hard to ease the sovereign debt crisis any time soon.”

The main reason for China’s relatively slower growth rate is a contraction of its major export markets in Europe and the United States. The US and Europe are trying to deal with their debt and deficit problems. They were, the US in particular, running large trade deficits with China. A good chunk of China’s trade surplus with the US was invested in US bonds and treasury notes. It seemed a convenient exercise for both countries with China continuing to expand its exports, while the US had access to easy credit. In the process, with cheap Chinese goods flooding into US and Europe, the inflation remained under control. An important contribution of China’s export economy was to keep inflation under wraps in the West.

With inflation under control and easy credit available domestically and internationally through all sorts of complex and phony credit instruments, the Western economies went on a spending spree like there was no tomorrow. But the time and their profligacy eventually caught up, leading to the global financial crisis of 2008 that is still working its way. Not surprisingly, China too got caught up in all this, with a sudden drop in its exports and rising unemployment. This was potentially dangerous for China’s social stability, when millions of unemployed migrant workers from rural areas returned to their villages with not much employment prospects back home.

The Chinese government sought to deal with this situation with a massive economic stimulation package of about $600 billion. This did salvage the situation temporarily with banks (under state direction and funding) making credit available to fund all sorts of construction projects at local, regional and central levels. While this massive expenditure did halt the slow down and improved employment, it has also created a housing bubble, inflationary pressures and a huge internal debt from easy credit availability. For instance, there are vast empty housing estates built in the last few years without people to live in them, as most people can’t afford to buy these places.

In some ways it is like the Japanese bubble of the nineties that is still plaguing the Japanese economy. In other words, the Chinese economy, with its inbuilt imbalances of rural and urban development and growing income disparities all around has become even more distorted. And this sort of “unbalanced, uncoordinated, and unsustainable development” cannot continue, as Premier Wen Jiabao told the assembled 3,000 delegates of the National People’s Congress.

The breakneck speed of China’s economic development has not only created structural imbalances but also social dislocation. From a predominantly agricultural economy, China is now 50 per cent urbanized. Nearly 300 million rural people (and rising) constitute its floating migrant population working on urban industrial and construction sites. And they are not entitled to urban residency entitlements because of their rural residency registration. A whole way of life, going back thousands of years, is in search of a new sense of belonging that eludes them.

No wonder, China is in the midst of widespread social unrest. According to the last official estimate, China experienced in one-year 90,000 cases of social unrest, big and small. The government has stopped compiling and issuing statistics on this. Corruption is now endemic and getting institutionalized, affecting even the higher level of bureaucracy and government. The Bloomberg columnist William Pesek has quoted a report to the effect that: “The wealthiest 70 members of China’s legislature added almost $90 billion to their bank accounts last year....”

The big question is: how do you restructure an economy geared to high rates of growth fuelled by ever increasing exports? China is planning to address this question by expanding domestic consumption to increase its internal market. For this to happen people’s incomes would need to rise alongside increased employment. As regards the first, there has lately been some increase in wages due to workers’ protests, especially in the coastal industrial zones. Another way is to give people greater return on their savings with the government banks, which currently have very low interests. People have no options but to accept what is offered. Being essentially government institutions, people also feel safe about their money.

China has a very high rate of savings, mostly at the government’s disposal with very little cost involved. If people were to save less and get more return on what they save, their disposable income will rise thus enabling them to spend more and stimulate demand. Of course, China’s industrial enterprises will need to invest more in producing consumer goods for domestic economy, thus diverting funds from fixed investment in construction projects that is creating a bit of a bubble economy. But to transform the country’s economy in such a radical way is a tall order, especially because the existing system has spawned vested interests and in the midst of entrenched corruption.

Another way to diversify China’s economy is to spend more on education, health, and social welfare sectors. China’s preoccupation with statistical growth has seriously neglected these sectors, even though it is now the second biggest economy. Besides, there is also need to invest more in the rural sector that has seen relative neglect in the last two decades from the nineties. That explains the increasing migration of rural people to cities in search of jobs. China could also do with developing ancillary small and medium scale rural industries to provide employment for people closer to farming communities. This is important not only to stem the outflow of rural population to cities but also to foster social harmony by keeping people within their familiar social and cultural environment. But unfortunately the government instrumentalities at the local and regional level, in particular, have been busy acquiring rural land for urban development and industrial construction without much consultation and compensation. Which is an important reason for rural unrest.

The overhaul of the economy will be a slow and a long process, requiring public accounting and transparency. In other words, it is time for China to link up economic transformation with political reform. As Premier Wen Jiabao said at his press conference, “ … Without successful political structural reform it is impossible for us to institute economic structural reform and the gains we have made in this area may be lost.” He has said before that, “… if we are to address the people’s grievances we must allow the people to supervise and criticize the government.

China will soon undergo a change of top leadership, with a new President and Prime Minister. That might lead to a concerted effort to transit China into a more sustainable development path, though it is not going to be easy and painless.

China’s race to become superpower

By S.P.SETH

China is in a hurry to become the world’s superpower. It is now the world’s second largest economy and might overtake the US in a decade or two. It will, however, still lag behind the US in terms of per capita GDP for a long while yet. In other words, many of its people will still struggle to make a decent living.

China is now also a major military power, with enough deterrence to discourage any threat to its national security. But it still finds its ambition to do what it likes constrained for a number of reasons.

The main obstacle being that the US is not facilitating its unilateral claims over South China Sea and its island chains. Washington is also not terribly keen on conceding Asia-Pacific region as China’s strategic space.

Beijing realizes that without US understanding, if not support, of its “core” interests and strategic concerns, China will feel thwarted in its primacy over the region. Not surprisingly then, China’s vice-president and leader-in-waiting, Xi Jinping, said in Beijing, just before his US visit, that he hoped “the US can view China’s strategic intentions… in a sensible and objective way…”

And he emphasized that: “Ultimate caution should be given to major and sensitive issues that concern each country’s core interests to avoid any distraction and setbacks in China-US relations.” Apparently, he didn’t succeed in this respect during his recent US visit.

Beijing is angry that the US is increasing its military muscle in the region. Reacting to President Obama’s recent announcement that the US would be prioritizing Asia-Pacific as part of its new strategic direction, Xinhua warned that, “If the US indiscreetly applies militarism in the region, it will be like a bull in a china shop [literally and figuratively], and endanger peace instead of enhancing regional stability.”

Another problem is that China’s neighbors, though duly impressed with its growing power, are not willing to give up their core interests. For instance, China’s sovereignty claims over regional waters and island chains are strongly contested by several South East countries, as well as Japan in the East China Sea.

And some of these neighbors have close strategic ties with the United States. Australia, for instance, feels that China’s growing power will destabilize the region, thus posing a security threat.

There are two ways for China to deal with these constraints. The first is to persuade the US to let China sort out its problems with its neighbors, without Washington’s overt or covert backing for them. If this were to happen, Beijing might not have much problem “persuading” its neighbors to see things China’s way.

However, this is unlikely. Therefore, there is no way for China to test this hypothesis since the US is not vacating the region for China’s power games.

The second way is to tell its neighbors, in no uncertain terms, that contesting China’s sovereignty claims might mean exclusion from beneficial economic relations with China. Their strategic tilt against China, as part of closer ties and/or security alliance with the US might, therefore, cost them dearly.

Australia has clearly received this message. In a recent editorial, the Sydney Morning Herald wrote: “Cui Liru, the head of the Institute of Contemporary International Relations in Beijing, warned that the economic relationship could not mask the strategic divide with China.”

It opined, “The underlying message was that Australia would have to catch up with the reality of growing Chinese power.”

No doubt, similar messages are being conveyed overtly and covertly to other regional countries that are cozying up to the United States.

Will it work? It is hard to say. But so far it is having the opposite effect. China’s flexing of muscles lately has had the effect of pushing some of these countries into a tighter US embrace, as well as creating bilateral and regional linkages.

Xi Jinping’s visit was intended to soften China’s image regarding its regional ambitions. But the differences with the US remain, because it refuses to acknowledge China’s privileged position in the Pacific.

For instance, on Taiwan, the US is continuing to sell defensive weapons despite China’s insistent pressure against it.

And that applies to the Korean peninsula too, with the US committed to its alliance with South Korea.

In a sense, China wants to enforce its own Monroe doctrine in the Pacific area.

If the US were to concede China’s sphere of influence in the region, China’s neighbors would feel vulnerable.

Obviously this is not going to happen, with all signs pointing to the US determination to become more active in the Asia-Pacific region.

According to Aaron L. Friedberg, in his book A Contest for Supremacy… , China’s goal is “to displace the United States as the dominant player in East Asia, and perhaps to extrude it from the region altogether.”

As for any common ground on international issues, the currently hot issues of Iran and Syria are a matter of contention. While supportive of nuclear non-proliferation, China is not keen on becoming part of the US-sponsored strict regime of comprehensive economic sanctions.

On Syria, China, along with Russia, has vetoed the UN Security Council resolution to condemn the regime’s bloodbath of its own people.

Another issue clouding their relationship is North Korea’s nuclear ambitions. There is some hope that Pyongyang might put a moratorium on its nuclear program in exchange for US food aid.

China has been playing a helpful role with its Beijing-sponsored on–off six-party talks on the North Korean nuclear issue but has resisted putting decisive pressure on its North Korean ally.

At the global level, China lacks commensurate clout in the existing international order designed and shaped, after WW11, by the United States and its western allies.

However, over the last few years, due to global financial crisis, the United States is starting to appear a bit wobbly giving China, as its major creditor, a lift in its global ranking.

At the same time, Europe is limping with the euro zone racked with debts.

With US and Europe in economic difficulties, China will seek to change international economic institutions to its advantage, with its financial power.

But it is still a long way to go for China.

For instance, even with all US’ economic problems, the US dollar still remains the world’s reserve currency. And when the economic news is bad, there is still a rush on US dollar as a dependable asset.

Even China is heavily invested in US bonds and treasury notes.

Therefore, it is too early to say that China will replace the US as the world’s superpower.

And considering the rising social unrest and other domestic problems, including its slowing economy, it might take a long time for China, if at all, to become the world’s top dog.