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Introduction +
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Introduction
China has been achieving an impressive rate of development of its economy and
increase in its regional / global economic and political influence. There has
been speculation about its future potential to act as a major driver of the
global economy, and whether its methods will provide the model that others
will now seek to emulate.
In relation to this, the present document will suggest that:
- China's
accomplishments have been remarkable over
the past 2-3 decades, especially when considered in the light of its history;
- acting
as an 'engine' of the global economy would be
impossible unless China fundamentally changes its primarily mercantilist
goals. Economic progress has been viewed mainly as a means for increasing
national power. The economic methods which have underpinned its
recent progress have involved unproductive use of capital and
protecting financial institutions with bad balance sheets by maintaining a
current account surplus (both in China and in many of its economic
'tributaries');
-
cultural features affect China's aspirations and ability to achieve an
economic transformation;
- if China were to be the pacesetter for the future of the world,
this would be a world founded on practices that are incompatible with the
principles that Western societies have sought in influencing the
international order in recent centuries (eg individualism, individual
freedom, a rule of law, increasing citizen's welfare as the goal of economic
growth, coordination of economic activities through financial
outcomes, democracy, and universal ethics which value all people rather than
a particular group);
- China's rapid export / investment driven growth is likely to prove to
be a 'bubble' because of its: state-driven economy
reliant on administrative methods for managing economic and financial
outcomes; dependence on exports and on others' ability to productively use its financial
'waste'; exposed banking institutions; environmental stresses; fast aging
population; and unstable political climate;
- following the bursting of China's economic 'bubble' by the global financial crisis, there is a possibility that
China's leaders, having no market-oriented way to further increase their
power, may turn to aggressive nationalism as an alternative.
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History and
Accomplishments |
China's History and Recent Accomplishments
China has achieved spectacular recent progress in the
face of immense difficulties.
Some History
China has the longest continuous national history
(something like 4000 years) and was politically,
militarily and economically dominant in its region (and also globally
significant) for most of that period.
For much of that period, this was based on a system of
imperial regimes - administered by Confucian bureaucracies who sought
wisdom from a study of the past.
This seems to have been based on views about the nature of knowledge, society, power, economic goals and governance
that are quite different to those of Western societies (see
East Asia).
In overly-simplistic terms
China was apparently held together through cultural conformity (backed by
force) [1]. 'Harmony' and learning were idealized
under Confucian traditions and achieved through a form of centralized
soft-power ('thought control').
Under the
examinations system the Emperor (the 'chief examiner') determined which of the
best students the education system produced he favoured to control administration, and the bureaucracy then
exerted state power primarily by guiding the way ordinary people understood the world.
China's traditional regimes seemed incapable of coping with the more decentralized
initiative and empirical (ie does it actually work?) knowledge of European powers during the
latter's period of economic, military and
political expansion from the 15th to the 19th centuries.
In 1911, China emerged from its feudal order - and then experienced decades of
instability. It was governed to 1949 mainly by the Nationalist Party in the face of
conflict with: imperialist warlords; Communists (at times); and expansionist
Japan. The Nationalists favoured building China on the basis of traditional values and
Confucian administration but were forced out in 1949 by the
Communists led by Mao Zedong - who favoured breaking down the traditional
social order, abandoning some of China's cultural
traditions and adoption of a Marxian version of Western methods. Mao's 'cultural revolution' then
largely deprived the country of its traditional intellectual capital (and
made initiative impossible for ordinary people) - resulting in widespread
suffering and economic setbacks.
Recent Progress
It was only after the liberalization reforms
and a cultural counter-revolution in the late 1970s (under Deng Xiaoping
initially), that China made appreciable progress.
Massive external (manufacturing) investment was first attracted based on
education and cheap skilled labour, while equally massive internal investment
has more recently been mobilized in modern infrastructure and urban (including consumer)
facilities especially in major cities.
Despite China's intense population
pressure, there was no shortage of land as traditional uses were simply
demolished to make way - and existing residents apparently compensated with an apartment
and better job prospects (though this process frequently generates
dissatisfaction [1]). In China
all land belongs to the state, and occupants only own the structures erected
on it.
A key feature of China's rapid growth is
seen to have been its ability to reform its economy very quickly
to become more efficient [1].
Techniques that encourage and support policy initiative within hierarchies
have been developed [1].
In China's recent progress it is
possible to see lessons learned from (a) Singapore's experience in building a
modern 'Chinese' city with foreign investment (b) Japan's neo-Confucian 'industry policy' methods and disregard of
Western financial disciplines (c) the Nationalist Party's preferred cultural alternative to
Mao's version of Communism and (d) Taiwan's adoption of some US techniques. China seems to be attempting
to implement a system of
socio-political economy that has been little studied and probably can't be understood
in terms of Western analogies or cultural assumptions (for reasons like those
outlined in Structural Obstacles).
The short-term result has been an unprecedented and impressive rate and magnitude
of gains in China's real economy [1,
2, 3,
4, 5,
6,
7,
8,
9], and a perception that it
has excellent future
prospects - even recognizing that it suffers structural defects [1,
2,
3]. Moreover some analysts have
recently seen
China as a 'safe haven' for investors concerns about a US asset bubble, and
the structural problems facing Japan and Europe [1].
It is also argued that that China is playing, and will continue to play, a key role in promoting regional
and global collaboration [1,
2]. It is seen to be
challenging Japan's status in Asia, and to be the only country able to
sustain a view of the world which is different to that of the US [1].
China has also been seen as a rising power that will force others to adjust
because of factors such as: its huge human resources and markets; the
emergence of a high class education system; and the external resources of
Greater China which will provide the skills to allow its structural problems
to be overcome [1]. A
China-centred 'Confucian Union', similar to the EU, has been speculated for
Asia [1].
China-led Asia has been seen to be returning to its historical role at the centre of
affairs - which has had a huge impact on the global economic system similar to
the long rise of Europe (and its American offshoot) to pre-eminence 500 years
ago. [1] Its emergence has (as also in the case of India) been
suggested to be simply a restoration of the position which had existed for
most of recorded human history [1,
2]. The take-off by
these two poor countries which account for 1/3 human population will make a
huge difference to the global (and especially Australia's) economy. [1]
China has shifted from a unilateral stance in opposition to global
institutions to working (often with great effectiveness) within those institutions
[1]. A 'Chinese
consensus' has been suggested to be a better alternative to the (so called)
'Washington consensus' (free societies and free markets) for developing economies [1].
The 'Beijing consensus' is seen to be characterized by putting political stability
and development before (democratic / human rights)
reforms
[1].
Some have even argued that China is 'the future of the world' [1] - undergoing a rapid
developmental process, building infrastructure and industrial capabilities
that will put it into a position of immense power in 20 years - and replace
the US as the world's dominant power by 2050 [1].
It has been suggested also that China's role as an economic engine shows that
the 'Asian century' has already arrived [1].
China is seen to have features which are quite different to earlier
challenges to the US's 20th century global dominance (eg Soviet Union, Japan) and to have the
potential to create a future Asia-centred economic regime which others
including the US can either be part of, or be excluded from [1].
A popular image now seems to be presented within China of a trendy,
super-modern consumer society that will eventually be able to satisfy every
material desire.
Though there are obvious
environmental and political problems behind this
image and China's model for socio-political economy may
prove financially / economically un-sustainable, China's leaders present a
confident face to the world and to Chinese people.
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Economic Engine? |
China as the 'Engine' of the Global
Economy
It has long been speculated that (because of accumulated debts) the United States is losing its ability to
provide a strong source of demand and by doing so to support the growth of the
global economy.
This is considered in
Structural Incompatibility puts Global
Growth at Risk, which also argues that the US current account
deficits party have an external
source (ie an unsustainable
potential deficit in
global demand now exists because of the way in which the monetary and financial
systems of major East Asian economies are managed - a deficit which the US has
temporarily filled by creation of credit and foreign borrowings).
It has been argued for years that
East Asia, China in particular, must in future provide the demand to
sustain growth in the global economy [1,
2,
3, 4].
In relation to this, it is noted that:
- a massive infrastructure development program (perhaps equivalent to the
US New Deal in the 1930s) was undertaken in China to stimulate domestic demand in the
face of the 1998 Asian financial crisis and the bursting of the dot-com'
bubble in 2001 [1]. While this
couldn't be sustained indefinitely, public spending could be eased as foreign investment drives growth [1];
- China's emphasis on export-driven growth was described as
self-defeating [1]. Similarly its continued growth
was seen to be at risk unless domestic demand
(which contributed only 26% of its overall growth) increased [1].
After decades of export driven growth, China's next stage in development
will be driven by consumer demand [1];
- domestic demand has, in fact, been increasing in East Asia - and led
investors to be more positive about the region's prospects [1];
- China has been seen to be already playing the role of an 'economic
engine' - as its trade growth has stimulated and stabilized
growth elsewhere (especially in Asia) [1,
2,
3,
4,
5,
6,
7]. In particular the World Trade
Organization supports such a view [1];
Furthermore the World Bank has outlined a process whereby East Asia might shift to the
next stage in development (ie based on innovation) - a shift which amongst
other things requires boosting demand [1].
And China has ambitions as a global leader in innovation and defining
technological standards [1]
However a counter view has been that:
- current levels of consumption in Asia are too
low for this to be globally significant - so Europe will have to fill this role
when US becomes incapable of doing so [1].
Poor Asia-wide outlook for demand growth has likewise been seen as a critical
constraint [1];
- China's
growth has been very highly dependent on US demand growth [1];
- 41% of China's GDP was being derived from exports in 2004 - up from 26% in 1996
[1];
- China's domestic demand growth seems mainly to be due to massive investments in
infrastructure and urban facilities by state institutions - which have been
generating bad debts in the banking system [1];
- China's investment driven growth has been too fast to be sustainable [1,
2,
3]
- and a substantial economic slowdown is likely due to overcapacity [1];
- the expectation that Asian demand could could take over from the US in
driving global growth seems already to have lost credibility [1];
- China's potential as a consumer is likely to be limited because rapid
population aging (related to the one child policy) will make it 'old' before
it becomes 'rich' [1].
Furthermore, despite the gains which China has achieved from opening to external
market influences, there appear to be significant political influences still favouring a
closed, state-driven economic system [1].
Also China has reportedly decided to:
- abandon its 'growth at all costs' strategy in favour of reducing internal inequalities [1,
2]; and
- significantly slow investment and growth to avoid economic overheating [1]
- an action that was needed not only in 2004 but again in 2007 [1].
More will be said about the latter (and its difficulties)
below.
It has seemed that China's ability to act as a
regional or global economic 'engine' depends on a strong US economy to provide
export demand and on massive domestic capital spending which is ultimately likely to be
unsustainable.
In 2004
there was also an expectation that Japan would be able to take the role of
driving global growth because of its expansionary macro-policies [1]
- a
hope that clearly was not realised.
In 2007 global financial instability
(which initiated in the US) was accompanied by expectations that 'decoupling' of
the global economy from that of the US (with growth driven in future by emerging
economies especially China - and also India) would allow strong global growth to continue [1].
However:
- though China's dependence on
exports to the US might be reducing, there are much more complex requirements
for real decoupling, the most important of which relates to success in
the 'symbolic' economy rather than to outcomes in the 'real' economy (see
Decoupling: A New Urgency); and
- the most likely consequence of any failure by US financial institutions
would be a failure of China's economic model (see
China: Victor or Victim?)
By 2009, financial instability had translated into a
global financial crisis and an economic
crisis , and (as noted below) this seemed likely
to have closed off market-oriented options for continuing China's economic
growth and thereby increasing it's power.
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Cultural / Financial Issues |
Cultural and Financial System Considerations
Despite the emergence of growing consumer demand [1,
2],
It seems culturally implausible
that East Asia generally (or China in particular) will ever be more motivated
or capable than
Japan has been to develop a sufficiently strong economy to provide a
primary source of support
for either domestic or global demand.
Societies in East Asia whose cultural
traditions have historically been heavily influenced by China (as many have) tend have a
quite different economic goals to Western societies.
An
attempt to describe
these critically important characteristics is presented in Competing Civilizations. This
refers to a tightly linked package of traditions founded on intellectual
styles quite different to those of Western societies which are the basis of
economic systems which are communitarian and mercantilist (ie oriented towards
building the strength of an ethnic community - and its social elites in
particular) rather than oriented towards
earning a return on investor capital by satisfying the demands of individuals
as consumers. The power-building (rather than consumer-welfare) goal of
economic activities is closely linked with the fact that (because of diverse
other cultural assumptions) social 'harmony' depends on the ability of elites
to suppress dissent.
The way in which these characteristics have been developed in the case of
Japan's more highly unified political and economic systems are explicitly outlined in
Why Japan cannot
deregulate its financial system.
These characteristics could be changed. However doing so would require a
very long time. Thus it may be wishful thinking to expect that
economically-dynamic East Asian societies might be able to quickly shift from
a mercantilist focus on increasing the power of ethnic communities and their
social elites to being consumer oriented (a focus which results in an
unbalanced emphasis on economic production - as seems to be the case in
continental Europe also for different reasons
and to a much lesser degree).
A broadly-based consumer economy might be economically advantageous in East Asia - but it
would: subject
the economy to the discipline of market / consumer demands rather than of nationalistic elites; and undermine the social,
economic
and political order (which has been based on communitarian interpersonal
obligations rather than earning income).
However the most critical practical constraint on China's ability to support global demand growth involves the 'skeletons in its financial closet'
which arise from its economic traditions.
As noted in
Competing Civilizations, characteristics of East Asian business models
tend to include:
- an orientation to maximizing 'real' production rather than return on
capital (eg to emphasize market share rather than profitability) - which thus
generates financial losses in the banking system;
- a preference for coordinating economic outcomes through social
relationships rather than through financial outcomes (ie doing business
depends on 'guanxi' (connections) rather than financial calculations).
Moreover there seems to be no Chinese word for 'unprofitable' [1];
- a heavy reliance
on financing business through debt rather than equity (which results in only
a limited 'buffer' being available in the event of economic shocks)
This model creates a predisposition towards financial crisis (as
shown by Japan's stagnation in the 1990s and the 1997
Asian financial crisis). In China's case the problem is compounded
by its large and loss making state industries, and by the high levels of
state-driven economic growth [1].
It used to be generally recognized that capital has been used very wastefully in China [1].
And, despite efforts to improve the situation and claims of success, the
problem remained (see below).
The assumption that wasteful use of capital is a residual effect of socialist history (ie
that banks fund state-owned institutions who can usually ignore profits) is
an oversimplification - see
Structural Incompatibility Puts Global Growth at Risk. The reality is
likely to be that the banking system directs funds to well-connected projects
- a category in which state
industries are merely an example. Firms who are not well connected have to pay
black-market interest rates [1].
The IMF has argued that China's pile-up of foreign exchange earnings reflects
deep structural problems - as these lead to overinvestment, overcapacity and falling
prices. [ 1]
Moreover where profitability is not seen as important, the economic system can only be stable if the financial system is isolated from the international
financial system by holding large foreign reserves (and by strict regulation in Japan's case).
Confucius' instruction to become rich by saving and avoid consumption [1]
provided a means of protecting financial institutions with dubious balance
sheets.
China was stable through the 1997 Asian financial crisis
(despite the dubious balance sheets of its financial institutions) not
because of its fixed exchange rates against the US [1],
but because
financial institutions were able to draw capital from China's foreign
exchange reserves [1], rather than having to establish a sound international credit rating.
The same was not true of 'Asia' as a whole - which had run a current account
deficit in the early 1990s, and many countries could not protect their
unsound financial institutions.
China shifted into current account
deficit as its economy transitioned from its solely export-driven growth phase.
Furthermore by late 2004, the growth of exports (which had built up the
foreign reserve buffer for China's financial system) was slowing rapidly [1].
Moreover, while foreign exchange reserves may offer protection against a financial
shock in the short term, they can be of little long term value because drawing down such
reserves to cover a current account deficit that had emerged would reduce the
ability of other countries to purchase China's exports, and thus further increase
that deficit.
Before
(say) China could increase demand enough to act as a real 'engine' of the global economy:
- it would have to increase domestic demand to the point where it has a
substantial current account deficit which would steadily erode its accumulated
foreign reserves;
and thus
- the balance sheets of its financial institutions would have to be sound enough
to be able to borrow in international capital markets - which must be
impossible if the basic
mechanisms of its
economic / enterprise management remain biased against achieving positive financial
outcomes.
In reality, despite efforts that have been made at reform, China appears to be at more
risk of suffering a financial dislocation than it does of curing the
balance sheet problems facing its institutions and driving global growth.
China's reported shift in early 2006 towards boosting consumption
(rather than exports) to drive growth [1]
(and the weakness of US demand associated with its 2007 financial
problems) would seem likely to eventually expose China's 'skeletons'. |
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Future of the World? |
China as the 'Future of the World'?
An even more ambitious view has been that China is 'the future of the world',
and will be the world's dominant power by 2050 - a view which parallels
1980s' expectations about Japan. Moreover a case
can still be made, from the viewpoint of Asia's nationalists, that Western economic and
military strength must decline.
An address by
China's president Hu to Australia's parliament in October 2003 laid out what
may be seen as the high-minded and constructive principles which China would
support in continuing its rise. It gained many very favourable reactions [1,
2,
3,
4].
Outline: President Hu's address raised critically important
issues about the future of international relationships - and did so in a
generous way in relation to the specific situation of China and Australia.
Amongst the significant issues raised were:
- China's long term awareness of, and interest in Australia - and its
strategic approach to developing relationships;
- future international relationships should be based on:
- putting aside differences, and building on points of agreement (ie
respect);
- economic complementarities - bringing in capital and know-how to
exploit mutual comparative advantages;
- cultural interchange - drawing upon the strength's of others;
- security built on mutual trust, cooperation and equality -
involving democracy in international relations (especially
multilateralism through UN and Security Council)
- China has:
- promoted domestic democracy, rights, freedoms and a rule of law;
- a large stable market - which has complementarities to Australia;
- managed the relationship amongst many different ethnic groups, benefited
from interchange with the wider world and recognizes Australia's
multiple cultural origins;
- has a sound relationship with Australia - and shares an interest in
regional stability and opposing terrorism;
- an irresolvable intent to incorporate Taiwan;
- Australia was (in effect) offered an opportunity to seek a respected status in the
'Asian' region under the patronage of China's rulers.
The address was also significant as an expression of China's recognition that
humanity faces severe challenges - to which force of arms is not a viable
solution (see also Risks in a Clash with Islamist
Extremists, and The Second Failure of
Globalization?).
However there are unstated aspects of this proposal that also need to be
considered. These include: China's radically different approach to universal
values and human rights; the practical consequence of cultural differences
(including the unfamiliar character of China's 'market' economy); and China's
efforts to re-establish its historical dominance in Asia (perhaps now
including Australia?).
For example:
- President Hu presented one traditional Chinese approach to the relationship between
cultures. He argued for putting aside points of disagreement, and
concentrating on practical (commercial) gains. This reflects (not just
pragmatism but) a traditional perception
that all beliefs merely reflect the particular history and circumstances of a
community and that the Western
goal of seeking universal 'truths' or values has been foolish. This approach
(which is adopted because differences in beliefs are seen as the main cause
of conflict) has advantages in promoting harmony and creates opportunities
for 'learning by doing'. It also reflects the
undoubted fact that all cultures have strengths. However the assumption also has
disadvantages, as:
- culture appears to be the principal determinant of peoples' ability to
be materially successful (see
Competing Civilizations)
- and very few cultural traditions provide the necessary environment for
the reliable production of goods and services, and for economic change
(see
Towards a Comparative Study on Development Policies: Indonesia and
Australia). There are serious constraints on one's ability to help
disadvantaged peoples if the effect of cultural assumptions is
disregarded;
- the
search for 'truth' can also confer social and political advantages
(see
Competing Civilizations). For example:
- one can not value the welfare of all people (which has been the Australian ideal)
and simultaneously treat all cultural traditions as equal, because there are many
cultures
in which social inequalities are intrinsic;
- where there is no search for public 'truth' there is no basis for
contesting the opinions of the powerful, so autocratic government is
unavoidable (as is traditional in East Asia and as has recently been
recognized to be an
unwanted side-effect of the spread of 'post-modern' assumptions in Western
humanities faculties). And in turn autocratic government both:
- increases the risk of disharmony through abuses of power; and
- is seen as essential to promote harmony by suppressing dissent;
- where there is no 'public truth' there can be no egalitarian culture
(another Australian ideal) because hierarchy is vital to hold a society
together.
- the differences in cultural assumptions (which President Hu suggested
putting aside to concentrate on commercial benefits [1])
have significant implications [1,
2]. For example:
- a social, political and governance
order has
traditionally been supported in China which involves: prescriptive rules for interpersonal
relationships; a particularistic rather than a universalist
set of ethics (ie one that only values those with whom one has a direct
relationship); consequent acceptance of racism as natural (and a ruthlessness
towards weak outsiders); a rule of man (especially of bureaucratic elites
who are the real power behind nominal rulers such as emperors, presidents or
elected officials) rather than
a rule of law; and a concept of human rights which values community, but not
individuals;
- the (so called) 'Beijing consensus' about socio-economic development
places emphasis on political stability before development and (democratic /
human rights) reforms.
[1];
- the preference for government by Man, or virtue, rather than by law is
based on Confucius' view of a major weakness of the rule of law (Little R.
The Confucian Renaissance). The Analects stated: "Lead the people by laws
and regulate them by penalties and the people will try to keep out of jail
but will have no sense of shame. Lead the people by virtue and restrain them
by the rules of decorum, and the people will have a sense of shame and
moreover, will become good". The problem with this view is that:
- those who purport to lead others by virtue suffer human
failings. Moreover the moment 'virtue' is accepted as the basis for
unquestioned power, every thug and power-seeker will put on a virtuous 'face' - whilst remaining a
thug or power-seeker;
- like legalism, virtuous leadership only creates the appearance of
becoming good while others are watching - rather than affecting a person's
inner being. Thick Face, Black Heart (Chu C.) discussed the
consequences in terms of a willingness (behind an impenetrable 'face') to
accept the necessity to do evil. The acceptance of organized crime as a
element part of society reflects acceptance of the necessity to do evil. It
was probably no coincidence that Japan's organized crime gangs (Yakuza)
instigated the Meiji restoration to modernize Japan to resist Western
influence, as a rule of law would have transformed them most specifically from
'respected' citizens into outlaws;
- Confucius did not recognize the revolution in the concept of a rule of law
Jesus of Nazareth introduced when he prescribed adherence to the spirit
(rather than the letter) of Jewish law through an internally-driven
'put-others-first' ethical ideal (see
Competing Civilizations).
Without this a simple rule of law must, as Confucius said, be morally inadequate (eg
as illustrated by the
social dysfunctions that have
accompanied the widespread abandonment of that ideal in Australia);
- China's democracy is to be subservient to the rule of the elites who make
up the 'Communist'
Party - a fact which needs to be considered while noting the dysfunctions
sometimes associated (a) with
immature democracy and (b) with autocracy. In practice democracy has been
repressed more than developed [1,
2],
and proposals for creation of mechanisms which would reduce elite power are
difficult to implement [1].
[One observer in Beijing suggested to the author that it is the People's
Liberation Army which still ultimately holds power];
- China's economy is not a 'socialist market' system as such words would be understood in the West - because
China's 'socialism' involves: educated elites (rather
than collectives of ordinary people or their elected representatives)
assuming the right to make judgments about what is best for the community; and
the 'market' involves networks created and managed by those elites. This
arrangement:
- is a
market (rather than a planned) economy, but it is certainly not free;
- involves corporatism (ie economic control by
state-linked organisations) rather than capitalism (where economic
control resides with those who
seek profits and are independent of the state);
- is best viewed as a
neo-Confucian system - even though those
elites are organized under the label of a 'Communist' Party. The 'neo'
element involved the introduction of Daoist
concepts about the nature of knowledge (which provided the base for learning from others
as the way of achieving change) to the tradition of learning strategy
mainly from the study of history - the traditional Confucian assumption which had led China to
centuries of stagnation (See
Transforming the Tortoise);
- involves mercantilist goals of increasing the power of an ethnic
community (and its social elites in particular), because (as noted
above) various cultural assumptions create a
situation in which social harmony can only be assured where elites are strong
enough to suppress dissent;
- is revealed in practical terms in China's approach to support for nation
building in SE Asia, which involves establishing economic capabilities and
relationships with limited concern about financial outcomes [1];
- has been described as a Confucian 'worker caste system' which is a future
better alternative to the 'merchant caste system' in which capital has been
the source of power. It is seen as superior because it would be run by
bureaucrats / technocrats whose productivity 'merchants / capitalists'
otherwise constrain [1]
- has been described as the basis for a 'Chinese consensus' about a better
way of achieving economic development than the (so called) 'Washington
consensus' in an analysis which entirely ignored China's poor financial
institutions [1];
- seems to have resulted in possibly the world's most unequal distribution
of wealth [1] because elites
have taken advantage of their positions to enrich themselves and their
families [1];
- a case for the universal relevance of Confucian traditions has been made
(see The Abduction of
Modernity). However as noted in comments on that article, there are
aspects of that model which others need to consider. For example, Western
societies are seen to be 'barbarians' because their development of advanced
weapons allowed common folk to equal their aristocratic superiors;
- China's perceived economic success leaves its elites with no pressure to
transform eventually from its authoritarian political model to some form of
democracy [1];
- the market opportunities that seem to exist may well be a mirage (see
below) - unless
(a) the global economic system changes to a 'social market' model under which
economic transactions are coordinated by relationships amongst neo-Confucian elites, and financial outcomes
are treated as unimportant and (b) such an alternative system is
found to be sustainable. In this case, Australia's economic and
financial system would need to be re-built from the ground up on a 'Asian'
model;
- China's Diaspora have reputedly gained significant behind-the-scenes political
influence in many nations in SE Asia (eg see Seagrave S 'Lords of the Rim') - a fact which has led to friction (and
even conflict at times). The extension of those networks might
constitute one of the 'strategic' elements in the development of China's relationship
with Australia. In other words the 'strategic' element in the development of
China's relationship with Australia is likely to involve Australians in
influential positions becoming directly or indirectly dependent on patronage
(eg in terms of providing information / contacts) on Chinese elites;
- Australian leaders who are subject to such influence could be expected to
have good Chinese connections and also exhibit 'Confucian' characteristics, such as: (a) intellectual elitism
(and perhaps an effort to enmesh politically with intellectual elites [1]); (b) a
focus on history; (c) seeking moral authority by quoting respected ancient sages (eg Christ in Australia's case); (d) an autocratic
approach to using power; (e) valuing society above individuals; and (f) a concern for concrete / material (rather than
abstract / spiritual) outcomes
- China has been seen to be re-establishing its ancient 'tributary' system
as the basis for renewed imperial dominance of the region [1];
- the rapid development of China's military capabilities - and its need to
defend its resource supply chains - require a comprehensive reconsideration
of Australia's planning [1];
- recognition needs to be given to the unfamiliar characteristics of East
Asian 'Art of War'
strategies;
- negotiations with China about a Free Trade Agreement can not be straight
forward, eg
- Australia is entering FTA negotiations with China without understanding
China's negotiating methods [1]
- China's traditional method of dealing with conflict involves
psychological weakening of perceived enemies rather than over use of force [1];
- amongst the conditions associated with closer economic collaboration with
China by Australia were:
- applying a 'free market' label to China's economy [1]
- which seems simply not true [1]
. though not all agree [1].
Ultimately such a concession had to be made simply to get negotiations
started [1]
- managed resources trade between Australia and China (ie limiting price
rises, locking out China's competitors for Australia's resources) [1].
[To some extent this would transform Australia into a Chinese 'colony']
- making concessions to 'dumping' [1];
- acceptance of its territorial claims in Taiwan [1];
- ignoring its dubious human rights record [1,
2];
- making no public comment on China's human rights record [1];
and
- suppression of political dissent [1,
2];
- diplomatic pressure has been applied to Australia to:
- ignore Australia's ANZUS Agreement with the US in relation to Taiwan [1];
- suppress Falon Gong demonstrations in Australia [1]
- whose significance is speculated below;
- support China politically [1]
- Australia has had great difficulty in dealing with application for
political asylum from a Chinese diplomat - because China is a regional hegemon
which defies the rules of liberal democracies [1]
- It has been suggested that China is seeking to use economic power to
force Australia to give ground on security and human rights issues [1]
- Australia will not gain from China an agreement that economic outcomes
should be determined by ability to compete. Such concessions from China would
only be obtainable through the WTO which is being sidelined [1]
- there is a critical question about whether contracts should be
enforceable [1]
- concessions in relation to upstream investment would be a condition of
contracts for resources [1]
- intrinsic difficulties in developing closer relationships with China
include: its command
economy (which results in wastage of resources); Communist party governance
(which allows large scale corruption); its lack of legal infrastructure to underpin a
market economy; lack of transparent codified laws [1];
-
the key issues in Australia's foreign policy
environment are that China is now the gatekeeper on Australia's
relationships with Asia - and is also preparing for a
war with Taiwan. [1]
The suggestion that the 'Beijing consensus' (which emphasizes social /
political stability enforced by autocratic elites) would be an alternative to the 'Washington consensus'
(which emphasizes liberty) as the basis for a model of socioeconomic
development is undoubtedly valid. However both suffer from the limitation that
they can not be extended globally without transmission of the cultural
characteristics which are required for them to work.
The Western model (typified by the 'Washington consensus') requires
(for example)
individual liberty as an essential feature because
it is at the level of individuals that rationality / abstract analysis can be
most effective in making economic decisions.
Similarly the 'Beijing consensus' is contingent on specific
cultural features, in particular "the ancient Chinese
philosophical outlook that makes little distinction between theory and
practice"
[1]. This is essential
for the model to work, because where economic theory is separated from
practice, theory oversimplifies reality (because of the huge complexity of
economic reality) and thus results in poor decisions.
This is the foundation of the neo-liberal view of economics - which is
embodied in the 'Washington consensus' and
ultimately based on Hayek's recognition that it is impossible for any central
authority to assemble the information required for correct economic decisions
(see 'The Use of Knowledge in Society', 1945). When there is little distinction
between theory and practice (ie where elites encourage decision making by
practitioners, rather than themselves making decisions on the basis of abstract
analysis), this difficulty can be reduced. However in countries which lack this
cultural feature, attempts by authoritarian elites to guide development must
result in economic and political failure.
Outside East Asia, adoption of the 'Beijing consensus' would (as for the
'Washington consensus') only be successful if the cultural foundations on which
it is based were also adopted by others;
|
|
Bubble? +
|
China as an Economic Bubble?
As noted above, no one should doubt the spectacular progress which China has achieved in the
face of immense difficulties, or the creativity and effort which that
progress reflects.
But, tragically, rather than regional and global leadership
in economic and political affairs, the more probable outcome is that China's future
prospects will be limited by its economic, financial,
environmental, demographic and political challenges.
The possibility that rapid growth could be disrupted due to
economic overheating was recognised
in 2004. Efforts to avert this (and seriously deal with other constraints) were
redoubled, but may have been inadequate.
Global financial instability in 2007 added
to China's risks despite official confidence in its invulnerability. It also
made the possibility of real 'decoupling' of emerging economies (especially
China's) from economic conditions in US a matter of considerable global
economic importance (see
Decoupling: A New Urgency - which addresses in particular the apparent
dependence of East Asian economic models on strong financial institutions in
other countries, eg US).
It has been the present writer's suspicion that China's
rapid progress can not be sustained though when and why the economic 'bubble'
would burst was unpredictable.
Constraints
Economic ConstraintsThe Chinese economy
appears to work on neo-Confucian dynamics which
are a different version of the (supposedly 'non-capitalist market' economy)
that Japan practiced. Government influence is strong in all aspects of
society, and this arrangement is perceived by elites to be as it should be [1].
In particular China retains a 'state-driven' economy and has experienced
highly unbalanced development. For example:
- many sectors (eg agriculture, mining, basic manufacturing)
remained backward in the 'growth at all costs' emphasis on infrastructure and
foreign 'high tech' investment [1]
- and as this imbalance is recognized and the most obvious backward sectors /
regions are addressed, new backward sectors must emerge if the economy
remains state-driven;
- serious infrastructural deficiencies have
emerged [1]. Energy industries
have been developed on the basis of national self-sufficiency rather than
market requirements [1]. Huge
losses were incurred (related to poor corporate governance) when state
enterprises engaged in futures trading [1,
2]. Fuel shortages have
emerged because local oil prices were not allowed to rise when global prices
increased [1].
- growth has been export dependent - because a current account surplus
has been needed to protect financial institutions from the need to borrow
internationally - as the latter would lead to a financial crisis because of their
poor balance sheets (see above);
- growth is overwhelmingly driven by investment, rather than consumer demand
[1]. Investment has mainly
been by state institutions (eg in infrastructure) and foreign investors.
The former have been adding to bad debts in the banking
system (see below). Very high rates of industrial investment could have created an overcapacity which
could have a deflationary
impact [1]. Most of that capacity
has been created on the basis of expected:
- strong export demand [1].
In practice this can not be maintained unless
the growth of demand elsewhere allows the US current account deficit
to be reduced. And there does not appear to be anywhere else for that demand
to arise (see Structural
incompatibility puts global growth at risk). Moreover, in late
2007 financial / economic difficulties facing the US economy seemed likely to
reduce consumer demand for China's exports (see
Financial Market
Instability: Two Sides of the Story).
- domestic consumption - which is constrained (for reasons outlined
above);
- there have been major changes in the structure of China's growth since
2000. Corporate profits were 20% of GDP in 2002 but had increased to 30%
by 2007 through state manipulation (ie artificially cheap land, allowing
profit reinvestment, stalling financial reforms to limit investment
choices, preference for state-owned enterprises, rewarding officials on
raw GDP / production numbers). Employee's share of GDP fell
correspondingly - especially as non-farm job growth was only 3.4% pa from
2000-2007 [1]
In 2004 China apparently concluded that its
investment-driven economy had become overheated because of:
- fast growth of steel, aluminium,
cement and property industries; accelerated fixed investment;
shortages of coal, power, oil, transport; fast money supply / credit growth; potential inflation; and
the failure of banks to follow instructions to curb
lending [1];
- overcapacity which emerged in many industries [1].
Many observers suggested that government actions to slow growth would lead to a 'soft' landing [1,
2,
3,
4] - though not all agreed [1]
- and in fact little slowing occurred.
'Blunt' tools are all that are available to
manage economic growth. Altering interest rates will not do so as these are not main mechanism used to ration
credit, and provinces (who control much infrastructure investment) apparently resist central government
economic directives [1,
2]. Restraining high risk investment by state companies in the face of
an uncertain economic environment seemed to remain a problem for government
in 2007 [1].
Furthermore it is hard to anticipate the consequences of administrative
controls on credit (eg it is easy to over-correct, while
targeting specific sectors for slowdown will create unpredictable
repercussions for other activities that depend on them).
Economic history does not suggest that administratively orchestrated
investment is likely to be sustainable. For example:
- the Soviet Union experienced very rapid investment-driven growth in
the 1950s but subsquently stagnated economically because investments
determined by socialist administrators often turned out to be in things
that were not really needed
- in the 1980s Japan's success with state orchestrated
exports led to economic triumphalism and a massive investment surge overseen by
neo-Confucian with
little regard for profitability. This ended badly, and Japanese
observers have suggested a parallel with China's current situation [1]
China's private sector (which operates in parallel with large and
traditionally unprofitable state-owned-enterprise) is weak. Industrial growth has mainly been achieved on the basis of foreign investment, rather than
by creating an environment which would support the initiative of indigenous firms [1,
2]. Moreover historically
China's mandarins and cadres have always given low status to domestic
enterprises - and favoured foreign businesses [1].
Rather than enhancing the environment for private indigenous firms,
efforts in recent years to improve China's economy have focussed on raising the productivity of state enterprises
and claimed achievements in this may be based (at least
in part) on 'cooking the books'.
Moreover:
- those who have become rich in China are well connected politically. There
is confusion between ownership and management. Those who control and
personally gain from assets may never have paid for them - but argue that
previously the assets belonged to the people, and 'we are the people' [1];
- while foreign investment has a significant role in driving growth, it has
typically been unprofitable for investors [1,
2,
3,
4].
Many firms have invested not because of current profit expectations, but
because of hope for future profits [1]. China has a reputation for demanding much, and giving little - and for
foreign partners gaining much less, and spending much more, than they
expected [1,
2]. As this may not be a transitional situation but rather reflect the the communitarian / nationalistic nature of the
business environment (featuring a preference for thin margins and
accumulating wealth through savings rather than profits, as well as subsidies for those with
connections [1] and a desire
to make sure that foreigners do not profit), a high rate of ongoing foreign investment appears
uncertain - though there are claims that this situation has started to change
[1]. But, though profits have
increased in recent years, profit levels remain well below those gained
elsewhere [1].
- based on slender evidence as the subject does not seem to have been
studied, it seems that an
industrial development system has been deployed - which
has parallels with that in Japan and has mainly had
the effect of accelerating (without directing) change by engaging social elites in intelligence gathering and networking
through various institutional arrangements;
- emphasis is traditionally given to 'real' production, rather than to profitability
(see above), and this is reflected in the losses incurred by banking institutions;
- there is a critical sustainability
difference between economic activity which is driven by the volume of
business (ie by market share, as has apparently been the motive in Japan and
now China) as compared with that driven by the value-added.
Profitability is a much more discriminating indicator for efficient resource
allocation, than is turnover. Even though the latter initially
yields impressive results through increased (low cost) inputs, growth can only be sustained
in the long term if it is based on productivity (value-added)
growth. Other indicators of this constraint involves a reported heavy
emphasis on investing in 'things', rather than in human capital [1].
- It has been suggested that China's growth could be surpassed by India
because of the latter's emphasis on domestic businesses rather than on
foreign investment, and on business profitability [1,
2].
India's balanced approach also involves greater reliance on growth of domestic demand [1],
and on R&D [1]. Moreover
India is globalizing in services and these offer far better margins than
manufacturing, and with an effective legal system and financial system it is
much easier for others to work in. [1]
- the measurement of economic
growth is subject to uncertainty [1,
2,
3] - because
'financial' statements about what is being achieved
don't necessarily mean much;
- China's competitiveness ranking is not high - given concerns about state
industries and corruption [1];
- currency controls have stabilized the exchange rate against $US and directed resources to
production rather than consumption. Such controls may have been damaging [1,
2]
by:
- limiting imports which are a major part of the gains from trade - through
providing (a) access to goods and services which would otherwise not be
available, or be more costly; and (b) the stimulus of competition to
domestic producers;
- increasing domestic money supply (as hard currency inflows have to
be exchanged for yuan or government debt) leading to inflationary
pressures, and to an unsustainable expansion of public sector debt. The
availability of surplus cash is seen to have created bubbles in
automobile purchases, real estate and steel [1];
- minimizing pressures on government for policy reforms;
- increasing the risk of inflation [1]
- which in 2007 was becoming a major problem.
The World Bank pointed out that China's growth pattern is based on cheap
capital - and this is unsustainable. Rapid gains in manufacturing
productivity and stagnant agricultural productivity drive inequality. Growth,
it suggested, can't be sustained without household demand and service industries and
reduced emphasis on exports and resource inputs. [1]
Financial ConstraintsChina seemed
to be becoming a new economic 'bubble' at risk of
bursting eventually (and creating renewed Asia-wide / global financial turmoil) because:
- a huge fiscal stimulus (ie high public spending and
deficits) was required for years to achieve a sufficient rate of growth to absorb labour force growth and workers displaced from failed state
enterprises in the face of international economic weakness [1,
2].
- investment has accounted for a very high percentage (eg > 50%) of output
and mainly involved development of infrastructure and urban facilities by
state institutions financed (often unprofitably) by banks drawing on local
savings - and generating bad debts [1];
- China's growth appears to be being driven largely by massive investments
with limited concern for return on investment [1]
- the banking system has been a disaster area in terms of non-performing assets, and
technically insolvent institutions [1,
2, 3].
The IMF warned of the risk of a financial crisis [1]. This system transforms the savings of China's people into
bad debts. As argued above this seems
more likely to be a consequence of cultural traditions rather than the residual
effect of a socialist history. It was not subject to internal reform pressure or to external
checks because China finances itself internally (and has generated large
foreign reserves) - but there are no precedents suggesting that these
contradictions can be continued indefinitely. External financial
institutions have to be allowed entry by 2007 under WTO requirements [1].
The value of China's bad debts exceeds its foreign exchange holdings [1]
- and some foreign exchange holdings are already
committed. The possibility of a financial crisis is considered further
below;
- there is uncertainty about the financial viability of massive housing
investments - as the average price / household income ratio is three times greater than
normal [1]
- China's economy has grown rapidly but not been very productive - as shown
by bad debts in the banking system and huge government debts. It may be seeking
to correct decades of economic mismanagement through pressures imposed by
seeking WTO membership but there is little room to manoeuvre and time is
running out [1]
- emerging private areas of the economy also have limited concern for profitability - and a significant economic downturn could emerge if banks are
forced to tighten up on credit conditions [1];
- the buffer of foreign reserves which has protected China's
perhaps-insolvent
financial institutions started to be eroded by:
- a current account deficit which emerged - as growth
was increasingly driven by urban / infrastructure investment
rather than exports, and imports of components of goods to be exported
increased from elsewhere in Asia;
- weakening of export growth [1];
- the need for Chinese companies to make mainly-defensive foreign
investments (which may result in losses because of management difficulties
and paying too much in an economic / resource boom) [1];
- drawing upon foreign reserves to recapitalize insolvent banks [1];
- drawing upon foreign reserves in a $20bn bid by CNOOC (a state owned
company) to buy Unocol to increase China's oil security [1].
- also China's balance of payments surplus depends on continued
high rates of foreign investment - given reduced current account surpluses
- and this is not assured because of such investment is frequently
unprofitable and would not be maintained if export demand faltered.
- there is a further risk of very large foreign reserve losses if the US current account
deficit is not reduced and financial markets devalue the $US (in which most
foreign reserves are held) at some time after the Yuan is untied from the
$US;
- massive overcapacity, and a collapse in profits, have emerged in vehicle
production by investment on the assumption of continued 70% pa growth in
domestic demand which has not eventuated [1].
A low level of capacity utilization (around 60%) appears (in mid 2005) to
have emerged in many industries - and this will increase the exposure of
banks to bad debts;
- much urban investment is simply being wasted - and there is vast
industrial overcapacity and low returns [1]
- problems that create the risk that the bubble may burst include:
artificially high property prices; a weak banking system; poor corporate
regulation; an immature legal system; and official corruption [1];
-
intense competition within China could lead to a
classic business downturn. As margins are small and pricing power is nil, weak
profits could lead to low investment / growth. [1]
-
China's economy is unbalanced - with 45% of GDP invested (suggesting
over-investment). Its low interest rate policy (a bye product of $US currency
peg) has led to property speculation - which could bust. High reliance on
exports could halt growth as the world will not indefinitely tolerate its
mercantilist exchange rate policy. China's growth has not been due to
productivity improvement but to huge investments in bringing part of its rural
labour surplus into a market economy - and it won't achieve high rates of
productivity gain without adopting free market economic principles [1]
-
China has made significant progress since opening in 1978 - but liberalization has stopped before
dealing with financial sector. Investment funds are channelled through state banks, while equity
markets are dominated by state-owned enterprises. Financial repression has created a sea of bad
debts; mis-allocation of capital; overinvestment in the state sector and private
under-investment; politicisation of decisions; widespread corruption; poor
stock-market performance; undervalued real exchange rate; and stop-go monetary
policy. Financial reform is vital for development to continue [1];
- Chinese people are seeking
profits through stock market and real estate investment which is like a pyramid scheme.
It seems similar to Japan's asset bubble. China
like Japan at that time has a loose monetary policy - which favours asset booms. China's growth is
supported by foreign investment
- that assumes that the currency is undervalued. This can't be corrected without
large losses in China's $1.4tr in foreign exchange reserves [1];
- while China's share-market does not reflect the real economy,
companies have come to depend on it and on property as a major source of
profits - alongside their core businesses in which profits are increasingly
squeezed [1];
- economic openness has increased the potential for instability within
China's financial system [1].
For example:
- large foreign
capital inflows to China [1]
(by investors seeking to reduce $US exposure in 2007 [1])
was seen as a risk of further over-heating (say) property markets, and China attempted to prevent foreign
investment in such sectors [1].
- falling US interest rates, while China's rise, makes it harder in 2007 to
prevent rapid growth in property / stock prices in China. Continuing
international turmoil encourages capital to flow to China, and strains it
financial / regulatory system [1]
Blunt tools also appear to constrain
China's ability to reform its financial system. For example:
- reforming China's financial institutions by making
them act more commercially is problematical (as suggested
above) if their characteristics are
not (as Western observers apparently tend to believe) a product of socialism / communism
but are rather a
product of a communitarian / mercantilist economic regime which has deep
cultural roots (eg emphasizes the 'real economy', rather than financial,
outcomes - and involves economic coordination by 'connections' rather than
by calculation of financial outcomes). Reform could disrupt the basic dynamic of China's rapid growth and
development (as perhaps occurred in Japan);
- government instructions to the banking system in 1999 to behave more
commercially were apparently ignored [1];
- China's economic progress to date has been achieved by eliminating
the most extreme obstacles to markets but the next stage (creating the institutions
required for fair and stable markets will be much harder), and political
changes needed to contain community demands for liberty could lead to
instability [1]
- China has the most restricted capital market in Asia - and this has huge
costs. Development can't continue unless capital restrictions are loosened -
but such liberalization would put the current governing regime at risk of
losing power [1]
- problems in reforming China's financial institutions might be solved by
privatization, and obstacles to this (eg lack of methods for setting values,
and negative net worth) have been reduced by establishment of a State Asset
Supervision and Administration Committee [1].
However this may not be an easy option if state ownership of banks is seen as
essential for a 'socialist' economy [1]
in an environment in which a (so-called) 'Chinese consensus' (a form of
autocratic corporatism) is being promoted as a superior alternative to the 'Washington
consensus' (free financial markets) as a path to economic development [1].
There have been ongoing financial reforms (as mentioned
below), and possible progress. For example:
- amid rising
input and wage costs, China's corporates are making best gains and efficiencies in
sectors with strongest wage and material-cost pressures (which have been absorbed with little price rise, and profits contribute to
high levels of corporate savings). Profit growth is high (37% yoy). China is now
importing less intermediate goods from elsewhere in Asia - and this could
improve the profitability of Chinese companies [1]
There
are also plausible suggestions that reform has often
been only superficial [1,
2]. Furthermore;
- while reform of its banking system is China's top priority because of the
risk of a financial crisis, this may not be possible [1];
- while China is striving to present a
number of major financial institutions (eg Bank of China) as financially sound
and worthy of foreign investment and offshore listing, this seems likely to be being achieved by
're-arranging the deck chairs' rather than by solving structural problems [1].
In particular one major bank was recapitalized by drawing upon foreign
reserves which merely transferred losses to China's central bank [1].
And in attempting to write off the bad debts of banks, it appears likely that
state-owned companies (under no pressure to make a profit) would out-bid
foreign investors [1] - and
this outcome would (of course) merely 're-arrange the deck chairs';
- 'red chip' firms are experiencing rapid growth in China by buying up
other firms - but their operating position is poor. Profits seem to come from
financial engineering rather than performance [1];
- corporate profits have been boosted at least partly by squeezing workers'
share of national; income. Wages' share of GDP fell to 41% in 2005 from 53%
in 1998 [1]
Various
other observers have have identified the potential for a serious China-centred
financial dislocation [1]
or suggested that this is inevitable in the next few years - and
that this has the potential to turn an economic downturn into a global
depression [1]. It can be noted that in the event of a banking crisis, it would China's government, rather than
its (insolvent) banks, which would borrow heavily [1].
However China's government also has very high debt levels due to past
public spending to sustain growth.
Environmental ConstraintsChina seems likely to
follow the USSR as a place where (with the help of 'Soviet trained planners') the 'limits to growth'
are transformed from an
ecologist's theory into a nasty fact. For example:
- China has a huge population. Its
cities occupy 50% of the countryside in fertile areas.
- it has immense
constraints on soil and fresh water - which seem to be near their limit.
The water table drops 1.5m pa in major grain growing regions in North China [1]
- traditional sustainable agricultural practices have been traded for 'industrialised'
agriculture.
- industrialization adversely affects people's
health (eg air pollution has a wide impact) and the environment (eg loss of
vegetation causes concern about desertification [1,
2]);
- the UNEP has argued that China could never achieve a high level of
consumption due to environmental
and resource constraints [1];
- as in the USSR very real environmental hazards have been ignored by autocratic
government in the push to industrialize (eg the Three Gorges Dam project [1]
was driven apparently by Li Peng, an influential Soviet trained engineer). Similar (smaller) projects in China have failed to live up
to expectations due to silting - while international experience and experts
on the environmental and economic impact of large dams suggest a more cautious approach);
- many people suffer diseases caused by pollution which have been ignored so
as not to disrupt economic growth [1]
- China's environmental problems are mounting and pose a risk to economy and to public health. The economic
miracle could end
due of this - officials have warned. Central government has announced measures to address
these problems, but it has little influence in the provinces. Solving this problem requires
revolutionary political reforms.[1]
Furthermore the world does not yet
have (and has no guarantee of ever having) a way of meeting China's escalating energy needs. It
seems inevitable that
global conventional oil production will peak sometime over the next decade - leading to shortages and rapidly rising
prices. Fossil fuel usage really could become problematical given the
possibility that global climatic change could be more severe and rapid than traditionally assumed
[1]. Alternative energy
sources seem to remain unproven. China's economy uses energy very
inefficiently in relation to GDP [1].
There were signs in early 2008 that the 'peak oil' phenomenon -
and priority being given to the production of biofuels - could give rise to
famine in vulnerable regions (and that China might be vulnerable) [1].
A radical change in China's economic model has been seen to be needed if
growth is to continue [1].
DemographyChina will face the most severe 'aging population' challenge in the world
around 2030 because of its one child policy, and even now is suffering
shortages of skilled young workers in its major cities (partly because lower
educational standards in rural areas make rural migration an ineffective
solution to the cities' problems) [1]
Political ConstraintsChina's political system
is autocratic - and sits on top of a seething mass of minor potential
local 'protests' - which constantly need to be suppressed [1] and which could get out
of control if for some reason they were to gain critical mass [1,
2].
Moreover, the growth-at-all-costs approach has led to increasing social unrest [1]
and problems in rural regions [1].
- China is planned economy - ruled by a single party. Since
Tiananmen Square great efforts have been made to ensure that educated
elites are enmeshed with party - but this is not true of the masses [1];
- China has been seen to be close to revolt in regional areas because: population growth has reduced size of holdings;
desertification has
reduced arable land (just 14% of China); deforestation and pollution have reduced water available
for irrigation; officials have imposed heavy taxes; and only 20% of farmers can access credit for
productivity improvement - at the same time that urban middle class is entering
an era of conspicuous consumption. [1]
- potential instability across Asia as a whole is seen as possible because
rapid economic growth has not been matched by jobs growth, and unemployment
rates are very high [1];
- there are now vary large numbers of affluent consumers who are not
included in the one-party state [1].
In the absence of political reform economic growth can lead to instability,
because of demands of rising middle class [1].
- Traditional authority structures (based on a Confucian
'merit-aristocracy') may not be viable because:
- to some extent power requires access to superior information to influence
subordinate's thinking and this is at risk because of widespread access to the Internet -
as demonstrated by heroic efforts that have been made to devise an Internet system which allows censorship of disruptive
ideas [1]. Such
efforts to suppress access to information must inevitably prove futile in a
networked society;
- the Communist Party's practice of making no distinction between news and
propaganda in the information which is released [1]
is unlikely to work if a more knowledge-based economy is eventually to
emerge;
- Japan's economy stagnated for a decade, because of its traditional
'merit-aristocracy' - whose economic leadership promotes mercantilist goals
(ie excessive 'real' production
without ensuring financial profitability so as to accumulate US paper assets
despite the insolvency of its bureaucratically-controlled financial
institutions - see Scenario). Writing-off the
bad debts
that Japan's financial institutions accumulated in the 1980s' asset bubble
was vital to their future financing role, but this would have required a loss of
status and control of the banking system by the elites descended from the Ministry of
Finance (and also by the nationalistic gangsters (yakuza) who provide the
discipline in Japan's social order [1],
and control the often-technically-insolvent construction industry);
China reputedly has a 3000-4000
year history of repeated conflict between the commercial and materialistic cultures of South
China and the rural and spiritual cultures of North China (see Seagrave S., Lords of the Rim). Conflict
between these has seen the merchants driven out of China in many waves - to
become the offshore Chinese. If China's commercial drive falters then the 'northern' influences
concerned with 'higher' values may well again mobilize to suppress the 'greedy' merchants of the
'south'.
The potential for a new civil conflict is suggested by:
- the perceptions that public morality has collapsed in China in recent
years [1,
2] and that East Asia
now exhibits many of the worst elements of Western modernization [1];
- north-east China's continued status as a huge economically
under-developed region [1];
and
- the emergence of Falun Gong in 1992 in the tradition of
the White Lotus Society, which has been the source of earlier
grassroots attempts to gain political power in China [1].
Tensions have also grown over Taiwan [1]
which could, if
not resolved, have an adverse effect on foreign investment into
China.
Initiatives
There have been indications that China has been getting serious about the
constraints it faced.
Whether such reforms will prove sufficient is unknown.
Is Optimism Justified?
A case can be made that China's growth and development is assured
despite the many constraints it faces. For example:
- China has huge human resources and potential markets. It has a high class
education system, and can draw on external resources (Greater China) for
the skills to allow its structural problems to be overcome [1];
- past obstacles have been successfully navigated, and (as
above) this process is continuing;
-
China's response to indications of over-heating in 2004 were satisfactory
because (a) the problem was addressed by administrative
controls rather than raising interest rates and (b) despite the bad debts of its
banking system, China has large international reserves, a more-or-less
balanced current account / a modest fiscal deficit and a closed capital
account which prevents capital outflows [1];
- the 2007 credit crisis illustrates China's strength. A $1.3tr cash
reserve has been built up in the 10 years since the Asian financial crisis
- and the Peoples Bank of China believes that this provides insulation
against crises elsewhere. Entrepreneurs have flourished in China, and the
stock market has risen rapidly. There has been a flight of capital to Asia
because of the credit crunch. The US / UK economies are heavily dependent
on financial services - and these are in doubt [1]
There appears to be a very high level of confidence amongst China's leaders,
and the message given to the people is that China's rise to world
prominence / dominance is assured. The political consequences if this does
not eventuate could be severe.
Crisis Scenarios
However China's prospects are uncertain because of the constraints outlined above,
so its spectacular growth could be derailed at some time.
Potential sources of crises have included:
- economic imbalances - especially:
- very fast growth
driven mainly by investment by the state and foreign investors without
adequate concern for return on state capital, and limited profitability of
foreign investments directed towards China's consumers;
- dependence on strong economic conditions and financial
systems elsewhere to provide demand
for exports;
- the unsatisfactory environment for domestic businesses,
which seem vital to filling the economic gaps left by foreign and state
investors and so creating a balanced economy;
- overheated markets (eg an apparent property bubble) that are at
further risk from capital flows as a result of global financial instability in 2007
- the poor balance
sheets of financial institutions, the dependence on strong financial
markets elsewhere to productively invest the current account surpluses
which are needed to protect those institutions and prevent currency
appreciation; and the
uncertain claims about
improved productivity by state-owned enterprises;
- the blunt 'administrative' tools that are mainly used (and are all
that are really available without extensive further reforms) for managing potentially-unstable
economic and financial
systems;
- environmental / resource
obstacles to long term growth; and
- potential political instability.
Moreover the interactions between such risk factors make government
into a difficult juggling act. For example:
- the current account surpluses that
are needed to protect financial institutions contribute to the global financial imbalances that put export demand at risk.
Moreover the foreign exchange reserves that protect them are subject to other
demands;
- the dependence on export demand can't safely be overcome without improving
the balance sheets of financial institutions, and the latter seems to be
constrained by cultural features (see above);
- there is a fundamental incompatibility between maintaining strict
political control and reforms of financial systems to comply with
internationally accepted practices;
- seeking to create a 'private sector' to fill economic gaps while
maintaining political control has resulted in 'entrepreneurs' who tend to be
crony capitalists and whose 'success' breeds domestic resentment.
It has reasonably been suggested that, though China is implementing reforms that are headed in
the right direction (eg reducing environmental degradation and social inequality and
reigning in overheated sectors), they are too slow - and China faces huge risks
because its economy is now open and exposed to external shocks [1].
For example, with an overheated economy in early 2008 which needed to be
slowed by higher interest rates while others were reducing rates to
stimulate growth, there was a risk of rapid
revaluation of the yuan - which would erode competitiveness and lead to large
losses in foreign exchange holdings (perhaps the
'financial tsunami' an
Australian Treasurer warned about?).
This could arise because hot money inflows
(attracted by higher interest rates and the prospects of currency appreciation)
added to the already significant problem of sterilizing current account surpluses
by acquiring ever more foreign exchange reserves (see
more).
The US argued that unless China implements much deeper reforms of its
economy it would be unable to sustain rapid growth [1].
Because of the apparent inability of the problem solving methods
that are the basis of economic 'miracles' in East Asia to ensure
success in terms of financial outcomes, the control of
global financial systems seems likely to be an ever more important source of
international disputation (see
Friction over global
financial systems).
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China: After the GFC +
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China After the GFC
In March 2009, there
appeared to be uncertainty about China's response to a severe economic shock
(see Global Financial Crisis: The Second Test
of Globalization?).
China's economy was impacted very
severely. In part this was due to a sharp fall in exports and foreign
investment as a bye-product of the global financial crisis (GFC). However, as exports
had only accounted for about 10% of GDP, other factors were important in
China's economic slowdown and rising unemployment including:
An Apparently Inadequate Stimulus
In the December quarter of 2008, China's GDP growth was reportedly essentially
zero [1].
However in March 2009, China's premier announced that
his country would achieve 8% growth in 2009 because it needed, and had the
ability, to do so [1].
But he did not state how this would be achieved beyond vague references to
'doing whatever was necessary' and exhortations for China to 'change its
development pattern and realize structural adjustment' and 'promptly and
creatively implement the policies and plans of the central government'
including 'boosting domestic consumption' [1].
Another official suggested that stimulus measures announced previously were
appropriate and working [1],
while another source suggested that the solution lay in 'confidence' and the
fact that all officials were aware of the vital need for 8% growth [1].
The World Bank suggested that China's 2009 growth would be 6.5% because of the
first stimulus package and the expected property recovery in late 2009 [1]
However many economic analysts had believed that this growth goal would only
be achievable with a large additional economic stimulus as China's first round
stimulus of (about) 2% of GDP in November 2008 was seen to be inadequate. By
early 2009 there had been a strong rise in public fixed asset
investment (roads, railways, power plants, bridges and apartments) - as a
result of government stimulus package. But private property investment
was stagnant,
and developers were going bankrupt [1].
Moreover:
- China's current account surplus had collapsed to $4.8bn per month in
February 2009 [1]
- thus raising the prospect of deficits if China's growth was faster in the
face of global contraction. Deficits would create problems because of
the weakness of China's financial system (see
China: Victor or Victim?);
- there was very limited prospect of significantly increasing domestic
consumption because of extreme imbalances in the distribution of wealth and
the limited role consumption had played in China's economy in the past.
In June 2009, it became apparent that in addition to the national stimulus
program, additional stimulus measures had involved (a) reduced constraints on
bank lending (see below) and (b) heavy borrowing by
local governments in the expectation that tax revenues would increase with
recovery to allow increased debts to be repaid [1].
While a turn-around from 0% growth to 8% would be very difficult,
something like 8% is vital to keep up with the growth in China's labour force and
maintain political stability.
Export-Oriented Industrialization
Strategies are Now Impractical
One problem is that export-oriented industrialization reliant on traditional
markets (especially the US) won't be feasible as the
primary driver of Asian growth and development in the post-GFC era (see
New Economic Strategies)
This problem appears to have been recognised in Asia (op cit), though initial
responses seemed unlikely to produce sustainable growth. The US did little to
boost its supply capability, and China's stimulus mainly increased production
capacity.
In initially responding to
the economic crisis, governments have done little or nothing to address the
need for a more balanced international financial system.
For example, the US (and other current account deficit countries like
Australia) have done nothing to promote structural economic changes - ie to boost
production capacity, rather than demand, so as to reduce the global
financial imbalances that were linked with the easy money policies that led
to the GFC.
Likewise China's first-round fiscal stimulus package tended to go mainly into
boosting production [1] (for which there is currently no assured market other than
China's government itself). For example:
- China's growth model in the face of the global financial crisis is based
on government spending [1];
- while China forecasts 8% growth in 2009, the World Bank projects 6.5%.
4.9% of this will result from a massive government stimulus package. Also
though new state bank lending surged in February, as industrial growth and
private investment stagnate. Also World Bank forecasts assume that China's
exports will pick up as global recovery emerges in late 2009 while IMF
forecasts global economic decline of over 0.5% in 2009 [1];
- China, because of the modest size of its fiscal expansion, is clearly
expecting that economic recovery will be driven by external demand [1];
- analysts had doubted China's ability to rapidly resuscitate its economy -
but this under-estimated the advantages of a semi-command economy. Banks
pumped money into state controlled companies, and they expanded investment.
75% of China's expected 6.5% growth in 2009 will come from government
investment and consumption. Going beyond this will be harder [1]
;
- while private investment had provided most of China's rapid jobs' growth
in the past, it is now investment by state enterprises that is driving growth.
The fact that lending has exploded at the same time that market conditions are
contracting suggests an increase in future non-performing loans and
over-capacities [1];
- China is 10% of global output, but suffered severe slowdown in late 2008
which may recover to 5-6% pa growth in early 2009. Better outcomes depend on
US / global recovery (in 2010?). Risks include: inadequate stimulus /
overcapacity. Growth is based on aggressive fiscal / monetary policy - as
measures to boost domestic consumption have been slow. Government is well
placed to fund deficits, but gaps between China's 8% growth goal and external
weakness is large. When US recovers it will rely more on increased exports
than on ongoing imports and consumption [1];
- China 's stimulus program is to invest heavily in the development of
4G telecom technologies - and
was seen as potentially setting standards in this area [1];
- Comment: this seems potentially hazardous
as, without strong
consumer demand, such development would be driven (as in the former Soviet
Union) by the guesses of technologists and industrialists without the ultimate
direction being set by users (ie consumers) which is necessary for successful
innovation.
- China is likely to rapidly recover from its economic downturn because the
official decision to launch a 4tr yuan stimulus package concentrated
leaders at all levels in China on boosting growth - so huge amounts of
additional spending resulted from local governments and business who had
needed nothing but a release from government controls [1];
- China's aggressive stimulus has steadied its economy, but it has not made
the deep structural changes needed for growth after available funds run out [1]
Measures to boost domestic consumption in China were
taken involving a social safety net, consumer subsidies and dubious
statistics.
Efforts are being made to promote domestic demand:
- some indicators emerged of a shift in China's emphasis from hard
to soft infrastructure (eg to health care and education); a willingness to
downsize existing production capacity; and improvements in China's safety
net in ways that would reduce China's high, but ultimately destabilizing,
savings rate [1].
Indications have also emerged of vouchers being provided to citizens
allowing them to buy appliances [1]
- data has been presented suggesting a rapid increase in the number of
cars being sold to consumers in response to a demand stimulus package
(reduced taxes and subsidies). However observers have noted that
other data sets suggest that this is 'happening' at the same time that the
number of engines being produced is declining [1].
Other data suggested a 15% increase in retail sales in China in the first
quarter of 2009 - though there may have been uncertainties about this [1].
- China is to boost the production of electric cars, by providing large
subsidies to consumers for buying them [1];
- China's growth is increasingly self-generating and domestically-driven
despite the perception that recovery has been entirely the result of
government spending [1]
- China may have scope to increase domestic demand because prior
policy actions had been taken to reduce it - ie
constraints could be taken off bank lending [1]
However the effect has been modest, and huge social and political reforms
would be needed to make China's economic growth sustainable through such
reforms.
Economic Reforms on Western Principles are Absent
There are serious structural obstacles in the economic model
that China appears to have adapted on the basis of Japan's pre-19990 rapid
growth to achieving the macroeconomic balance needed for growth based
largely domestic demand (see
Are East Asian Economic
Models Sustainable?). For example, the lack of serious attention to the
profitable use of capital creates the risk of
financial crises if growth were
based on domestic demand.
Thus China's leaders may believe that they are unable to engineer
market-oriented economic changes based on Western principles that would allow continued growth in the
global economic environment that must emerge as a consequence of the GFC. They
do not, for example, appear to envisage Western-style reforms to China's financial systems [1]
- any more than Japan did following its financial crisis in around 1990.
Moreover emphasis continues to be place on state-owned-enterprises which are
not noted for the profitable use of capital. Doing China's Own Thing?
One interpretation of the vagueness of China's premier about
future
GFC responses is that it is recognised that further economic stimulus (which
mainly boosted the supply side of China's economy would be pointless), and
that something radically different is intended.
One initiative suggesting this involved diversifying perhaps 50% of
China's $2tr+ foreign exchange holdings away from $US - perhaps into commodities and
other assets with reduced current values. While this could be rationalised as
seeking protection against an
expected $US collapse [1,
2,
3], it would appear to make US-led global economic recovery
more difficult and thus: (a) increase the demands on China's limited foreign
exchange reserves - and the risk of a medium term financial crisis; and
(b) put at risk the value of the alternative assets that China acquired.
Implications
of Diversification from $USIf correct (and other reports mention
China's rush to build up coal stockpiles at almost any price) this could
be taken to imply that China either expects, or is trying to ensure, that
the financial crisis will result in a crash in value of $US. However this
outcome would be counter-productive.
Why: China might ensure access to the resources needed to manufacture
(say) hybrid cars - but, if a general run on US Treasuries prevented the US from
funding its stimulus / bank rescue packages and budget deficits without simply
printing money and crashing $US value, then there would be no short term global
economic recovery or much market demand for whatever China intends to
manufacture - so that the value of industrial commodities purchased with
proceeds of selling US Treasuries would also fall.
However China may not simply be shifting its foreign exchange holdings
because of concern about the prospective collapse of $US, but because the
GFC has highlighted the structural challenges facing China's own capital account
that are implicit in its past strategies.
China's previously solid
current account surplus had reportedly essentially disappeared in February
2009 [ 1].
China had record surpluses from November 2008 to January 2009 and the World
Bank forecast a $400b current account surplus for 2009 (because lower
commodity prices would partially offset the impact of the global demand
shock) [personal communication].
However the World Bank's forecast seemed to depend on a substantial
improvement in the global economic situation in late 2009, ie that the world
emerges from recession even though:
- the IMF
forecast a decline of 0.5%
or more in global GDP in 2009;
- the World Bank forecast a 9% fall in world trade in 2009 [1];
- the OECD has forecast a 4.3% contraction in developed world's
economies in 2009 [1];
- any benefits China gained from lower commodity prices would be
offset to some extent by reduced capacity elsewhere to buy its products;
and
- despite the optimism
US authorities express about the potential for recovery, the challenge of
funding the US budget deficits this requires would seem to be severe
(eg because of the risk of a post-flight-to-safety bond market crash similar
to that which apparently occurred in 1931 as cashed-up investors, believing
the crisis was being resolved, shifted their money in other areas).
Thus (if China is to
achieve 8% growth in the face of global recession) it will probably have to finance
growth by drawing down its foreign exchange reserves. However China can't
safely do this for long (as its financial system is not able to cover future
deficits by borrowing).
Moreover "protecting" China's
now-critical foreign exchange holdings by withdrawal of capital from $US may
damage the global economy and thus be counter-productive for China in
particular (because global demand could further weaken, and falling exports
would merely accelerate China's slide towards a financial crisis). .
For these reasons steps to attempt to avoid this constraint in the medium
term (see Creating a New
'Confucian' Economic World?), may have become urgent - even though there
is no guarantee of their ultimate success.
China has also indicated a desire for radical change by expressing concern
about dependence on US markets and the $US. For example, a case was made for
the creation of an an international currency
based on IMF Special Drawing Rights. And a Chinese analyst called for
significant increases in US savings [1],
a change which would severely disrupt China's export-led economic strategy.
Other Chinese economic initiatives include:
- using foreign exchange reserves to: (a) make loans to key
trade partners; (b) acquire businesses; (c) stockpile commodities; and
(d) acquire future key energy / commodity inputs;
- restricting machinery imports;
- seeking to upgrade established industrial regions on China's coast to
succeed on the basis of independent innovation - while transferring
traditional low-cost industries inland;
- proposing the development of Shanghai as a international financial
centre with 'Chinese characteristics' - perhaps including better stock
market regulation
- encouraging use of the Yuan as international trade currency
Indications of other initiatives include:
- in May 2009 it was suggested that China was seeking to become a
hard-asset republic (with a preference for conducting trade in RMB; currency
swaps in Asia and acquiring energy / resource assets). Walking away from $US
slowly - so as not to hurt its $US holdings was seen as a way to help
rebalance the world economy [1]
- China's competitive strengths have been improved as a result of the GFC.
It is using cash to acquire natural resources and friends. Its economic
stimulus package will retrain workers, increase R&D and provide infrastructure
which reduces transport costs. Bank lending has increased rapidly. The
slowdown has also solved persistent inflation problem, reduced shipping costs
and wages. China's companies are buying foreign businesses [1];
- China provided $25bn loans to SE Asia. Industrial production rose 8.3% yoy
to March 2009. Crazy amounts of iron ore are being imported and boosting
stockpiles. All China's neighbours are being boosted. Most new activity comes
from government stimulus [1];
- China has made arrangements for its currency (Yuan) to be used
in international trade with South Korea, Indonesia, Malaysia and Argentina
(as an alternative to $US [1].
Others have suggested that China has taken many steps to promote the Yuan as
an international currency and as a reserve currency [1].
- China has reportedly strongly promoting its leadership in SE Asia, while
(a) criticising the global dominance of developed economies (b) offering to
invest in the region and to use the yuan as a trade currency (c) complaining
about dependence on US markets - which is said to be needed because of $US hegemony and
(d) advocating use of available resources - including China's huge foreign
reserves - to promote growth [1].
- China has reportedly envisaged that (a) it could refuse to finance US
deficits (with the expectation that the $US would then collapse) without
adversely affecting its own prospects and (b) its own currency could be
floated as the basis for an independent market-based financial system [1];
- China's sustained growth was seen to
potentially come from: (a) economic spin offs from the government stimulus;
and (b) innovation within China that significantly improves its productive
strengths [1];
- China will no longer 'hide its
capability'. Using $2tr foreign exchange reserves: industrialists have locked
in energy resources; infrastructure investments have been committed, as well
as projects to bridge wealth gap. China's success formula is its state banking
system - which has plenty of cash allowing increases in consumer / capital
spending. State controlled banks take compulsory savings of all employees.
Once child policy forced parents to save. China has started to
internationalize its currency. China's premier argued that financial crises in
recent years have resulted from clash between needs of country issuing reserve
currency and international fiscal requirements - and argued for a
super-sovereign reserve currency managed by a global institution. US leaders
will in future need to concede that they are losing financial power to regions
such as China [1];
- China owns several large banks, all well
capitalized, and has many companies that are going public on HK and Shanghai
exchanges. Its growing middle class will encourage more sophisticated
financial services sector. China's financial system is simpler than US / UK
but this may be an advantage. China could link HK and Shanghai banks and
transfer know-how from former colony. Beijing has declared Shanghai will be
major global financial centre - and there is growing cooperation with HK.
Common regulations could be established [1];
-
while foreign banks are frustrated about many aspects of
doing business in China, they are making profits (which in one case came 80%
from holdings of Chinese financial institutions, while losses were incurred on
consumer banking). China is offering them room to pursue business despite
tight overall restrictions. China has promised pro-market rules, new products,
technological advances and lower taxes in an effort to boost Shanghai's role
as a global financial centre that retains Chinese characteristics. Shanghai
has been seen to face many obstacles as a financial centre because of: state
involvement in everything; uncertain legal, tax and media structures; and lack
of a convertible currency. On the other hand China's restrictions allow banks
to charge premium fees (a form of tax on users) [1];
- however the fact that
foreign banks in China are becoming profitable
seems to reflect something like the market rigging through cartels that
allegedly [1]
allows state-favoured enterprises to appear profitable at the expense of the
economy generally.
-
as well as trying to change the international rules
by blaming $US's position for global crisis, China is seeking to become a
hard-asset republic (with a preference for conducting trade in RMB; currency
swaps in Asia and acquiring energy / resource assets). It is seeking to walk
away from $US slowly - so as not to hurt its $US holdings. This may help
rebalance the world economy [1]
[Comment: The short term risk with such a
strategy would be a collapse
in economic output]
-
China's regulators are seeking to remove scams associated with stock market in
the past [1]
-
China's leaders have suggested different ways of responding to decline in
exports - eg government support for cheap-labour exports or new industries
Wang Yang (Communist Party Secretary, Guangdong) suggested Party was advancing
with the times and can communicate with West, but West doesn't understand
China and this is needed. He suggested that economic transformation and
industrial restructuring must be based on 'scientific perspectives on
development' (a party slogan for maximizing growth and also addressing
rural-urban imbalances and environmental issues). The model used for 30 years
is no longer viable - because (a) it neglects costs of resources / environment
/ worker health; (b) it depends on external demand. The obstacle to economic
change is seen to lie in dealing with vested interests (eg those who have
become wealthy through renting land). Plan is to enhance independent
innovation, transform traditional industry and set up modern industrial
systems. This will open wider markets. Local industry will be upgraded while
low-cost manufacturing is transferred inland. Guangdong would become the
shop-front for manufacturing elsewhere in China. Transformation of Guangdong
into a centre for independent innovation poses risks in facing chaos of
marketplace [1]
-
a new market for $US denominated bonds to be issued by non-financial firms has
been announced [1];
-
though China has benefited most in recent years from trade, bans were imposed
on the purchase of foreign equipment in investment projects - a more
restrictive version of the US's 'Buy America' clause - which threatens to
generate reactions elsewhere [1]
Beyond Export Dependence: Creating an 'Asian'
Economic World?
The steps which are being taken seem to make little sense within an
international order based on Western political and economic practices.
Why?
Any attempt to use the Yuan as an international trade currency
generally (in the way the $US is used) would result in its revaluation, and a decline in China's international competitiveness and create
hazards in the longer term in the absence of serious
reform of China's financial systems.
Seeking to establish Shanghai as a major global financial centre (perhaps
in parallel with Hong Kong) [1]
can not in itself solve the difficulties that China faces in growth based on
domestic demand (ie the need to borrow in international markets to fund
growth). The ability of banks in such a centre to counter-balance a
substantial Chinese current account deficit depends not on the practices of
those banks and their regulatory framework, but on the practices of the
entities within China that they would invest in.
Likewise seeking to reduce dependence on the $US by
acquiring hard assets (which, in some ways, would reproduce the tactics of European
mercantilists in the 18th century and arguably result in a collapse in global
demand) would not result in the emergence of a balanced / efficient economy
within China.
Stimulating growth in trading partners who lack sound domestic financial
practices so that they could allow export-led growth to continue in China
would also be futile.
The possibility of redirecting surplus savings (from East Asia and oil
exporting nations) into investment in developing countries through
international institutions created by the IMF has also been raised [1].
This could (in principle) allow China to continue with an export-led
development strategy by shifting the excess demand from the US to
developing countries.
However developing countries who participated in this
scheme to permit export-led development in East Asia would have to
run large current account deficits, the financial institutions managing
the offsetting capital flow would need to be able to guarantee sound
financial practices - and this is not characteristic of developing
economies. Moreover 'everyone' now apparently wants to copy the 'successful'
export-led strategy that allowed East Asia to avoid the risk of
financial crises.
Achieving profitable outcomes is difficult /
impossible within the framework of socially-coordinated East Asian economic
models, Thus borrowing in international markets to fund growth has been
impossible. Economic strategies have thus been dependent on large domestic
demand deficits and export markets (mainly to the US). This is no longer feasible - and the
problem is recognised in East Asia.
It is possible that China's leaders do not understand
their medium-long term economic predicament
under a Western political / financial global order (and are suffering a case of 'pride before a fall').
It is also possible (noting provocative statements about the US increasing its
savings to avoid risk of a further economic crisis [1]
- a step which, while necessary, will probably make East Asian economic models
unsustainable) that China expects that a catastrophic economic crisis is
unavoidable and is trying to make a point about who should be blamed.
However it is more likely that there is a long-developing plan to
create an international economic and financial system with 'Asian'
characteristics. It may be hoped that a combination of innovation, growth in
domestic consumption, developing non-traditional markets (eg in emerging
economies whose growth might be less affected
by the GFC) and creating
machinery to handle 'international' financial transactions under government
control could overcome the growth constraint in a uniquely Chinese / Asian basis.
This possibility is speculated in
Creating a New 'Confucian' Economic World?.
As noted in the latter speculation this option would seem risky. It would
involve a race against time (ie to create alternative markets within a
China-centred trade / tribute regime before foreign exchange reserves became
depleted). It would demand a great deal of ordinary Chinese people, mainly to
ensure control by traditional social elites. And in the long term, the lack of
profit seeking enterprise (ie of effective capitalism) would probably make it impossible
to balance supply and demand.
Discord / Conflict?
Thus another possible interpretation is that there is internal discord
about China's future directions, and
thus no current consensus.
China has faced constant internal social political unrest (with a reported
100,000 mass incidents pa) and has an extremely imbalanced income
distribution. Thus despite China's overall economic growth internal political
shifts are not impossible - even though they may be unlikely.
The ever-present tension (noted
above) between what might simplistically be
called 'north' and 'south' China could be significant - as the rural 'north'
apparently favours a military approach to developing China's strength, while
the commercial 'south' favours economic tactics.
'South China' has dominated in determining strategy for China's growth and
development since the post-Mao economic liberalization in the late 1970s - a
dominance which funded the military aspirations of the 'north'. However the
'southern' tactics may be no longer sustainable, and have caused many domestic
concerns within China (eg about the distribution of wealth and abuses of
power)
Thus, in an environment in which the West's strengths in financial services
have been undermined, it could be that a resurgent 'north' might be gaining
more influence in
advocating both traditional socialism and aggressive nationalism. The
potential for virulent anti-Western nationalism (based on both pride in
China's achievements and resentment of its historical treatment by Western
powers) was exposed by grass-roots
responses to widespread Western demonstrations against China's actions in
Tibet during the 2008 Olympics [1].
If maintaining GDP growth is vital, and it was believed that little could
be achieved by market-oriented
adjustments, at some time spending on armaments and militarily-significant infrastructure (for which
the state would be the 'customer') could be emphasised to boost GDP and create
jobs, while nationalistic drums were
beaten to blame 'foreigners' for the economic crisis and thus divert attention
from domestic defects. Needless to say such an intention would not be overtly
stated - not least because such a change in tactics could generate internal
conflict.
It can be noted in passing that China's military spending is
reportedly to increase 14.9% in 2009 - and the details of what this involves
are being kept secret [1].
September 2002 - and amended October 2003 and from November 2007
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