China in 2009 – the risks in the year of the ox

«China has too many problems of its own to be of much help in sorting out global ones. Don’t look for Beijing to assume a constructive role on the global stage.»

All economic processes are non linear. History sometimes jumps. Even great powers do not escape to that iron rule. Paradoxically, after 30 years of hot growth, the second world economy (measured by GDP at purchasing power parity) is at risk of expanding by one or two percent in 2009. In an emergent economy, that means open crisis. The world trade contraction already forecasted for next year by World Bank can mean also an export crash and a slump in financial liquidity of the foreign reserves’ Asian giant. China is one of the critical countries you must follow close. Janelanaweb.com interviews Gordon Chang.

PROFILE

Gordon G. Chang, 57, graduated from Cornell University (USA), is an author, best known for his first book, The Coming Collapse of China (Random House, 2001). His father is from Jiangsu province, China, and his mother was American of Scottish descent. He lived and worked in China and Hong Kong for almost two decades, most recently in Shanghai, as Counsel to the American law firm Paul Weiss and earlier in Hong Kong as Partner in the international law firm Baker & McKenzie. Chang has appeared before the U.S.-China Economic and Security Review Commission and has delivered to the Commission a report on the future of China’s economy. Now he blogs at Commentary magazine. He wrote recently an interesting series of commentaries about the 30 Years of Chinese Reforms for Forbes Magazine.

INTERVIEW

1st picture from a trip this year: ‘A cement economy’

Q: The last time you have been in China what was the most economic and social striking aspect you saw?

GC: My wife and I were there this June and July (2008) and were struck by the overbuilding.  In my dad’s hometown in Jiangsu province, we saw a magnificent 18-story hotel surrounded by a dusty city of low-story buildings.  The brand-new hotel was deserted–we seemed to be the only guests.  There was also a yet-to-be-opened opera house.  This overbuilding, which was also evident in Beijing, indicates that the central government’s recently announced stimulus program, which is essentially an excuse to pour even more cement, may not do much for the economy in the long run.

Q: China contributes nowadays more than 25 per cent for the annual growth of the world economy; a larger contribution than the US or India. If this engine got sick in 2009, we have a big problem. Is China the Achilles’ kneel of the world economy next year?

GC: China is not the engine of the world economy.  The engines are consumers in Europe, North America, and elsewhere.  If you want to know what will happen to the global economy, see what they are doing.

2nd picture from an overview analysis: ‘If the trend continues next year the Chinese economy will expand by one or two percent–or maybe not at all. China is experiencing a greater and faster economic slide than almost any other country this year’.

Q: For the first time in 2009 China will grow below the average of the last 30 years. For some analysts’ forecasts less than 7 per cent, for the World Bank 7.5 per cent. The head of the IMF, Dominique Strauss-Kahn, has predicted GDP growth could fall to as low as 5-6% next year. We already know that the international trade will contract significantly, this will mean for an open economy like China big problems ahead. Is China at risk?

GC: As I wrote recently in “Thirty Years of Reform in ChinaEconomic collapse may soon bring political crisis”, at this very moment the Chinese economy is moving from expansion to contraction and decelerating rapidly. In 2007, China’s gross domestic product grew by an astounding 11.9 percent. In the first quarter of this year (2008), growth was 10.6 percent. Second quarter: 10.1 percent. Third quarter: 9.0. This quarter, analysts expect 5.8 percent growth. If the trend continues–and there is every reason to believe it will–next year the Chinese economy will expand by one or two percent–or maybe not at all. China is experiencing a greater and faster economic slide than almost any other country this year.

Q: Have China internal conditions to surpass the external contraction?

CG: No.  Consumer sentiment in China is bearish and appears to be getting worse.  Consumer spending as a percentage of the economy, now about 35 percent, has been shrinking in the last few decades.  The steps Beijing is taking to boost the economy, like export incentives and currency manipulation, tend to depress consumption.  The new stimulus program heavily favors infrastructure, not social services, and will only have a delayed effect on consumers.  In any event, it takes years and decades to reorient an economy away from exports and investment to consumption.  Eventually China will have a consumer economy, but it will not have one in time to pull China out of the current downturn.

Q: Economist Li Yang, from the Chinese Academy of Social Sciences, said that the stimulus package of 4 trillion yuan renminbi (US$ 586 b) will permit the uptrend in the second semester of 2009. Do you think this “political” forecast worth credit?

GC: Obviously, spending 4 trillion will have some positive effect on the economy.  But most of the effect of the spending will not be felt until 2010.  Although they run an authoritarian state, China’s leaders cannot just push a button and turn out eight-lane roads.  It takes time to conceive projects, relocate peasants, survey land, flatten mountaintops, and pour concrete.

3rd picture from history: As we saw in the Great Depression in the 1930s, it is the current account surplus countries that are hurt the most in severe downturns because they have to make the most adjustments.’

Q: What do you think are the main structural weak points of China regarding the ongoing global crisis? Can the present political structure and leadership thrive on this new situation?

GC: The weak point of the Chinese economy is over reliance on exports.  As we saw in the Great Depression in the 1930s, it is the current account surplus countries that are hurt the most in severe downturns because they have to make the most adjustments. Judging from their actions since July, Chinese leaders can quickly diagnose their economic problems but do not know how to respond.  They look much less impressive than they did a few months ago.

Q: That’s what happened with US vs. UK in the 1920-1930s. Do you think the Chinese can commit the same mistake as Roosevelt did, as professor Michael Pettis, from Guanghua School of Management, Beijing University, recently referred?

GC: The Chinese are making the smallest adjustments possible.  That is why they are trying to export their way out of this crisis.  By the time they realize they cannot succeed, it will probably be too late for them to make necessary changes.  In the past, they were often saved by their cautious approach, but now their caution will make them the biggest victims of the global downturn.

Q: China is the world largest foreign reserves recipient (mainly US dollars) and also the first foreign entity in US Treasuries. In what direction will China use this relative financial power – larger than Japan or the European Union – regarding the “rescue” of the financial system or even the ‘rescue’ of the present lonely superpower in 2009?

GC: The reserves are not much use for rescuing other nations.  We have to remember that Beijing has accumulated debt to acquire its foreign exchange reserves.  So to use them abroad entails substantial risk for the central government.  Chinese leaders obviously understand their limited flexibility, and this is one reason we have not seen them make big commitments to rescue any nation.

4th picture from political system: ‘Further reform would threaten the power of the Communist Party.’

Q: You mentioned that most of the economic and social transformations in China in the last 30 years were due to civil disobedience and not by political design. What kind of urgent reforms were needed from the Party and Government for 2009?

GC: China needs to develop a consumer economy, but that won’t happen for at least a decade.  More important, China needs a more open economy, less internal regulation, and representative governance.  Don’t expect any of these in the next few years.  Why?  China’s economy has progressed about as far as it can within its existing political framework. Further reform would threaten the power of the Communist Party. A true market economy requires, in addition to other things, the rule of law, which means constricting the power of government. Because such limitations on power are incompatible with the Party’s ambitions to continue to dominate society, the country cannot make much more progress toward them. In general, Beijing should let the Chinese people figure out their own goals and then permit them to go about solving problems.  This cannot happen under the current political system, however.

Q: What will be the Chinese aptitude regarding the role of the G20 in the reform of the international financial system to be discussed next year?

GC: China has too many problems of its own to be of much help in sorting out global ones. In any event, the Chinese leadership has clearly stated that its contribution to a solution will be to handle the Chinese economy well.  They’re failing in that task, so don’t look for Beijing to assume a constructive role on the global stage.

Q: A Japanese, Akio Mikuni, president of a credit rating agency, just proposed that Japan can launch a Marshall Plan as a chance to shrink its foreign-exchange reserves, the world´s second-largest after China. Do you think China and Japan can work together a plan like this?

GC: No, I do not see close Beijing-Tokyo cooperation in the near future.  Both countries have pressing problems at home, and these problems will not permit either to overcome substantial hurdles to a real partnership.  In any event, China is not disposed to helping others in a substantial way, as the term “Marshall Plan” suggests.

Q: Do you think there are excessive expectations in the West and other emergent countries regarding China’s role in international affairs in the short term?

GC: Definitely, our faith-based expectations are more than just excessive at this point.  But we should not be surprised–the West, fundamentally misunderstands China.

11 Responses to “China in 2009 – the risks in the year of the ox”

  1. […] China pode ter chegado, agora, a um ponto crítico – 2009 pode ser o primeiro ano de grande arrefecimento do seu crescimento, ironicamente quando a […]

  2. […] Chang não acredita numa mudança rápida deste modelo, nomeadamente com o disparo do consumo interno, apesar do crescimento da classe média – as estimativas falam de 150 milhões de chineses com um poder de compra equivalente ao PIB de Espanha ou do México. “Sem dúvida que a China acabará por ter uma economia de consumo, mas não chegará lá a tempo de poder tirar a economia do actual arrefecimento. Isso requer mais de uma década”, sublinha-nos. “Aliás, os gastos de consumo são apenas 35% da economia e têm vindo a emagrecer, depois de representar 50% em 2005”, remata numa entrevista que pode ser consultada em inglês. […]

  3. […] chinois » qui en 2009 est en train de se transformer en bourbier socio-économique. Source : Janelanaweb, 25/12/2008; Yahoo/Reuters, 07/01/2009; Guardian, […]

  4. […] chinois » qui en 2009 est en train de se transformer en bourbier socio-économique. Source : Janelanaweb, 25/12/2008 ; Yahoo/Reuters, 07/01/2009 ; Guardian, […]

  5. […] « ElDorado chinois » que en 2009 está trasformándose en un pantano socioeconómico. Fuente : Janelanaweb, 25/12/2008 ; Yahoo/Reuters, 07/01/2009 ; Guardian, […]

  6. […] A « Chinese Eldorado » turning in 2009 into a socio-economic quagmire. Sources: Janelanaweb, 12/25/2008 ; Yahoo/Reuters, 01/07/2009 ; Guardian, […]

  7. […] A « Chinese Eldorado » turning in 2009 into a socio-economic quagmire. Sources: Janelanaweb, 12/25/2008 ; Yahoo/Reuters, 01/07/2009 ; Guardian, […]

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