January 24, 2010

Beijing focused on taming the dragon of rampant growth

Sat, Jan 23, 2010
http://www.irishtimes.com/newspaper/opinion/2010/0123/1224262922780_pf.html

ANALYSIS: Single-party rule means China can act to curb the inflation and asset bubbles that threaten its economic stability, writes CLIFFORD COONAN

YOU CAN drive for hours in the industrial zones around the southern boomtown of Shenzhen, just across the border from Hong Kong, and not lose sight of factories, with heavily laden trucks leaving their gates and workers coming and going as the shifts change.

Figures published this week show that the Chinese economy grew by 8.7 per cent last year, putting the country on course to overtake Japan as the world’s second-largest economy, and much of that economic growth, which seems almost impossible to imagine in Ireland these days, comes from southern China.

China recently overtook Germany as the world’s biggest exporter, and its car market is now the world’s largest too, since ousting the US. The superlatives about the Chinese economy keep on coming.

Without doubt, China is the first country to emerge comprehensively from the credit crunch, but how stable is that growth? It’s certainly not without risk. There are signs that inflation is picking up, adding to pressure on Beijing to tighten monetary policy and ease rising prices without disrupting the recovery.

The astounding performance of the Chinese economy is a source of pride to the workers in the factories of southern China. The plants and offices in the Pearl River Delta area account for 40 per cent of China’s economy. Within the Pearl River Delta lie Shenzhen, Hong Kong, Guangzhou, Macau, Zhuhai and other booming commercial centres. The factories suffered when the downturn demolished the Chinese export market, which fell for the first time in nearly 30 years. There were redundancies and protests outside factory gates.

But the government managed the crisis capably, appeasing the workers’ demands, introducing a four trillion yuan (€410 billion) stimulus programme and freeing up bank lending to allow the companies to refocus their output towards the domestic market, easing up on the products for export.

One problem is that the white goods, flat-screen TVs and cars from these factories are getting expensive, and fast. And the flood of cheap credit has prompted fears of asset bubbles in real estate and the stock market.

Consumer prices rose in November by 0.6 per cent from a year earlier after falling for most of 2009 and the rate jumped to 1.9 per cent in December, the steepest monthly rise since February 2008, a period of record inflation. Ma Jiantong, commissioner of the National Bureau of Statistics, said the Beijing government will concentrate on trying to ease inflation triggered by the stimulus plan and a huge rise in bank lending.

The threat of a real estate bubble is one painfully familiar to many in Ireland. Data from the National Bureau of Statistics showed that 940 million square metres of property was sold last year, and prices rose 24 per cent. Meanwhile, sales revenues hit 4.4 trillion yuan (€460 billion) in 2009, a 75.5 per cent increase from the previous year. Property investments alone account for about 12 per cent of the country’s gross domestic product. The response has been to introduce policy measures to make it harder to buy property and this has caused some cooling of the market. A crucial difference is that the Chinese government is in a position to implement whatever cooling policies it wants, because of single-party rule.

The stimulus plan always had an expiry date, as this kind of spending produces more bubbles than any sane economy can possibly deal with, and so it has been with the Chinese economy, as policymakers gird their loins for a probable interest-rate hike later this year.

Last year, bank lending was 9.5 trillion yuan (€990 billion), an influx of credit that fuelled a construction boom and a surge in business investment; but this is expected to fall to about 7.5 trillion yuan (€780 billion) this year.

At one stage this month, banks were lending about 100 billion yuan (€10.3 billion) a day, the official China Securities Journal reported.

The scale of new lending combined with fears about inflation has made the Chinese leadership anxious. Late last month premier Wen Jiabao admitted that lending by the country’s banks was growing too fast and needed to be “more balanced, better structured and not on such a large scale”.

While cities are booming, the countryside is still underdeveloped, and the message from the leadership in Beijing remains that China is a developing country, with a great number of poor people. A structural problem for the past 25 years in China has been a growing income gap between China’s urban rich in the south and along the eastern seaboard and the poor rural residents of the heartland.

Economic reform saw millions of farmers move to cities like Shenzhen and neighbouring Dongguan to work, prompting the imbalances. Last year, city dwellers earned 3.33 times more than the farmers, which the government fears could be a cause of instability. After all, the People’s Republic of China was founded on a peasant revolution.

A survey of 50 leading Chinese economists in Economy and Nation Weekly last month showed the excessively wide income gap was the biggest threat to healthy growth in China.

Growth in China is generally seen as a good thing internationally. The country’s economy may be relatively small in global terms, making up 8 per cent of global GDP in 2009, compared to the share of about 25 per cent accounted for by the US and 22 per cent by the euro zone, but Chinese growth could help to drive a global recovery by boosting demand for imports such as oil and consumer goods, and increasingly for services.

What are the political implications when China becomes an economic superpower? There is plenty of evidence that China wants to match its economic strength with political influence, while promising a “peaceful rise” and soft power.

China played hardball at the recent Copenhagen talks on climate change, prompting accusations by the British that China had hijacked the talks and allowed them to fail.

The controversy over censorship, highlighted by Google’s threat to quit the country, and harsh treatment of human rights activists, have demonstrated the discomfort that some in the West have in dealing with China.

There are growing trade tensions between the US and Europe and China over what the West sees as the unrealistically low value of the Chinese currency. China has effectively kept its currency at about 6.83 against the US dollar since July last year. Analysts are forecasting that China’s currency may rise almost 3 per cent to 6.63 yuan to the dollar by the end of the year.

Both US president Barack Obama and European Commission president José Manuel Barroso went to China last year to meet the Beijing leadership. On both occasions China rebuffed calls to allow its currency to rise. The Europeans and the Americans complain that China is manipulating its currency to gain an unfair trade advantage.

In Nanjing for an EU-China summit in November, a clearly irritated Barroso cancelled a press conference as tempers frayed over trade issues – about 20 per cent of China’s exports go to Europe, and the EU runs a large trade deficit with China.

But the Chinese say calls on Beijing to push up the yuan’s exchange rate are unfair, especially in the context of what they describe as “brazen” protectionist measures by the West.

Some commentators have described China’s trade relationship with the West as being like a clumsy couple dancing – close but always treading on each other’s toes. China’s burgeoning economic growth will test that closeness, but ultimately the relationship will survive. The world needs Shenzhen’s and China’s economic vitality too much.