SPEAKING
FREELY Forget China's rosy economic
scenario By Manjit Bhatia
Speaking Freely is an Asia Times Online
feature that allows guest writers to have their say.
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When former
strongman Deng Xiaoping opened China to international
investments and market reforms in 1978, seasoned China
watchers wondered whether the communist monolith would
ever be able to rival East Asia's dragon market
economies. Chinese catch phrases - dictums like "Never
mind if the cat is black or white so long as it catches
mice," attributed to Deng - seemed entirely pithy and
fuzzy to Westerners and even those in the region. Maybe
they weren't sufficiently schooled in "Confucius
thoughts".
Pans aside, though, Chinese slogans
have become less bewildering and more exciting over
time. The slogans, and Deng's exhortations to his
capitalist-roaders, have irretrievably taken China on a
long march that will probably keep Marxist-Leninist
revolutionary Mao Zedong turning in his grave.
Today, China is Asia's second-biggest economy,
after Japan. In terms of global investment flows, China
has an appetite for foreign money that's more voracious
than the sum of Asia's entire dragon and tiger
economies. Most of these had had their flames and their
growls snuffed out by the region's worst made-in-Asia
economic crisis in the late 1990s. Since then they've
lost out massively to China in attracting foreign direct
investments (FDI). So they turned their eyes desperately
to the booming Chinese economy, hoping it would save
their goose. And why not? Over the past 25 years,
China's gross domestic product (GDP) has expanded by an
average of 9 percent a year. Foreign trade has averaged
15 percent annually since 1978.
And every week,
more than US$1 billion of FDI enters China. The Chinese
economy is now the world's sixth-largest, with a GDP of
$1.4 trillion. Goldman Sachs, an investment bank,
predicts China will surpass the United States to become
the world's biggest economy by 2040.
So, all
hunky-dory in the Middle Kingdom? Maybe. In the past
decade, and certainly since the Asian crisis, warnings
by some contrarian analysts of a rapidly overheating
Chinese economy cranked up a few more notches. That
didn't faze foreign investors and Chinese policymakers,
who scoff at the babble as banal - the same way Asia
ignored, then lampooned, similar talk in the mid- to
late 1990s. Then, wham! Asia's economic castles were
found to be built on sand. Their miracles were almost
entirely debt-financed. And still other analysts
fervently describe Chinese economic development as a
miracle par excellence. Some are already saying this
century is China's.
The zeal and eulogies are
all too familiar. But the contrarian chatter is fast
catching up to China, with stronger tones - not
something Chinese policymakers can afford to ignore
anymore.
Asian, Western press offers good
news hype Among Asia's press, only the good balm
about China is proffered. In most Western media, there's
similar hype, but there's mostly a questioning voice
amid the awe of a giant forging ahead, with claims by
some that the period of Japanese regional hegemony is
dead and a new regional hegemon is emerging vis-a-vis
China.
Even so, Chinese regional geopolitics is
crucially dependent on domestic political stability.
Twenty-five years of sustained high growth rates have
underscored the relative stability inside China, thanks
to a totalitarian state system. Here, too, some analysts
say Beijing's power has been decentralized, insofar as
its inability to rein in increasingly autonomous
provinces such as Guangdong, Fujian, Zhejiang, Jiangsu
and Liaoning, where per capita GDP in 2002 exceeded
$3,000, and underpinned by foreign-invested companies
putting down their production roots there.
Surveys by the American Chamber of Commerce in
China of US firms operating mostly in the coastal
provinces put their numbers at 251 in 2002, up from 115
in 1999. And all claimed to be profitable, with 40
percent saying their margins were higher than their
global benchmarks. Last year, despite severe acute
respiratory syndrome (SARS) and the Iraq war, China
attracted a record $57 billion in FDI, and contracted
FDI - an indicator of future investment - soared 39
percent to $115 billion. It's that kind of pull that has
Beijing's policymakers putting stable domestic politics
ahead of regional geopolitical ambitions. Besides, given
Chinese foreign policy in regard to the US-led war on
global terrorism, China is seen by Washington more a
partner than a threat, despite some US neo-liberals'
revulsion for China's mercantilist capitalism.
But can China continue to grow at this pace year
in and out? Not an easy question to answer given the
size of the economy and its highly uneven growth. And
that's made worse by China's notoriety for unreliable
accounting and governance standards, and terribly skewed
income distribution, especially for the 800 million
rural dwellers who, eking out meager wages from
declining agricultural prices, supplement income by
taking part-time work in cottage industries. Yet each
year about a million Chinese flee the countryside for
better wages and living standards in China's coastal
cities. But their pot of gold is no more than an
illusion. Without totalitarian state controls, China
would have suffered a million labor-led mutinies by now.
On March 14, at the country's annual National
People's Congress, Prime Minister Wen Jiabao warned that
bank credit, which has been feeding the investment
frenzy, needed to be tightened, and soon. Demand for
property, steel and cars has been skyrocketing, while
production capacity, especially in those Chinese firms
supplying the domestic market, has expanded
exponentially, although not necessarily with increased
productivity and efficiency gains.
China
pumps in $4 for $1 of annual output Another
looming problem is that, despite a potential
1.3-billion-consumer market, hard-to-get data reveal
surplus accumulation in some manufactured goods.
Unchecked overinvestment could easily fuel deflation
down the line. If that's not enough, China's growth
quality is questionable, and may be unsustainable.
Incremental capital-output ratio numbers show China has
been pumping more money to generate the same growth. To
generate an additional $1 of annual output, China now
pumps in $4, compared with $2-$3 in the 1980s and 1990s.
Last year, fixed capital spending accounted for a
whopping 47 percent of GDP. That's worrying.
But
Beijing is responding to what it once would call banal
chatter of the contrarians. On Monday, China's central
bank lifted its statutory deposit ratio for commercial
banks from 7 percent to 7.5 percent, starting April 25.
Banks with lower-than-average capital-adequacy ratios
will lift their ratio to 8 percent from 7.5 percent.
This is clearly an attempt to cool down the economy,
which has seen imports of raw materials surge. There are
fears in Beijing of rising inflation risks.
The
central bank may be forced to lift interest rates but
not revalue its yuan-dollar peg. Both policy instruments
will slow GDP growth, but revaluing the currency peg
will hurt foreign-invested, export-oriented firms. By
taking money out of circulation, Beijing wants to dampen
aggregate demand. Fair enough. But it also needs to slow
investment in runaway industries such as steel, cement
and aluminum without raising benchmark lending rates
that could also adversely affect China's struggling 800
million rural poor, thus raising social and political
problems for itself. Yet raising interest rates could
also hit Beijing's coffers - hard.
And still
more problems. Provincial governments including
Guangdong, which was Deng Xiaoping's experimental
epicenter for market reforms, may be sitting on a
growing mountain of debt that could easily rival the bad
loans held by the state's banking sector. There's more:
now questions are emerging whether local governments
could be forced to turn to Beijing to fund their own
programs - the kind of problems faced by local
governments in many modern states. On the one hand this
development questions the idea of rising autonomy of
provincial governments. Conversely, it shows how Beijing
has kept its centralized authority - by rolling back
arbitrary fees and levies on the country's mostly rural
population. All this has left provincial authorities
with fewer fundraising options. But it's all in keeping
with Beijing's need to maintain a highly stable domestic
order for the sake of its growth fetish.
Provincial governments saddled with
staggering debt Just how much debt the provincial
governments are saddled with is hard to tell since there
are no complete and accurate data on hidden debts. A
recent report in the 21st Century Business Herald, a
Chinese newspaper, says local governments could have
accumulated debts exceeding 1 trillion yuan ($120.9
billion). The situation is just as dire on the level of
non-performing loans in the state-banking sector.
Estimates put the state-run commercial banks needing at
least 2 trillion yuan to bail them out of
insolvency.
And that's just for this financial
year. If true, it suggests China's banking sector faces
a crunching financial crisis, which Beijing has been
desperate to hide. These problems are set to worsen
Beijing's fiscal position, though. It is already
lumbered with a swollen budget deficit of its own, with
public debt at 30 percent of GDP, and climbing fast. Now
it may be forced to take on more of China's growing debt
problems from other sectors.
Beijing needs to
get its financial house in order. That means taking a
long hard look at its spending and taxation. But with
problems also looming on the agriculture front, it won't
be easy. Beijing is set to ax its 30 billion yuan annual
agriculture tax by 1 percentage point annually. Premier
Wen thinks this will lower the tax burden on Chinese
peasants by some 11.8 billion yuan per annum until the
tax is abolished. What was originally a five-year
timetable is now being mooted within certain
policymaking circles in Beijing as a three-year plan.
But local governments aren't happy about their loss of
revenue.
To pacify its critics, Beijing is
stepping up transfer payments to provincial governments.
Finance Minister Jin Renqing has set aside 39.6 billion
yuan in transfer payments in the 2004 budget. That's up
by 9.1 billion yuan from 2003, and this money is
earmarked strictly for the hardest-hit local
governments. Not a huge amount in a $1.4 trillion
economy, but huge enough all the same to breed the kind
of policy complacency for which China is famous, which
often oscillates confusingly between socialism and the
market.
Take the long-neglected Chinese
hinterland: real land reforms have been abandoned for
industrialization in urban centers, where powerful
capitalists with close ties to the corrupt political
elite rule the policy roost. But if the growth fetish is
a festering problem for China, so too a potentially
horrendous debt crunch that could see millions of
Chinese lose their jobs. That will unravel China's
stable domestic order.
Manjit Bhatia
is an academic and writer in Australia. He specializes
in international economics and politics, with a focus on
the Asia-Pacific region.
Speaking Freely is
an Asia Times Online feature that allows guest writers
to have their say. Pleaseclick hereif you are
interested in contributing.
