SPEAKING FREELY China exports mask domestic weakness
By Tom Velk and Olivia Gong
Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click hereif you are interested in
Time and time again, financial markets willingly cheerlead the public into eating up the juicy parts of data release, and ignoring the rotten ones. Recent optimism over Chinese export numbers, and claims that the slowdown in China’s economy may be bottoming out, may be optimism too soon.
While exports rose 7.2% in August (compared to 5.1% in July), imports were 7%, down from 10.8% in July. The fall in import
growth alone serves as a worrisome signal of China’s core economic problem: declining internal demand.
In 1858, the great Abraham Lincoln famously said: "A house divided against itself cannot stand." He spoke at a time when America faced its greatest internal stress and division. Failing to accommodate the disputants, the result was the bloodiest war - a civil war - in US history. China's stresses do not match those present in 19th century America - happily so, since we think China can regain internal balance - but inaction may cause serious harm.
Past policies have enriched top tier cities, the urban population, beyond anyone's prior optimistic predictions: The re-awakened nation has the potential to dominate world history for the next hundred years. But past policy dividends have left lower tiered cities, the still poor and underdeveloped areas, behind.
A two-part solution to the issue arise: "Download and privatize", and the rule of law.
"Download and privatize" is an idea of structured growth aimed at underdeveloped cities: to shift development in a new direction to maintain harmony. Chinese leaders need to move money down from the government to ordinary folks. How? Wealth can be simply handed over - given away - to individual members of low-tiered cities.
Most of the national treasure that now takes the form of US bonds, and other international investments in the hands of the central government should be gifted to its real owners, the citizens of China, for investment into the underdeveloped areas. The current rate of return on those bonds and foreign exchange reserves are not great - international interest rates are at all-time lows.
Moreover, future inflation, and inevitable declines in the sales value of those investments will soon require the government to find alternative investments. No better re-investment plan exists than to allow Chinese individual citizens to choose where to put the money.
China should not eat its capital, but invest it. The proposition varies contrastingly to the Keynesian model of boosting consumer spending in that the requirement for the "giveaway" of wealth is that it must be invested, and not spent. It forces real entrepreneurial long-range technical change resulting in profits for whole communities.
For example, the government may distribute chunks of money, each large enough to finance start-up firms, pay for modern agricultural machinery, renovate a factory site, or build a staff-owned community hospital. It can encourage groups of applicants to apply for co-operative project finance and get the money out via a "rigged" lottery, where nearly all-serious proposals get funded.
The government may also send the money in the form of existing US bonds, and motivate immediate bond sales by taxing "passive" interest income while subsidizing equity earnings arising from local investments financed by bond sales. The key is to include rural and impoverished folks who nonetheless live among more fortunate top tier cities neighbors.
The second most important element in solving China’s challenges is the rule of law. China's own ancient moral code has always taught the value of unity achieved by equality. The country needs to avoid the dis-unity that results when the Kingdom’s rulers are above the very laws that apply to the people at the periphery. It is not so much a question of morality as of efficiency.
Modern economic growth, saving and investment, all of which depend upon long-run security, stability and predictability, cannot thrive where magisterial whim takes the place of an honest, stable system of sovereign law.
Two divisions must be healed if modern China is to continue its march forward. The easier problem is to diminish the economic gap between China A and China B. The greater challenge is to diminish the differences between the Magistrates - whose power will be defined and limited once they are put under the law, - and ordinary citizens.
China’s policy decisions should be aimed at low-tiered cities first, and then the top tiered cities. By designing a solution so that most of the pain is only felt by latter, and bringing more attention to former, China can possibly avoid a crisis- one that threatens to tear the country, and its leadership apart.
China's house will remain whole, its social tensions moderated, and equalized, balanced growth established via a policy of rule of law, private investment, and a switch from export led stimulus to internal domestic investment.
Tom Velk is a professor of economics and director of the North American Studies program at McGill University. Olivia Gong is a research assistant at McGill and a financial analyst at Interinvest.
Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing. Articles submitted for this section allow our readers to express their opinions and do not necessarily meet the same editorial standards of Asia Times Online's regular contributors.