Page 3 of
5 Paulson, China and the turmoil
beneath By Henry C K Liu
prosperity" phase so as to bridge the
growing income and wealth disparity that threatens
to polarize of society. That is a historic
adjustment to the pattern of five-year plans since
China changed its approach to economic and social
development in the 1970s.
More than two
decades after Deng's reform and opening-up policy,
the per capita gross domestic product (GDP) had
risen to only
$1,700 in 2005 and is
expected to reach only $3,000 in 2020. Even with a
purchasing power parity of 4:1, Chinese 2005 per
capita GDP was $6,800, still substantially below
the US 2005 per capita GDP of $35,000. China is
still, and will continue to be, a poor, developing
country notwithstanding all the glister of
highrise apartment towers and office skyscrapers
in Shanghai.
China's rapid economic growth
has also engendered new socio-political problems.
The lowest-income families, comprising the bottom
10% of all families, owns less than 2% of all the
private assets in the economy, while the
highest-income families, or the top 10% of all the
families, own over 40%. Chinese leaders have
warned against extremes of poverty and wealth,
rising unemployment and intensifying social
conflict. "Common prosperity is not an unreachable
goal, but the basic principle and pursuit of
socialism," said President Hu Jintao.
The
11th Five-Year Plan recognizes that the
single-minded quest for economic growth does not
necessarily lead to sustainable economic
development, and rejects unbalanced quantitative
growth as the goal of development, putting
importance instead on improvements in the quality
of life. Chinese leaders have of late repeatedly
criticized flawed concepts of economic growth,
asserting that that the doctrine of "economic
development as a focus" should not be
misinterpreted as "speed at all costs". In the
11th Five-Year Plan, economic growth will be
measured by "serving the people to improve their
life quality", rather than GDP readings.
Foreign trade now accounts for more than
70% of China's economy as compared with 24% in the
US economy. Frequent trade friction with China's
trade partners have imposed high costs on the
Chinese economy. China has become a major consumer
of energy resources. International energy
institutions predict that from 2002 to 2030 about
21% of the world's new demand for energy resources
will come from China. In 2004, nearly 50% of the
petroleum used in China was imported to feed the
export sector. When it comes to energy
consumption, China is merely the kitchen; the
dining room is in the US.
Chinese planners
are working to change the country's heavy reliance
on foreign investment and resources to secure its
national economy through energy and capital
independence in the next five years.
The
problem of social security is particularly serious
in the countryside, where the medical-care system
and welfare have been neglected and allowed to
deteriorate in the past two decades. During the
period from 1993 to 2003, the number of people
with no access to medical insurance in the country
increased from 900 million to 1 billion, with the
percentage rising from 67.8% to 80.7%. The number
in the urban areas rose from 96.53 million in 1993
to 300 million in 2003. And this is an economy
that holds $1 trillion in foreign reserves.
In the next five years, China will place
more emphasis on science and technology, education
and health care in policy and investment. All
rural children are expected to enjoy nine years of
free education before 2010, which will reduce
farmers' economic burden by 100 billion yuan
($12.37 billion) every year. The poor and the weak
will get more protection and have improved access
to social welfare. In all these policy objectives
of socio-economic development, neo-liberal market
fundamentalism has very little to contribute.
China trade is not unfair to
US Objectively, the case that Chinese trade
with the US is unfair or damaging to the US is
very weak. The fact is that the terms of US-China
trade favors the US more than it does China. The
US trade deficit with its flip-side capital
account surplus does more for the US economy than
for the Chinese economy.
Conventional
wisdom mistakenly suggests that the US economy
rests precariously on an unsustainable
accumulation of debt, particularly foreign debt.
Fueled by government profligacy and low private
savings rates, the current account deficit and
fiscal deficit, the US has become the world's
largest debtor nation. But the US is a debtor
nation with a difference, for all its debts are
denominated in its own currency which the US can
print at will.
The current-account deficit
is created by the difference between what US
residents spend on imports and what they earn from
exports in a given year. This deficit now stands
at almost 7% of GDP. Total net foreign liabilities
are now approaching 25% of GDP. And China is now
the top trade-surplus partner of the US as well as
the top creditor to the US. While this means China
has been shipping real wealth in the form of goods
to the US in exchange for US dollars it cannot use
at home, there is much talk among fear-mongering
pundits and politicians of the danger of sudden
unwillingness by investors abroad (read Chinese)
to continue adding to their already large dollar
assets. In this scenario, a panic will cause the
dollar to sink, dollar interest rates to
skyrocket, and the US economy to descend into
crisis, dragging the rest of the world down with
it.
But the prospect that this scenario
will actually come to pass is nil. This is because
economists fail to understand that the dollar,
since was taken off gold backing, is no longer a
financial instrument subject to market laws of
supply and demand. Under
