Can China save the global economy?
Posted: Thursday, October 09, 2008 1:56 PM
Filed Under:
Beijing, China
By Adrienne Mong, NBC News Producer
BEIJING – One of the very few light moments during the Sichuan earthquake last May occurred as a family in Xiang'e dug through the rubble of its fallen home. The wife paced around an earth-mover, looking agitated but not grief-stricken, and I guessed she was looking for a lost pet. But when she began hopping up and down in excitement at the appearance of a mattress, I was momentarily stumped.
That is, until one of the men began tearing through the mattress lining.
Before long the wife was beaming, having rescued and quickly tucked away several wads of rolled up 100-yuan notes.
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| Adrienne Mong / NBC News |
| A family digs for its savings in the aftermath of May's earthquake in Sichuan. |
One might chuckle at the scene, as I did, but this family represents one reason some commentators think China can save the global economy.
The argument(s)
The argument that China can bail out everyone – or at least the American economy – is actually two-fold.
One strand argues that in the wake of double-digit national economic growth of recent years, China's businesses and consumers are well positioned to counter the dwindling spending in North America and Europe by picking up the slack in domestic consumption.
"China has to make a transition from being export-oriented toward domestic consumption-oriented," said Michael Pettis, a finance professor at Beijing University. "Any large continental economy can't depend on external demand for its own growth."
The other strand has to do with China's reserves. With nearly $2 trillion in foreign exchange reserves and a massive sovereign wealth fund, commentators say, the Chinese can easily bail out the United States.
This was certainly the rallying cry at last month’s World Economic Forum gathering of business leaders and policymakers from Europe and North America in the northern port city of Tianjin. "China has a voice and has a wallet with a voice," intoned the CEO of a multinational company.
But both of these scenarios are unlikely, if not completely fanciful, say economists in Beijing.
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| Adrienne Mong / NBC News |
| Consumers of the last resort? |
Spending habits don’t change instantlyFor one, the transition to a consumption-driven economy doesn't happen overnight. "We're really talking about a 5 or 10 or 15-year process," Pettis said. "The United States went through its own process, and it took a very, very radical, a very deep crisis, quite a long time ago."
And China's household savers who sock away as much as 30 percent of their annual personal income, compared to the near-zero percent the average American family saves, are unlikely to change their spending habits any time soon.
"Since we began our economic reforms [30 years ago]," said Zhang Ming, an economist with the Research Center for International Finance in Beijing, "we haven't done a good job of offering social and welfare services." So families here in effect are taxing themselves by saving for their children's education, buying a home, medical care, and retirement.
More to the point, "Chinese consumers are steadily consuming more, but this is a long-term process that could only be propelled into a short-term global fix by a foolish leap into American-style lending practices," Andy Rothman, chief China strategist at CLSA Asia-Pacific Markets, wrote in a research note this week.
Corporations, meanwhile, will only spend or increase their investments if there is a reason to do so (hint: profit). But businesses have begun stockpiling inventories, because they can't find buyers, which sooner or later means they will need to start cutting back, too.
Can’t loan anymore money
As for whether Beijing will step up by loaning the U.S. more money, the notion is "nonsensical," said Pettis. "It’s not really meaningful."
China already owns an estimated $1 trillion of U.S. debt – most of which is U.S. Treasury bonds and the rest in U.S. agency debt. "The U.S. credit crisis has led to losses in China’s own wealth," noted Zhang. So where are they going to get more money for new loans to the U.S. – to buy more debt?
"The argument was that China already has almost $2 trillion. Yes, but those are already lent to the U.S. and European governments," argued Pettis. "So they can’t re-lend them. They would have to take the money back and then lend it, which is not a new loan."
Rumors of a China-led bailout have been so rife, in fact, that the central bank here, the People’s Bank of China, had to deny reports carried in Hong Kong newspapers that the government would buy up to $200 billion worth of U.S. Treasuries to ease the financial crisis in America.
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| Adrienne Mong / NBC News |
| China's reluctant consumers? |
Dealing with its own economic slowdown
"The question is, is it realistic to expect that one country, the size of China's economy, can hold up the rest of the world's economy?" asked Louis Kuijs, Senior Economist with the World Bank. "I would have my doubts, simply because the size of China's economy is not yet large enough. It's important to remember that [the Chinese economy] is still significantly smaller than Japan’s and not many people are looking at Japan as the country that can shoulder the rest of the world economy."
As far as the leadership in Beijing is concerned, the best China can do is to maintain its current growth trend, as Premier Wen Jiabao underlined at the World Economic Forum in Tianjin. "Maintain China's strong, steady and fast growth and avoid fluctuations. This is the biggest contribution to the world economy under the current circumstances," he said.
Keeping economic growth steady is not as easy as it sounds. In fact, given recent indicators, China is unlikely to do any rescuing apart from its own economy.
A confluence of factors means that the economic outlook here is less than rosy: growing inflation; slowing exports; a free-falling stock market (down more than 60 percent from its highs in 2007); and a hot housing market that’s cooled (the average rate of property prices on the coast slowed to 6 percent in August from 25 percent last November, according to China Reality Research studies).
Now add to the mix the widening financial crisis which has spread to Europe and parts of Asia.
"I would be very surprised if a slowdown in world growth did not reflect very, very significantly on Chinese growth," Pettis said. "What we are hoping for is that domestic consumption grows to make up for reductions in export. That is still an open question, we don't know if that is going to happen or not. But, if domestic consumption doesn't grow significantly, I suspect we are going to see a slowdown of the Chinese economy."
And even though an economic slowdown here translates to single-digit GDP growth in the range of 8 to 9 percent (still considered impressive), this would mark the first time an entire generation of Chinese have experienced such a thing.
The last time the Chinese economy suffered was in 1997, around the time of the Asian financial crisis, Pettis pointed out, but that was before the nation saw the kind of wealth accumulation that exists now amongst the middle class.
Feeling their pocketbooks pinched might have serious political implications, too, especially coming on the heels of a Summer Olympics that bolstered popular sentiment for the government.
Indeed, "the next few months in China could be really interesting," said Pettis.
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