Chinese brace for cracks in ‘miracle’ economy

Posted: Wednesday, November 12, 2008 1:08 PM
Filed Under: Beijing, China

It was one of the many tell-tale signs that the tumult is beginning to touch China’s once booming economy.

While Beijing has recently responded with a massive stimulus package to forestall a potential crisis, the Internet is abuzz with ordinary folks exchanging inventive tips to cope with the challenges ahead.

Reuters

A man holds a baby as he sits in front of a poster begging for work on a walkway bridge above a main road in Beijing on Nov. 5, 2008.

"Drink boiled water, not bottled water, and avoid entertaining guests," wrote one Chinese blogger in a 23-point advisory.

Another blogger called on China's youth "not to fear empty wallets or unemployment." 

"We are young and can start again," he said, and went on to describe how to outsmart the economic downturn. "Don't ask the boss for pay raise," he advised. "Layoffs start with those with high salaries."

Charity at home
The downturn seems to have hit everybody in China – from the lowly garbage collectors who are groaning about depressed prices for waste materials as industrial demand slumps, to the richest elites who have seen half of their wealth wiped out, leaving China with only 24 billionaires, down from the recent 66, according to Forbes magazine.

But China has a plan and the world seems impressed. The announcement of China's $586 billion stimulus package was well timed – it came out just as President Hu Jintao heads to Washington to meet President Bush and other world leaders for an emergency economic summit on Friday. 

"We should put our own house in order," said China's Foreign Ministry spokesman. "This is the most effective contribution China can make to tackling this financial crisis."

China message seems to be that charity will start at home, and for good reasons.

Major slowdown
Economic growth has slowed to 9 percent in the last quarter, down from 10.4 percent in the previous quarter, markedly lower than the 12.2 percent growth seen in the same period last year, and the lowest in five years. The fear is that the growth rate could drop further – to a potentially dangerous level that could spark massive unemployment and social unrest.   

Experts estimate that China needs a minimum of an 8 percent growth rate to accommodate the more than 15 million new job seekers every year.

While the U.S. stock market has plummeted over the past year, so has China's. There are about 150 million Chinese invested in the stock market, a large grieving constituency at the moment.

In addition, more than 80 million Chinese are directly employed by the construction industry, which is suffering a slump as property values tumble and real estate market stagnates nationwide.  In Beijing alone, housing sales have plunged by 70 percent.

And while China recently registered a monthly trade surplus of $35.2 billion –which was partly caused by lower imports, indicating a sluggish domestic economy – a trend of decreasing exports is now becoming clear, too. More than half of China's toy exporters have gone bust, and many more are facing closure. Millions of jobs in the export sector are threatened.

Not good enough
Given all that bad news, China's stimulus package is a good start, but not enough, according to Dr. Xiao Geng, a noted economist and director of Brookings-Tsinghua Center for Public Policy.

"(China’s plan) has to be combined with private investments and tax cuts and the reduction of lots of inefficiencies and price distortions," said Xiao, noting that China's starting point in this crisis is different from the United States. "China is too heavily regulated, unlike the United States," he said.

He warned that "the situation in China may still get worse before it gets better," pointing to excessive regulations and taxes that continue to hamper the efficient allocation of capital and resources.

Xiao explained that China could afford to cut taxes by as much as 50 percent and that it would not really have an adverse affect on government revenues, but that it would not really help the economy at the end of the day. "It's the private sector, not government spending, that should be the engine of growth," he said.

As for China joining in any global bailout efforts, Xiao supports China's stance to take care of its own first and foremost.

"China has no capability to save anyone, its resources are too small compared to the U.S. or the West," he said. "China can best help by putting its own economy in order and boosting its economic growth."

Xiao stressed the urgency of U.S.-China collaboration to stabilize exchange rates and avoid protectionist policies. "With stabilized exchange rate, we can concentrate on inflating our respective economies, because if asset deflation continues, the debt crisis will worsen and everybody will be in trouble," he said.

But he reiterated the sentiment of the central government that China’s biggest concern should be itself. "We must not let China's economy to fall down," he said, "it will be big trouble for everyone if China fails."

Crisis as opportunity
For economic analyst Mei Xinyu, however, the financial crisis may well be a historic opportunity for China.

Writing for Outlook magazine, he described the crisis as a potential harbinger of a "new international politico-economic order."

"Any great country must seize the opportunity offered by global turmoil and disaster," he said. "In a global recession, we must not fear a decline of our economic strength."

"As long as our decline is lesser than that of our rivals, then our standing in the global order will rise…In this sense, our setbacks today is a kind of investment," he said.

In effect, Mei was suggesting that the global crisis could result in a new balance of power in which China will enjoy a stronger voice.

"It's possible for China to fully seize this opportunity so that its rightful standing in the global political and economic order can be raised to a much higher level," he said, expressing in striking language China's great power ambitions.

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