Global View: The Chinese century begins
By Ian Campbell
Published 4/30/2004 4:53 PM
TEQUISQUIAPAN, Mexico, April 30 (UPI) -- The American century is over. A bamboo curtain has lifted. From behind it emerges the new force in the world economy, the country whose advance will enable it to claim this century for its own.
This is not a bold prediction. It is an obvious one. China's sheer geographical size, almost as big as the United States, and the size of its population, four times greater than America's, means it is going to stand big on the international stage one day. That day has been brought forward by the country's abandonment of communism and by the free-market reforms initiated by Deng Xiao-Ping thirty years ago.
Signs of China's growing influence on the U.S. and world economy were evident in U.S. markets this week. Something happened that would have been unthinkable ten years ago: The U.S. stock market dropped, with commodity-related stocks hit particularly hard, because Chinese Premier Wen Jiabao told Western media of the need to slow down China's fast growth.
The stock falls may have cast China in a fresh light for many Americans. The common view of China is as a thief of jobs. China's growth is often seen as being gained parasitically. Outsourcing is the preoccupation of American workers. But China's rapid growth is also creating demand for Western goods and services. Now it is not just the U.S. economy that is growing rapidly. That is a good thing.
In the first quarter of 2004 the Chinese economy grew, according to the less than reliable official figures, which probably overstate the rate of growth, by 9.7 percent. Industrial production was up by a staggering 23.2 percent in February compared with a year earlier. Retail sales in China rose in January and February by 10.5 percent compared with the same period in 2003. The number of people employed in industry rose by 13.3 percent over the same period, according to Chinese statistics.
Lubricating this rapid growth is abundant money. National statistics show the narrow M1 money supply and the broader M2 measure rising at an annual rate of close to 20 percent in recent months, a very fast pace when the official inflation rate is only 3 percent.
The danger this presents is partly from inflation. Though the inflation rate is still moderate it has jumped recently and is close to its highest level in six years. But the greater danger may be from a bubble: an excess of investment that will eventually end badly. This is the concern China is beginning to address.
The Chinese Xinhua news agency, on its English language site, writes that on his recent international tour Premier Wen Jiabao "cited China's ongoing need for coordinated development of its economy, while recognizing the importance of balancing the development of urban and rural areas, and between regions."
The phrase "coordinated development" is important. According to Georgina Wilde, a China expert based in London, "balanced growth" has become the new motto of the elite that runs China's economy. The search for balance is not just macroeconomic but geographical.
It is the macroeconomic balancing that the West focuses on and fears. The Chinese economy has been growing fast. The savings rate is very high -- just as it was in the Asian countries that went into crisis in 1997-98. The state-owned banks have terrible loan portfolios but are, Wilde says, "very liquid;" they have the deposits of a population that is keen to save. The danger may be of over-investment in productive capacity, causing eventually a swathe of bad loans, broken banks and unemployed and discontented workers. According to Andy Xie, Morgan Stanley's China economist, "The investment bubble has become too big for normal economic measures to achieve a soft landing."
Some of those normal economic measures may be taken shortly. Rumors abound that China is going to raise interest rates. The benchmark one-year lending rate is currently 5.3 percent. But a rise in rates may not cool the economy easily. Bankers familiar with China point out that the state-owned banks do not operate according to market forces. "Familiarity with a credit officer in a bank may be enough to guarantee abundant credit, even if the enterprise is loss-making," a China business consultant told UPI. China's free market economy is still a (big) baby.
What must be set, however, against the concerns about China's macroeconomic fragility is that concern about China's banks has been expressed for years--just as it has about Japan's. Muddle through has been enough to avoid crisis for now.
Wilde takes this view. "The Chinese know how to manage their macro-economy," she says. For her China's more serious problems are "geographical, long-term and political." High growth has been achieved in the south, close to the coast. In the north and west poverty and sometimes extreme poverty persists. When the Chinese leadership speaks of balanced growth it is thinking in part of how it can bring greater prosperity to inland, rural China. If it does not do so, political tensions may rise.
It is not only within China that the task that lies ahead is more complex than the market tends to perceive. At present, with foreign investment flowing into China and its currency, the renminbi, pegged to the dollar, China's exports are cheap and rising. The ever-hungry consumers of the United States, meanwhile, are providing demand for these goods. China then recycles its trade surplus into purchases of foreign assets. It, along with Japan and Taiwan, is U.S. President George W. Bush's financier, buying hundreds of billions of U.S. Treasuries in the past year and thereby helping to fund the U.S. fiscal and current account deficits. Any disruption to China's ability to do this would drive up U.S. long term interest rates, hurting the U.S. economy badly.
Meanwhile, other forces, domestic to the United States, threaten to drive up long interest rates. Inflation has picked up a little in the United States in the past three months. Industrial production has soared. The housing market continues to boom extraordinarily. Oil and gasoline prices are very high, as are the prices of most commodities, notwithstanding this week's falls.
Balance in the U.S. and global economy remains precarious. In the United States there is inflation and speculation in housing which mirrors the business investment boom in China. In both countries there is some pickup in inflation and the possibility that interest rates will rise.
Both countries and the global economy as a whole are vulnerable. Investors have bid stock and commodity markets up, trusting in sustained recovery in the United States and in the global economy. Yet there is every sign that in the two countries that have driven the recovery, growth is not sustainable and slowdown inevitable and necessary.
These are the immediate problems. But over time China's emergence is the most positive current aspect of the international economy. The low growth of Japan and Europe will cease to be so great a problem if China can achieve high rates of growth in coming decades. China is going to reshape the global economy and the world. By the middle of this century it seems set to be a super-power. For good and ill, the United States will no longer be alone.
-O-
Global View is a column published every two weeks that reflects on the global economy. Comments to icampbell@upi.com
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