A China Report
I hope no one will mind if I post the entire article. It's a bit lengthy, but well worth the effort. Too, it is no longer available at the source.
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West fails to scale the great wall that is China
by Rowan Callick
Shanghai's neon-pulsing Huai Hai Road comprises a colourful collage of images glimpsed from Indiana Jones and the Temple of Doom and Blade Runner, exotic past and wired future.
On this plane-tree-lined street, the former Avenue Joffre that bisects the old French concession, pomegranate sellers balance baskets at the end of poles. Teenagers with punk-dyed hair dash into a Japanese curry house blaring Chinese bubblegum pop.
A cigar store and a golf design centre do healthy business a block away from the autumnal, mahogany-lined room where the youthful Chinese Communist Party was established 70 years and many lifetimes ago.
An Australian businessman who came to Shanghai for a couple of years and has stayed on clings to a cab door as the taxi weaves in and out of waves of bicycles.
"It's China's autonomy that fascinates me," he yells above the traffic.
"It's unique. They don't need us. That's what makes doing business here a real challenge."
Many Western observers have decoded, instead, today's lively Chinese street scenes as an inexorable path towards a global future – a path whose steps echo in Shanghai, Asia's chaotic capitalist capital between the wars, the city's cosmopolitan past. But they underestimate China's historic sense of self-containment, a sense fed by an economy in which trade between its vast regions far exceeds overseas trade.
Shanghai only developed as a port in parallel with the trade explosion prompted by Britain's acquisition of Hong Kong 150 years ago. Until then, China's intricate mesh of canals mattered far more in trade terms. This autonomous inclination persists despite China's current, palpable enjoyment of Western products – which has in recent months led Western observers to a trail of false conclusions about Asia's rising superpower. China, like the rest of Asia and now increasingly the world, is in an economic crisis. But it is a distinct, home-grown one all of its own.
New and old, traditional and Western styles and products may jostle on the streets, but in China's sombre, walled palaces of power, the "third generation" of Communist Party leaders – who bridge the ideological and technocratic eras – retain substantial controls, including all the economic levers that are still available for pulling. Significantly, the equivalent social levers are largely now inoperable from overuse through countless failed campaigns, from the deadly Great Leap Forward to the Cultural Revolution – although controls persist at the margins. A "decadent" revival of the traditional opera The Peony Pavilion was recently banned by Shanghai's cadres from a world tour that would have included Sydney.
The unlikely, overlooked truths about China's economy today include:
China no longer cares about joining the World Trade Organisation. China is only marginally affected by the Asian turmoil. China is "marketising" its economy – but its private sector, beyond the farms, is struggling to survive. More than a third of international companies operating in China are losing money, according to a recent AT Kearney survey.
As a reward for China's apparent self-sacrifice in maintaining its strong currency, the yuan, and in order to lock China into any fresh attempts to regulate the global economy, the US – led by its Treasury Secretary, Robert Rubin – is strongly considering inviting China to join the G7. This could happen even before the end of 1998, provisionally at first but before long permanently. China's GDP has recently overtaken that of G7 member Canada.
For the 11 years since China launched its bid for accession, Western governments, including Australia, have counted on its apparent anxiety to join the WTO as not only a surety that it will continue to open its markets, but a more general guarantee of acceptable behaviour both domestically and internationally. But now, following successful visits with all the great powers – only Japan remains, and President Jiang Zemin will fly there after the APEC summit in Kuala Lumpur next month – and the effective neutralisation for the foreseeable future of the annual threats against its most-favoured nation trading status with the US, China feels assured of its sky-high international status.
Further moves towards WTO membership would bring certain pain but only marginal gain. Beijing has enough on its plate without granting concessions that, it feels, would complicate and potentially hamper its daunting agenda of domestic reform – and add to its already fast-growing army of unemployed.
The staff at the Kentucky Fried Chicken copycat CFC – China Fried Chicken – are doing a roaring trade in Shanghai's Nanjing Road and look secure. The Colonel won't come to close them down.
Economic growth, targeted at 8 per cent for 1998, was down to 7 per cent in the first half. The IMF forecasts 5.5 per cent for the full year, and investment bank analysts are widely tipping less. Yet it is estimated that growth would have to reach 12 per cent to absorb jobs lost from new competition on WTO accession.
When the 132 WTO members meet in a year to begin the next major round of liberalisation, they will almost certainly have to plan without China, which, in 1997, was the world's 10th largest exporter and 12th largest importer – unless they can agree on waiving further entry qualifications, a non-starter. Not that China will formally withdraw, which would be diplomatically awkward – not least because Taiwan, the world's 14th biggest trading nation, is virtually ready for accession but can be kept out by China so long as it remains in dialogue with WTO.
Accession involves not only talks at the multilateral level with WTO officials, but a long series of bilateral trade negotiations. Australia has in effect completed its bilateral talks with Taiwan, but still has a long agenda with China, including agriculture (where wool, wheat, sugar and barley are the big-ticket items), and financial services and telecommunications liberalisation.
Significantly, China has shifted responsibility for WTO from the Ministry of Trade and Economic Co-operation (MOFTEC) to the State Development Planning Commission, whose prime responsibility is domestic reform.
China has been shielded from the adverse impact of short-term capital flows by the non-convertibility of its currency, except for proven trade transactions. HSBC Securities' China analyst Joe Zhang, a former mainland central bank economist, expects a 10-15 per cent upswing in the yuan in the next two years. He estimates that persistent inflation has depreciated the currency by 84 per cent over the past 20 years – but that retail price deflation is set to exceed minus 7 per cent by mid-1999, especially as food prices fall despite recent floods.
China has $234 billion in foreign reserves, and claimed a $50 billion trade surplus in the first half of 1998 – though export figures are widely overstated to claim value added tax rebates. Exporters' hoarding of foreign exchange over the past year has masked rather than eliminated the appreciation pressure.
Zhang says: "The central bank will begin to offload its forex holdings to make way for the purchase of treasury bonds in a bid to stimulate the economy, and this will drive the yuan higher."
Psychological factors such as confidence count for little in China, where the black market remains modest; depositors have little choice but to keep their money in local banks in local money, and the currency is not readily convertible anyway. And inflation elsewhere in Asia is eating into the advantage of the competitive devaluations of China's neighbours.
While rapidly declining investment from Asia – by far the biggest source – is affecting China, Europe and the US have begun to take up the slack, encouraged by a succession of high-profile political tours, always accompanied by business people. And President Jiang Zemin will become the first Chinese leader to visit Japan, planning to reinforce Japan's major investment role.
Leading economist Hu Angang told a conference this week that up to 18 million people were already jobless in urban China, with the rust belt north-east the hardest hit, and that a further 160 million people in the countryside had become "surplus labour." The answer, he said, was increased labour-intensive private-sector manufacturing. Good news for potential investors, who now invariably set up alone rather than with often dubious joint-venture partners.
While a third of major foreign firms there are losing money, lessons are being learned – such as that "China" does not exist as a single market, but must be addressed province by province and city by city, and that both economically and – always important in a one-party State – also politically, it makes sense to operate far more labour intensively in China than elsewhere in the world.
For a decade or two to come, there will always be a province further west that can provide cheaper labour, a telling factor in competition with the rest of Asia. But – despite efforts by Beijing to persuade investors to move inland – such labour still chiefly comes, via migrants, to the more accessible and sophisticated coastal region. Cheap labour continues to neutralise gross inefficiencies in the economy – such as its production of a mere US82¢ of GDP for every kilowatt hour of electricity, compared with $US3.68 in Singapore and $3.34 in Hong Kong.
Private consumption contributed about 49 per cent to China's economy in 1997, government consumption 12 per cent, overall investment 33 per cent and net exports 6 per cent. The halving of the growth rate over the past six years has resulted in part from the maturing of the economy – much of whose early growth came from the monetisation of the former barter/subsistence farm sector – and in part from a slide into reform sclerosis, despite the continued magnificent output of rhetoric.
The Government has set itself an extraordinary range of reform targets, including the commercialisation of State corporations and banks, the mechanisation of agriculture, the shift of the urban population from cheap rents to home ownership, the halving of the bureaucracy, and the divorce of the army from its 20,000 businesses – while growth persists at 8 per cent.
Premier Zhu Rongji, at 73 a hugely experienced politician, knows well the impossibility of achieving all or even any of these targets within a few years. But he has secured his place in history simply by placing them on the agenda, and securing a form of consensus of intent.
In the near term, the banks' requirement to keep the 600 biggest State conglomerates afloat, their lack of experience in assessing credit, and uncertainty about just how liquid they are after bad debts are written off, mean that few home loans will get granted, and the squeezed-out true private sector will continue to rely substantially instead on the semi-legal "private banking" network – sophisticated moneylenders, some of whom now operate nationwide.
During this decade, China's governments have imposed so many levies on private business that the entry cost especially during a downturn like now is prohibitive. Zhang says there is a growing awareness and grudging acceptance among many ordinary Chinese of how little the Government can now do for them, as China's health service and schools shift heavily to user-pays systems, and as millions face the prospect of prolonged unemployment.
Zhu's insistence on closing the out-of-control Guangdong International Trust and Investment Corp last week, owing more than $2 billion to 80 local and foreign banks, demonstrates both the Government's determination to burst its own banking bubbles, inflated by real-estate speculation, and the extent of its problems, with 240 similar corporations littered around the country.
The Beijing leadership appears to be making predictably and increasingly heavy weather of its vital reform program, in part because underlying property rights and the rule of law remain beyond its capacity to introduce without undermining its own party hegemony.
But there will be no collapse, just a slowing of growth and an eventual lowering of expectations – while business people from the West will continue to watch, awed, the Huai Hai streetscape.
Australian Financial Review |
