26 Dec 2011
Topics China

In the 2008-9 global financial crises China did much to help the world economy.

In the 2008-9 global financial crises China did much to help the world economy. China’s GDP remained relatively healthier than its other Asian counterparts in the first quarter of 2009, growing 6.1 per cent compared to Singapore, Hong Kong and Japan, which shrank 14.6 per cent, 4.3 per cent and 4 per cent, respectively.

Unlike other Asian countries which are heavily dependent on their exports, China’s domestic demand (investment and consumption) is the main driver of its economy. The Chinese government introduced a series of measures to cool down its overheated economy in the first half of 2008. The stimulus package of RMB 4 trillion unveiled by Beijing only six weeks after the Lehman Brothers collapse was a continuation of the central government’s practice to peg China’s economic growth to the level of fixed investment.

In recent months, growth of exports to the troubled euro zone and the US has suffered a drop. For example, Chinese sales to the EU fell 7.5 per cent in September. Recent news from the Chinese Autumn Export Commodity Fair showed that orders from the US and EU decreased 10 to 20 per cent in the coming season. China’s foreign currency reserves in September fell US$60.8 billion, the first time in the past 16 months. Investment and advisory fi rm Blackstone and some Western companies started to sell their assets in China. This has echoes of what happened in the fourth quarter of 2008.

Some sources said the Chinese government would consider an emergency plan if a double dip recession happened in Western countries. However, this time round China is a lame duck. First, the country is facing the effects of its own 4 trillion yuan stimulus: the inflation rate was 6.1 per cent in September, housing prices were still at record highs in most cities, local governments had debt of 10 trillion yuan, and the number of social protests increased to 187,000 in 2010 owing to land disputes or increasing income disparity. The highspeed railway, one of the stars of the stimulus package, is riddled with safety problems and financing. Around 80 per cent of its investment projects have been halted or postponed.

Second, China’s economy may stagnate. Economic expansion slowed to 9.1 per cent in the third quarter from 9.7 per cent in the first quarter of this year. Thirty years of economic development achieved with the aid of cheap labour, capital and land cannot be repeated in the future. China’s economy is still in the midst of urbanisation, and needs to be driven by investment. However, that investment is increasingly less and less efficient in generating employment, income and wealth. When investment is decided by the government but not the market, this could lead to a vicious cycle: more investment creates more bad loans as shown by the Japanese Disease in the 1990s.

Third, after suffering a credit squeeze for two years and a cooling property market, the fi nancing amount from China’s shadow banking has increased to 10 trillion yuan (about 6 trillion in credit products and 4 trillion in underground lending), almost 12-15 per cent of China’s loan amount in the market. About RMB400 billion yuan deposited in China’s four largest banks were withdrawn in the last few months. This means that China’s central bank faces a systematic risk which did not exist before.

Owing to the credit crunch, one-fifth of Wenzhou’s 360,000 small- and medium- sized businesses in the south of China have gone bankrupt or stopped operations. A similar situation applies to the Ordos, in the north of China. The cash flow problems and defaulting could spread from manufacturing to the property industry, and even to banking in the near future.

Although this does not signal that China will have a hard landing, we cannot expect China to save the world again. With East Asia being one of the few bright spots in the turbulent world economy, China could fi nd support from its neighbouring countries. Trade between China and ASEAN is still expanding steadily at an average annual rate of around 20 per cent. Total trade volumes are expected to rise to US$500 billion in 2013, two years earlier than planned. The Asia-Pacific’s middle classes will grow faster than any other area in the world, with Asia’s share of the world’s middle class estimated to jump from 28 per cent in 2009 to 54 per cent by 2020.

South Korea and Japan agreed on 19 October 2011 while South Korea and China agreed on 26 October to expand their currency swap arrangement and revive efforts to reach a free trade pact. The three countries have recognised that a bigger pool could boost their ability to survive. In time to come, this kind of cooperation could be extended to the whole of East Asia.

The richer EU is turning to poorer East Asia for help. It is clear that China wants to be a responsible global citizen, but it prefers to do so in a safer way such as through a multilateral route. Japan has purchased around 20 per cent of the debt issued by the European Financial Stability Facility (EFSF). China, South Korea, Hong Kong, Taiwan, Singapore, Thailand, and other East Asia countries could also offer important support (Asia excluding Japan has bought another 20 per cent of EFSF debt). While payback of the money may be in question, what is certain is that an East Asia Group is emerging.

Yang Mu () is a Senior Research Scholar at the East Asian Institute, National University of Singapore

Topics China