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China headed in wrong direction

`Economic crisis is not the worst thing that could happen. The worst thing that could happen is that the appropriate authorities won't know how to respond correctly.'

After Stephane Marchand, economic columnist for the French daily Le Figaro, visited China, he published a long commentary on Dec. 4 on the state of China's economy called "Global Changes and Dangers." The thrust of his article was that the Chinese economic crisis is already here.

Marchand's article received widespread attention because it symbolizes a silent change in the direction of the mainstream Western media that in the past has looked optimistically on China's economic development. Other publications, such as the Financial Times in Britain, have recently run reports calling China's economic statistics unrealistic and casting doubt on whether China's economic growth rate can be seen as part of this new change.

Marchand warns that the Chinese economic miracle that has been flying for 20 years is contracting symptoms of paralysis of the wings. While increased investment is necessary to maintain its high-growth economic miracle, increased investment creates industrial over-capacity and leads to falling prices. Similarly, the high level of unemployment brought on by the adjustment to state-owned enterprises causes markets to shrink and consumption power to fall. But relieving the pressures created by unemployment with continued investment requires market support and consumption.

Marchand believes that this situation has basically set the Chinese economy up for the beginning of a vicious circle and his article emphasizes how the economic crisis will bring an opportunity for political transformation to China.

In this sense, Marchand is still a traditional "Huntingtonian" (influenced by Samuel P. Huntington, author of Political Order in Changing Societies), in that he believes that economic transformation will lead to political transformation. Leaving his political hopes aside, Marchand's warnings of a decline in China's economy should give us cause to reflect.

Facing the rapidly approaching impact of WTO accession, China has until now had no good policies to deal with the matter apart from expanding domestic demand. In a workshop on the economy held by the central government in Beijing in late November, the item "further the reform of state-owned enterprises and other reforms" was moved from first to fourth place on the agenda. The new number one item, listed as the biggest task for next year's economic work, is "raising the income of urban and rural townships and cultivating domestic consumption demand."

In other words, increase investment to kickstart domestic demand. To do this, China is considering an increase in national debt issue and lowering interest rates. It is said that the concerned departments have already proposed a few national debt issuance plans to the central government, and that the scope of each plan is no less than 150 billion yuan. Marchand meets this news with a doubtful "who is going to buy this national debt?"

US unemployment will this year reach a historic high of 5 to 7 percent, signalling a recession in the US economy. Taiwan's unemployment rate has risen to over 5 percent and the country is in recession. The general estimate of China's unemployment rate among foreign analysts, however, is 15 percent -- although Feng Lanrui (馮蘭瑞), senior economist at China's Academy of Social Sciences, estimates it to be in excess of 24 percent. Isn't it strange that there still are people with such a positive view?

Strictly speaking, the past optimism of Western analysts when it comes to China's economy is not based on completely objective analysis, but rather contained a certain amount of hope. Now people like Marchand that have analyzed the Chinese economy over a long period of time are overwhelmed by pessimism.

Just as Marchand says, the Chinese word for crisis, wei chi (危機), also implies opportunity, chi yu (機遇). Economic crisis is not the worst thing that could happen. The worst thing that could happen is that the authorities won't know how to respond correctly.

Up until now, China's response has been to put systemic reform focussed on adjusting the economic structure to the side and instead doggedly rely on printing more money in an attempt to stimulate domestic consumption and demand. Anyone can see how awful this response is. Marchand is one of the first Western journalists to have said so.

Wang Dan is a Chinese pro-democracy activist.

Translated by Perry Svensson
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