Thu, May 21, 2009 page9

• Political change in China may be key for sustained growth

  Political reform, energy needs and bridging the wealth gap are among the pressing issues for Beijing, but the private sector arguably deserves more attention

  • By Larry Elliott / THE GUARDIAN
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  During the winter, the closed factories in the Pearl River Delta and the drift back from the towns to the countryside told their own story. China, the country that has based its development strategy on becoming the low-cost workshop for the world, was feeling the impact of an implosion in global trade caused by the financial crisis.

  Across Asia, empty container ships lay idly at anchor as consumer demand collapsed and stocks of manufactured products were run down. China had always expected — indeed, had planned — a slowdown in its economy once the Beijing Olympics finished, but it was not ready for the global financial collapse that followed the bankruptcy of Lehman Brothers last September.

  Suggestions that China could decouple itself from the problems that originated in the US housing market proved fanciful. Having caught the flood tide of globalization for a decade and a half, the world’s most populous country was inevitably hit as the tide went out.

  Yet everything is relative. Beijing expects China’s economy to expand by 8 percent this year — down on the explosive double-digit pace since the turn of the millennium, but a growth rate to die for if you are a leader in the West.

  Already there are signs that the government’s fiscal boost — worth 16 percent of GDP over two years — is having an impact. A country that for three decades has been a curious mix of Karl Marx and Adam Smith has now turned to John Maynard Keynes to speed its way out of the global downturn.

  “Because of China’s structure, the government has direct levers to spend money quickly,” said Professor Peter Williamson at the Judge Institute of Management in Cambridge. “Whereas in Britain it can take years to get an infrastructure project going, in China things can happen immediately.”

  Much of the stimulus package is planned investment that has been fast-tracked rather than new money, but Gerard Lyons, the chief economist at Standard Chartered Bank, says it will make a difference.

  “The reality is that Beijing has announced a lot of new measures and they have started to push these measures through. They have pulled out all the stops,” he said.

  The real issue for China, however, is not whether the state can push the growth rate back above 10 percent next year; the consensus among economists is that it certainly can. Instead, at the root of everything lies the question of whether the country’s political structure is conducive to sustained growth.

  ONE-PARTY STATE

  In the West, the classic pattern of development has been for economic change to stimulate demands for political reform and greater democracy. Despite the arrival of designer labels in the glitzy shopping malls of Shanghai, China remains a one-party state and there is little evidence that the Chinese Communist Party has any intention of loosening its grip.

  Anxiety that rapidly rising unemployment, particularly among disaffected graduates, might put millions on the streets this summer demanding change helps explain both the scale and the speed of China’s economic stimulus. Memories of Tiananmen Square are still vivid for the policy elite in Beijing.

  But some economists believe the fear of political change will hold China back. Andrew Tylecote, of Sheffield University, believes the top-down fiscal package exacerbated the fundamental weakness of the economy — its lack of a thriving private sector.

  “The dynamism ought to be coming from the private sector, which has been hammered by the crisis, yet it is not being looked after by the stimulus or by the boosting of credit. The stimulus is going to produce a more top-heavy, muscle-bound economy full of rather expensive, poorly utilized equipment,” he said.

  China, though, is the country that pioneered paper, the compass, steel, the wheelbarrow, gunpowder, canals and a host of other innovations while Western Europe was struggling to emerge from the dark ages.

  In more recent years, Chinese expats have taken their entrepreneurial skills around the world, and in the domestic market Chinese companies are about to overhaul Western multinationals in patent filings for the first time.

  “There is a lot of innovation,” Williamson said. “The really interesting companies are hybrids, which are 30 percent state-owned and which get the best of both worlds — autonomy but support from the state.”

  Every bit of that innovation will be needed as China grapples with its next set of challenges, all of which — according to Lyons — relate to significant imbalances.

  These are the gap between rural and urban living standards and between the wealth of the coastal strip and inland poverty; the mismatch between the projected growth rate and energy needs; the rudimentary social safety net, which encourages the population to save rather than spend; and the way that lack of domestic consumption exacerbates tensions in the global economy between those countries that export too much and those that export too little.

  These challenges cannot be solved quickly or easily. China’s energy needs are enormous, and it has started to channel part of its export earnings into sovereign wealth funds, which are now taking advantage of the global recession to buy up assets at knockdown prices.

  URBANIZATION

  These needs are — and will remain — substantial. China is undergoing the most rapid urbanization the world has ever seen and has 221 cities with a population of more than 1 million. To put that in perspective, Europe has 35. The gap in living standards between those living in the cities and the rural population is large and growing.

  Because China is experiencing the problems of both a developing and developed country — high growth and an aging population — the government is also worried about the cost of a western European-style welfare state. Rudimentary healthcare and the cost of a decent education mean that families save far more heavily than in the West, leaving them with less money at the end of the month to spend in the stores. Unless that changes, the imbalances in the global economy that were at the root of the crisis will remain a threat.

  In the longer term, Beijing must decide how to use its growing economic clout on the global stage. China has allowed Americans to live beyond their means for years by using export earnings to buy US treasury bonds; the fear in Washington is that Beijing will pull the plug once it is ready to challenge US hegemony.

  Tylecote said China’s geopolitical objectives are far more limited.

  “Taiwan is a massive issue and China does not want to be told it cannot reclaim the motherland because an American fleet is sitting in the Taiwan Strait. It wants to challenge US hegemony in its own sea lanes. But I don’t think policymakers have a 30 to 40-year time horizon; they are much more focused on short-term issues,” he said.
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