Thu, Feb 10, 2011 - Page 8 News List

Economic trouble brewing in China

By Sushil Seth

At the height of the global financial crisis in 2008 and 2009, China won praise for stimulating its economy to inject some fuel into the global economy. However, the injection of excess liquidity, with a growth rate of more than 10 percent, is creating serious problems for China.

First, there is growing inflation that is eroding people’s real incomes. Already, the divide between rural and urban incomes and between rich and poor is growing at an alarming rate. Official figures estimate rural incomes to be less than one-third of those in urban areas.

As for the income disparity between the richest and poorest 10 percent, the rich make 23 times that of the poor. And this official estimate is believed to be grossly understated. The actual disparity, according to one Chinese economist, is 65 times more.

With such a gaping divide, inflation is not only an economic problem, and has the potential to be a destabilizing social factor.

Even though the Chinese authorities have taken measures to curb the excessive liquidity by multiple interest rate hikes and increasing the reserves requirements for banks, it remains a serious problem worrying the government.

At such times, there is always a tendency to blame others, and who better to blame than the US?

It is all the fault of the US because of its loose monetary policies. Although, it might just as well be argued that China is the real culprit both at home and abroad.

China’s breakneck rush to corner the market for crucial commodities, such as iron ore, coal, oil, food, is pushing up the prices of these and other items all around the world.

At the same time, by keeping its currency undervalued for export advantage, it is forcing competitive devaluation in other countries.

As Michael Spencer, chief economist for Asia at the Deutsche Bank, has been quoted as saying: “China’s loose monetary policy is imposing inflation on the rest of the world ... The rest of Asia feels squeezed because US interest rates are at zero and China won’t appreciate [the yuan].”

“I assume at the end of the day they’re not really interested in rebalancing [trade surpluses] because it’s a painful thing to do,” he added. “They’re hoping against hope that they’ll get a couple of years’ more [free] kick from the US.”

By subsidizing its exports through its undervalued currency, China has done well by doubling its economy about every eight to 10 years.

The US grumbled all along because of its increasing trade deficit.

However, because China was buying US Treasury notes and bonds with its trade surpluses, the US didn’t seem too bothered with easy and plentiful access to credit from China.

China’s mercantilist policy of creating a mountain of trade surpluses (now about US$2.4 trillion), helped with an undervalued currency, created global economic imbalances that are still wreaking havoc with global economy.

However, China is keen to continue until it has shifted its economy, over time, to rely more on domestic demand.

For China, the global financial crisis came at a wrong time. The recession in the US and elsewhere seriously affected its export industries, with an initial loss of about 20 million jobs.

China was able to get through this largely by an economic stimulus program and the pickup in foreign orders for its export sector.

However, the stimulus program has created its own problems. It has created the dual, interrelated problems of general inflation and an asset price bubble.

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