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.
China’s poor are the most affected, especially from a hike in food prices, on which they spend most of their income.
The economists quibble over whether it will be a hard or soft “landing” for China’s overheated economy, even though most agree that the economy is having serious problems.
Despite widespread concern about the economy, even within the government, there still is enough money going around. The banks keep on writing new loans and much of it is going into real estate and construction.
As a senior executive of a property development company, Ni Yawei, has been quoted as saying: “People can either put their money in the bank and get interest rates that are less than inflation or they can put it in property and a ‘two-directional’ return from capital appreciation and rent.”
This thinking is very much reminiscent of what brought about the sub-prime housing market crisis in the US: Investment in property has only one way to go, up.
This sort of thinking led people to overreach their means through unsustainable borrowings.
China appears to be going through the same process.
Another analogy is the Japanese bubble of the 1990s brought about by steep price hikes in the real estate and stock markets.
Will China go that way? It is quite possible, even though the Chinese government will do its utmost not to let things get out of control because Chinese Communist Party’s (CCP) sole claim to some popular legitimacy is based on economic growth.
If that falters, leading to stagflation and the bursting of the real estate and stock market bubbles, China will be in for real trouble.
The CCP is paranoid about social stability, and yet its economic policies might create the conditions for precisely what it fears — social chaos and a threat to the party’s monopoly on power.
This is precisely Chinese Premier Wen Jiabao’s (溫家寶) reasoning against revaluation of the yuan. He fears that a revalued yuan will cause large-scale unemployment, which, in turn, will lead to social instability, posing serious problems for China’s oligarchs.
The spontaneous eruption of people’s power in North Africa and the Middle East, seeking to remove its authoritarian and despotic rulers, should be an eye-opener for the CCP.
Indeed, according to the Guardian newspaper, Chinese authorities were “censoring references to the protests in Egypt as some Internet users drew comparisons with China.”
Of course, the two situations (in China and the Middle East) are not identical.
However, one important common thread is that in any society subject to authoritarian rule over a long time, people become frustrated with their unresponsive rulers addicted to feathering their own nests — be it political power or economic riches or both.
Such deep-rooted corruption, absence of transparency, intolerance of political opposition and human rights abuses in China are fertile ground for a sudden social and political eruption, triggered by a small event like what happened in Tunisia.
In the case of Tunisia, for instance, it was the frustration of a young 26-year old fruit vendor that led him to set himself on fire. In the process, he also set alight the Tunisian regime, forcing the country’s president to flee to Saudi Arabia.
The Tunisian uprising provided the trigger for the Egyptian people, and now people’s power is all over the Arab world.
The example of people overthrowing or seeking to overthrow their despotic rulers in one Arab country after the other can be quite contagious.
If the Chinese economy goes into a nosedive, such fragmented cases of unrest might easily coalesce into people’s power for a day of reckoning with their leaders.
You never know when people might pick up the courage to do just that. Just ask Tunisia’s deposed president and Egyptian President Hosni Mubarak, who is fighting for his political life.
Sushil Seth is a commentator in Australia.
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