While Europe is undergoing economic self-flagellation, China appears to be sitting pretty with its foreign currency reserves of more than US$3 trillion. Despite approaches from European leaders for China’s help, Beijing is acting rather coyly. Apparently, the Chinese would like Europe to approach them formally and, in the process, make China the crucial player in the European salvage operations.
Besides Europe, even the US is not in great shape economically. In other words, the entire global financial architecture needs overhauling. Meanwhile, China has deep pockets in terms of its foreign exchange reserves, potentially enabling it to play a leading role and in the process demand a determining role in global financial institutions, such as the IMF.
Beijing would also like the Western countries to lay off China in terms of its currency valuation, the market status of its economy, the building up of protectionist barriers against Chinese exports and so on. To give one example, Chinese Premier Wen Jiabao (溫家寶) reportedly said in September: “We have on many occasions expressed our readiness to extend a helping hand and our readiness to increase our investment in Europe.”
He added that it would be good “if they should recognize China’s full market-economy status” before the 2016 deadline set by the WTO.
This is the way “to show one’s sincerity on this issue a few years ahead of that time the way a friend treats another friend,” Wen said.
In other words, China will exact a price ranging from re-arranging the global financial architecture to political and strategic concessions as things evolve.
The point, though, is that it is in China’s economic interests to help Europe because: one, it is China’s major export market, and two, it has a big chunk of its foreign exchange reserves in the euro. Furthermore, if Europe’s economy slows or falls into recession (which might also happen with the US), the repercussions on China’s employment situation will only add to social instability.
For instance, when the global financial crisis hit in 2008 and 2009, China experienced a major slump in exports, with millions of workers laid off. There were also fears that the returning rural migrants could create an explosive economic and social situation back in the countryside.
China’s massive stimulus package saved the situation in the short term, but the resulting inflationary pressures — overinvestment, asset bubbles, sectoral imbalances, new unaffordable apartment buildings left unoccupied, increased internal debt — all still have to be remedied.
China is in the advantageous position of having large foreign reserves. However, it also has a large internal debt that is likely much larger than official government figures. Moreover, this debt is creating serious distortions in the country’s economy.
For example, the interest on savings deposits in China is about 2 percent, while inflation is about 6 percent, which is eroding people’s savings. This, in turn, has created a black market in lending with usurious interest rates.
Thus, there is something about China’s economy that just doesn’t add up.
As Larry Elliott wrote in the Guardian: “Historically, an uncontrollable rise in credit has been the best indicator of a financial crisis, as the West knows from recent experience ... Can China buck this trend?”
“There is exaggerated confidence in the ability of the People’s Bank of China to finesse a soft landing, just as there was in the ability of the ‘maestro’ [former US Federal Reserve chairman] Alan Greenspan to prevent the American bubble popping a decade ago,” he wrote.
It looks like the Chinese situation has the “booming echoes of the [US] subprime crisis.”
The question arises: How healthy is China’s economy? The bullish view is that China’s economic growth — even if at a slightly lower rate than the usual about 10 percent — has a long way to go, driven as it is by the country’s urbanization and industrialization. Therefore, any slowdown will be short-term.
The problem with this view is that it does not take into account social and political factors that are complicating China’s picture. At some point, there is a need to interlink the country’s economic growth with social and economic equity and political reform.
China is said to be about 50 percent urbanized and in the next decade or two there is talk of taking it close to 100 percent. One shudders to think of more than 1 billion people living in a dog-eat-dog culture of greed, not to talk of the resultant pressure on social and related infrastructure.
We are talking here of a society with a long historical and cultural tradition of close family and clan traditions that have provided succor through good and bad times. The displacement of people from such a close and known environment to an urban setting, putting them in the midst of an unfamiliar and, sometimes, hostile surroundings, is likely to create severe pressures and social breakdowns.
Even China’s rosy economic picture appears dubious at times. A cable released by WikiLeaks revealed a conversation in 2007 between the then-US ambassador to China and then-Liaoning Province governor Li Keqiang (李克強) in which Li said that China’s GDP figure was “manmade” and “therefore unreliable.”
In other words, China’s economic statistics might be dodgy. If that is true, it changes the entire picture and requires a re-evaluation of what is and what is not true about China’s economy.
However, that does not detract from China’s capacity, based on its foreign reserves, to lend Europe a helping hand in its time of need. Apart from its own economic advantage of maintaining an important export market and the value of its euro holdings, it is an important opening in which China can create a new strategic space in a fast-changing Europe.
Sushil Seth is a commentator based in Australia.
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