Fri, Mar 25, 2016 page8

• Troubled times ahead for China

  • By Sushil Seth
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  The state of China’s economy, and its impact on the country’s social and political stability, continues to figure prominently, even more so in the context of this month’s National People’s Congress (NPC) meeting.

  China’s economy has slowed down from its double-digit growth some years ago to just below 7 percent. There are even suggestions that real growth might be much lower, probably as low as half of that.

  At about 7 percent though, China’s economy is doing much better than most other countries. However, there are serious problems emerging and some of them were acknowledged by Chinese Premier Li Keqiang (李克強) in his annual state-of-the-nation report to the NPC.

  For instance, talking of the economy in general, Li said in his report that: “Domestically, problems and risks that have been building up over the years are becoming more evident,” and as a result, “downward pressure on the economy is increasing.”

  However, he maintained that, with appropriate adjustments, it would be possible for China to achieve an average annual growth rate of 6.5 percent in the next five years.

  So what are these problems? A major problem is that over the years some crucial industries have built up overcapacity that is weighing down the general economy. For instance, there is now a glut of coal, cement, steel and other industrial commodities. Even as these industries have created high levels of pollution, their profits have declined and some are even losing money. These and other industrial enterprises would need to be overhauled or closed, leading to massive job losses, and it is already happening.

  As Li said: “We will focus on addressing the overcapacity in the steel, coal and other industries facing difficulties. We will address the issue of ‘zombie enterprises’ proactively, yet prudently, by using measures such as mergers, reorganizations, debt restructurings and bankruptcy liquidations.”

  In other words, the economy is set to undergo a severe shake-up and the resultant loss of jobs will no doubt cause social unrest.

  The legitimacy of China’s political system is largely based on an implied contract between the regime and China’s masses, where its people abide by the Chinese Communist Party’s (CCP) monopoly on power in return for a progressive improvement in their economic conditions. The government is not unaware of the social problems that might arise from the loss of millions of jobs and is setting aside about US$15 billion to support laid-off workers. However, such economic disruptions are never easy and inevitably cause social unrest.

  Already, protests are happening in some regions and industries — mining for instance — over job losses and unpaid wages. The scale and management of such unrest will be an important challenge for the political system. The economic turbulence recently experienced by China’s stock market, affecting millions of small investors earlier encouraged by the government to make good money through this seemingly ever-expanding channel, is another example of the general malaise. At the same time, its exports sector, once an important source of economic growth, has slowed down, which has also caused unemployment.

  Faced with slow economic growth and its inevitable social consequences, the Chinese government is easing its credit policy, though it is still not sure how much more liquidity to inject. Such ambivalence is the result of a mountain of debt that has piled up following the stimulation of the economy after the 2008-2009 global economic crisis. The total debt is said to be two-and-a-half years of its economic output, and there are questions being asked about its manageability. The views on this are varied. One view is that with its monopoly on power, the CCP will not allow things to get out of control in any and all spheres of national life. Which is true, but as previously demonstrated, its instruments of control did not help much when the stock market went berserk. If anything, it tended to aggravate the situation.

  It has, of course, large foreign-exchange reserves of more than US$3 trillion, which might seem huge, but once the draw down begins, they might not last long. China has already spent some of these reserves to support its currency from falling too precipitously.

  Then there is the flight of capital, caused by nervousness over the economy. As one US fund manager was quoted as saying in the Sydney Morning Herald: “There are 1.3 billion people in China. If 4 percent of the population took out their US$50,000 limit, the US$3.3 trillion in foreign reserves is gone.”

  At the same time, there is said to be US$1 trillion dollars’ worth of seriously bad debt on Chinese banks’ books.

  Developing his argument about serious risk for China’s economy, Kyle Bass, a fund manager at Dallas-based Hayman Capital Hedge Fund, was quoted as saying: “The Chinese financial system is overstretched [likely to be further overstretched with more easy money]. China let the banking system grow 1,000 percent in 10 years.”

  “China’s [ratio of] bank deposits to resources is one of the worst in the world,” he added.

  This cannot continue without causing economic tremors.

  It is not a pretty picture. Its implications are quite bad for both global and domestic economies. China’s growth is now quite enmeshed into the global economy. Its stimulation after the 2008-2009 global financial crisis helped to mitigate the financial meltdown. In commodity-based economies like Australia, Canada, Brazil and others, it even ushered in a period of great prosperity. Now the slowdown and stock market gyrations are causing great economic distress in parts of the world because of falling demand from China for commodities like iron ore, coal, oil and gas.

  There is a great need for China to stabilize its economy through sensible transition from an exports and construction-led phase, which is almost all it has known in the past few decades, to consumption-led domestic growth. The government knows this, but it is not working as well and as fast as it could.

  In the interim, the restructuring of the economy leading to massive unemployment is creating unrest, and dealing with it through rough-and-ready and top-heavy exercise of power, which has been a feature of the system, will be quite challenging.

  Indeed, Chinese President Xi Jinping (習近平) is busy further consolidating his power, being christened as the “core” leader in the tradition of former Chinese leader Mao Zedong (毛澤東). Does it mean, by any chance, that China’s “supreme” leader is gearing for uncertain times ahead?

  All this does not mean that China’s economy or system is going to crumble. What it means is that the seriousness of its economic problems might set in motion a process over a period of time that might erode the legitimacy and durability of the communist regime, and all that underpins it.

  Sushil Seth is a commentator based in Australia.
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