Defying
the Economic Odds: The World Melts Down, China Grows
By
Dilip Hiro
TomDispatch
Posted by www.cenpeg.org
In the midst of the worst economic crisis since the Great Depression,
a new world order is emerging -- with its center gravitating towards
China. The statistics speak for themselves. The International Monetary
Fund (IMF) predicts the world's gross domestic product (GDP) will
shrink by an alarming 1.3% this year. Yet, defying this global trend,
China expects an annual economic growth rate of 6.5% to 8.5%. During
the first quarter of 2009, the world's leading stock markets combined
fell by 4.5%. In contrast, the Shanghai stock exchange index leapt
by a whopping 38%. In March, car sales in China hit a record 1.1
million, surpassing the U.S. for the third month in a row.
"Despite its severe impact on China's economy," said Chinese
President Hu Jintao, "the current financial crisis also creates
opportunity for the country." It can be argued that the present
fiscal tsunami has, in fact, provided China with a chance to discard
its pioneering reformer's leading guideline. "Hide your capability
and bide your time" was the way former head of the Communist
Party Deng Xiaoping once put it. No longer.
Recognizing that its time has indeed come, Beijing has decided to
play an active, interventionist role in the international financial
arena. Backed by China's $2 trillion in foreign exchange reserves,
its industrialists have gone on a global buying spree in Africa
and Latin America, as well as in neighboring Russia and Kazakhstan,
to lock up future energy supplies for its ravenous economy. At home,
the government is investing heavily not only in major infrastructure,
but also in its much neglected social safety net, its health care
system, and long overlooked rural development projects -- partly
to bridge the increasingly wide gap between rural and urban living
standards.
Among those impressed by the strides Beijing has made since launching
its $585 billion stimulus package in September is the Obama administration.
It views the continuing rise in China's GDP as an effective corrective
to the contracting GDP of almost every other major economy on the
planet, except India's. So it has stopped arguing that, by undervaluing
its currency -- the yuan -- with respect to the U.S. dollar, China
is making its products too cheap, thus putting competing American
goods at a disadvantage in foreign markets.
The Secret of China's Success
What is the secret of China's continuing success in the worst of
times? As a start, its banking system -- state-controlled and flush
with cash -- has opened its lending spigots to the full, while bank
credit in the U.S. and the European Union (EU) still remains clogged
up, if not choked off. Therefore, consumer spending and capital
investment have risen sharply.
Ever since China embarked on economic liberalization under the leadership
of Deng Xiaoping in 1978, it has experienced economic ups and downs,
including high inflation, deflation, recessions, uneven development
of its regions, and a widening gap between the rich and the poor,
as well as between the urban and the rural -- all characteristics
associated with capitalism.
While China's Communist leaders have responded with a familiar range
of fiscal and monetary tools like adjusting interest rates and money
supply, they have achieved the desired results faster than their
capitalist counterparts. This is primarily because of the state-controlled
banking system where, for instance, government-owned banks act as
depositories for the compulsory savings of all employees.
In addition, the "one couple, one child" law, enacted
in 1980 to control China's exploding population, and a sharp decline
in the state's social-support network for employees in state-owned
enterprises, compelled parents to save. Add to this the earlier
collapse of a rural cooperative health insurance program run by
agricultural cooperatives and communes -- and many Chinese parents
were left without a guarantee of being cared for in their declining
years. This proved an additional incentive to set aside cash. The
resulting rise in savings filled the coffers of the state-controlled
banks.
On top of that came China's admission to the World Trade Organization
(WTO) in 2001, which led to a dramatic jump in its exports. An average
economic expansion of 12% a year became the norm.
When the credit crash in North America and the EU caused a powerful
drop in China's exports, throwing millions of migrant workers in
the industrialized coastal cities out of work, the authorities in
Beijing focused on controlling the unemployment rate and maintaining
the wages of the employed. They can now claim an urban unemployment
rate of a mere 4.2% because many of the laid-off factory workers
returned to their home villages. Those who did not were encouraged
to enroll in government-sponsored retraining programs to acquire
higher skills for better jobs in the future.
Whereas most Western leaders could do nothing more than castigate
bankers filling their pockets with bonuses as the balance sheets
of their companies went crimson red, the Chinese government compelled
top managers at major state-owned companies to cut their salaries
by 15% to 40% before tinkering with the remuneration of their workforce.
To ensure the continued rapid expansion of China's economy, which
is directly related to the country's level of energy consumption,
its leaders are inking many contracts for future supplies of oil
and natural gas with foreign corporations.
Energy Security
Once China became an oil importer in 1993, it proved voracious.
Its imports doubled every three years. This made it vulnerable to
the vagaries of the international oil market and led the government
to embed energy security in its foreign policy. It decided to actively
participate in hydrocarbon prospecting and energy production projects
abroad as well as in transnational pipeline construction. By now,
the diversification of China's foreign sources of oil and gas (and
their transportation) has become a cardinal principle of its foreign
ministry.
Conscious of the volatility of the Middle East, the leading source
of oil exports, China has scoured Africa, Australia, and Latin America
for petroleum and natural gas deposits, along with other minerals
needed for industry and construction. In Africa, it focused on Angola,
Congo, Nigeria, and Sudan. By 2004, China's oil imports from these
nations were three-fifths the size of those from the Persian Gulf
region.
Nearer home, China began locking up energy deals with Russia and
the Central Asian republic of Kazakhstan long before the current
collapse in oil prices and the global credit crunch hit. Now, reeling
from the double whammy of low energy prices and the credit squeeze,
Russia's leading oil company and pipeline operator recently agreed
to provide 300,000 barrels per day (bpd) in additional oil to China
over 25 years for a $25 billion loan from the state-controlled China
Development Bank. Likewise, a subsidiary of the China National Petroleum
Corp agreed to lend Kazakhstan $10 billion as part of a joint venture
to develop its hydrocarbon reserves.
Similarly, Beijing continued to make inroads into the oil and gas
regions of South America. As relations between Hugo Chavez's Venezuela
and the Bush administration worsened, ties with China strengthened.
In 2006, during his fourth visit to Beijing since becoming president
in 1999, Chavez revealed that Venezuela's oil exports to China would
treble in three years to 500,000 bpd. Along with a joint refinery
project to handle Venezuelan oil in China, the Chinese companies
contracted to build a dozen oil-drilling platforms, supply 18 oil
tankers, and collaborate with PdVSA, the state-owned Venezuelan
oil company, to explore new oilfields in Venezuela.
During Chinese Vice President Xi Jinping's tour of South America
in January 2009, the China Development Bank agreed to loan PdVSA
$6 billion for oil to be supplied to China over the next 20 years.
Since then China has agreed to double its development fund to $12
billion, in return for which Venezuela is to increase its oil shipments
from the current 380,000 bpd to one million bpd.
The China Development Bank recently decided to lend Brazil's petroleum
company $10 billion to be repaid in oil supplies in the coming years.
This figure is almost as large as the $11.2 billion that the Inter-American
Development Bank lent to various South American countries last year.
China had established its commercial presence in Brazil earlier
by offering lucrative prices for iron ore and soybeans, the export
commodities that have fuelled Brazil's recent economic growth.
Similarly, Beijing broke new ground in the region by giving Buenos
Aires access to more than $10 billion in yuans. Argentina was one
of three major trading partners of China given this option, the
others being Indonesia and South Korea.
Will the Yuan Become an International Currency?
Without much fanfare, China has started internationalizing the role
of its currency. It is in the process of increasing the yuan's role
in Hong Kong. Though part of China, Hong Kong has its own currency,
the Hong Kong Dollar. Since Hong Kong is one of the world's freest
financial markets, the projected arrangement will aid internationalization
of the yuan.
In retrospect, an important aspect of the G-20 Summit in London
in early April centered around what China did. It aired its in-depth
analysis of the current fiscal crisis publicly and offered a bold
solution.
In a striking on-line article, Zhou Xiaochuan, governor of China's
central bank, referred to the "increasingly frequent global
financial crises" that have embroiled the world. The problem
could be traced to August 1971, when President Richard Nixon took
the dollar off the gold standard. Until then, $35 bought one ounce
of gold stored in bars in Fort Knox, Kentucky -- the rate having
been fixed in 1944 during World War II by the Allies at a conference
in Bretton Woods, New Hampshire. At that time, the greenback was
also named as the globe's reserve currency. Since 1971, however,
it has been backed by nothing more tangible than the credit of the
United States.
A glance at the past decade and a half shows that, between 1994
and 2000 alone, there were economic crises in nine major countries
which impacted the global economy: Mexico (1994), Thailand-Indonesia-Malaysia-South
Korea-the Philippines (1997-98), Russia and Brazil (1998), and Argentina
(2000).
According to Zhou, financial crises resulted when the domestic needs
of the country issuing a reserve currency clashed with international
fiscal requirements. For instance, responding to the demoralization
caused by the 9/11 attacks, the U.S. Federal Reserve Board drastically
reduced interest rates to an almost-record low of 1% to boost domestic
consumption at a time when rapidly expanding economies outside the
United States needed higher interest rates to cool their growth
rates.
"The [present] crisis called again for creative reform of the
existing international reserve currency," Zhou wrote. "A
super-sovereign reserve currency managed by a global institution
could be used to both create and control global liquidity. This
will significantly reduce the risks of a future crisis and enhance
crisis management capability."
He then alluded to the Special Drawing Rights (SDR) of the International
Monetary Fund. The SDR is a virtual currency whose value is set
by a currency "basket" made up of the U.S. dollar, the
European euro, the British pound, and the Japanese yen, all of which
qualify as reserve currencies, with the greenback being the leader.
Ever since the SDR was devised in 1969, the IMF has maintained its
accounts in that currency.
Zhou noted that the SDR has not yet been allowed to play its full
role. If its role was enhanced, he argued, it might someday become
the global reserve currency.
Zhou's idea received a positive response from the Kremlin, which
suggested adding gold to the IMF's currency basket as a stabilizing
element. Its own currency, the ruble, is already pegged to a basket
that is 55% the euro and 45% the dollar. Within a decade of its
launch, the euro has become the second most held reserve currency
in the world, garnering nearly 30% of the total compared to the
dollar's 67%.
Treasury Secretary Timothy Geithner's immediate reaction to Zhou's
article was: "China's suggestion deserves some consideration."
Nervous financial markets in the U.S. took this as a sign from the
Treasury Secretary that the dollar was losing its primacy. Geithner
retreated post-haste. And President Obama quickly joined the fray,
saying: "I don't think there is need for a global currency.
The dollar is extraordinarily strong right now."
Actually, maintaining the customary Chinese discretion, Zhou never
mentioned the state of the U.S. dollar in his article, nor did he
even imply that the yuan should be included in the super-sovereign
currency he proposed. Yet it was clear to all that at a crucial
moment -- with world leaders about to meet in London to devise a
way to defuse the most severe fiscal crisis since the Great Depression
-- that a China which had bided its time, even though it had the
third largest economy on the planet, was now showing its strong
hand.
All signs are that Washington will be unable to restore the status
quo ante after the present "great recession" has finally
given way to recovery. In the coming years, its leaders will have
to face reality and concede, however reluctantly, that the economic
tectonic plates are shifting -- and that it is losing financial
power to the thriving regions of the Earth, the foremost of which
is China.
Dilip Hiro is the author, most recently, of Blood of the Earth:
The Battle for the World's Vanishing Oil Resources (Nation Books).
His upcoming book After Empire: The Rise of a Multipolar World will
be published by Nation Books this year.
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