Defying the Economic Odds
The World Melts Down, China Grows
By Dilip Hiro
Tomgram: May 3, 2009
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.
Copyright 2009 Dilip Hiro
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