China to the rescue?

Stephen Marks (2008-12-17)

Stephen Marks looks at the rising influence of China in the global economy in the wake of the financial crisis. China’s top economic decision-makers, gathering for a key meeting in Beijing, were reported to be planning a new tax boost to the economy, as support was pledged to recession-hit firms from airlines to carmakers. But latest figures showed the recession’s impact was worse than expected. Officials began their annual three-day Central Economic Work Conference in Beijing, which sets the tone for policies for the coming year. Informed sources suggested they could cut business tax for enterprises by 1 percentage point from the current 5 percent which would amount to a 120 billion yuan ($17.5 billion) boost.

They were also said to be discussing raising the threshold of personal income tax from 2,000 yuan to 3,000 yuan a month to spur domestic consumption.

This follows the massive $586 billion stimulus package on announced on Nov 9. China needs at least 8 percent annual growth to employ the roughly 10 million people entering the job market each year.

At the same time emergency cash bailouts have been announced for China’s ailing airlines. The Financial Times reported on 10 December that China Eastern Airlines will receive a Rmb3bn ($437m) cash injection from the government, following an equal handout to China Southern Airlines with Air China, the third of China’s ‘big three’, expected to follow.

At the same time as they were promised continuing government assistance, the airlines were told to cut imports from abroad - a blow to manufacturers like Boeing and Airbus who were hoping a booming China market would help them through the recession.

Earlier, it was announced that Chery, one of China’s largest automakers, has arranged access to loans of up to Rmb10bn ($1.45bn) from the state-owned China Export Import Bank. The carmaker’s domestic sales have fallen in line with a sharp slowdown in Chinese car sales.

The news came as the China Association of Automobile Manufacturers announced a 10 per cent drop in November car sales in China, the world’s second largest market.

New figures showed China’s industrial production growing at what was said to be the weakest pace in nine years as exports slowed and the economy cooled.
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According to the Financial Times: ‘exports fell in November for the first time in almost seven years. With demand in many of its main markets slowing sharply, Chinese exports declined 2.2 per cent from a year earlier. Imports also fell 17.9 per cent from a year earlier, according to Chinese customs figures, prompting the government to announce plans to further boost the economy.

‘The Chinese data shocked economists. The figures were far below forecasts, even in the light of sharp slumps in exports in November from both Taiwan and South Korea’.

This follows a warning from Central Bank Governor Zhou Xiaochuan that China needs to prepare for a “worst case scenario” as the global slump worsens.

Exporters of toys, clothes and furniture were reported to be cutting production or closing down, triggering a surge in labour disputes and increasing the risk of social unrest.

Nonetheless some business analysts remained optimistic about China’s business prospects as the massive stimulus package begins to kick in later next year.

Gao Xiqing, vice-chairman and President of China’s $200m sovereign wealth fund China Investment Corp, told the Financial Times that he will no longer risk investing in western financial institutions because of concerns about their viability and a lack of consistency in their governments’ policies.

And in a fascinating in-depth interview with ‘Atlantic’ magazine he reveals how he concluded years ago that financial derivatives are ‘bullshit’ and advises the West to ’be nice to the countries that lend you money’.

At the same time Lou Jiwei, the fund’s chairman and CEO, confirmed that China had no plans for further investments in Western financial institutions, nor did it have any plans to “save” the world through economic policies.

A similar message was delivered by senior Chinese officials as they lectured top US officials in Beijing for a top-level economic summit. As the Financial Times reported;

‘The US was lectured about its economic fragilities on Thursday as senior Chinese officials urged the administration to stabilise its economy, boost its savings rate and protect Chinese investments.

‘The message went to Hank Paulson, the US Treasury secretary, in Beijing for the strategic economic dialogue he helped launch to discuss long-term issues between the two countries.
...Wang Qishan, a vice-premier and leader of the Chinese delegation at the two-day talks, called on the US to take swift action to address the crisis.

“We hope the US side will take the necessary measures to stabilise the economy and financial markets as well as guarantee the safety of China’s assets and investments in the US,” he said....Although China also faces a rapidly slowing economy and rising unemployment, the tone of the comments reflected an underlying shift in power.’

Eswar Prasad, a senior fellow at the Brookings Institution, observed: “One result of the crisis is that the US no longer holds the high ground to lecture China on financial or macroeconomic policies.”

As Associated Press pointed out, ‘Beijing owns $585 billion in Treasury debt that has helped to finance U.S. budget deficits and its holdings of other U.S. assets are growing. But the weak dollar and financial turmoil have fueled Chinese anxiety about such investments.

Nonetheless US Treasury secretary Paulson stressed that continuing US engagement with China was producing results in getting the world economy through the crisis. And his team stressed that President-elect Obama’s transition team was being fully briefed.

And it seems likely that despite campaign noises hinting at protectionism and a strong line on Tibet and human rights issues, the Obama administration will also be committed to positive engagement. As Bloomberg reported;

‘With the U.S. now officially in a recession, China holds more cards than it did even a few months ago. Washington is more reliant on Beijing- the largest holder of U.S. Treasuries -- to buy more government securities to finance deficit spending...The upside of interdependence is that the two nations should be less likely now to take punitive measures against each other, says Nicholas Lardy, an economist who specializes in China at the Peterson Institute for International Economics in Washington. There’s no incentive for China to stop buying U.S. securities; it needs a safe investment for dollar reserves, and its growth depends on the health of the U.S. economy. Congress also may hesitate before demanding trade barriers against a country that’s the main source of cheap goods for budget- conscious consumers’

∗ Stephen Marks is a research associate with Fahamu’s China in Africa programme.

Source: http://www.pambazuka.org/en/category/africa_china/52762