Our man in Davos sends word t0day of a CCTV debate on the global dimensions of China’s growth. Moderator Rui Chenggang likened China to a 16 year old Yao Ming, the basketball player, already 2 meters tall, but still lacking the muscle, skills and game experience that he would subsequently acquire and make him a basketball star.
It is an interesting metaphor by which to think of China which is now seen by the outside world, and particularly the U.S. and Europe, as a global power that China doesn’t yet see itself to be. It also helps explain the different expectations that the two sides have of what should be China’s appropriate global role and responsibilities.
Our man at the World Economic Forum’s annual meeting in the Swiss ski resort of Davos (this Bystander rarely moves in such rarified circles) sends word of a seminar there on U.S.-China relations. The point that caught our man’s ear was an unconsidered consequence of China’s urbanization. An estimated 60% of the population will live in cities by 2020. Urban lifestyle diseases such as strokes and heart diseases along with the aging of the population could help double the country’s health care spending to 8% of GDP within 15 years.
Bank of China’s announcement that it is to raise 40 billion yuan ($5.8 billion) of new capital through a convertible bond issue is the latest example of the authorities moving to sop up the stimulus-feed liquidity slopping around the economy. The big state-owned banks have to told to get back in line with their minimum capital requirements after last year’s 9.5 trillion yuan lending spree (with Bank of China at the forefront). They have also been told to rein in new lending, a message repeated again last week after previous strictures apparently fell on deaf ears and an estimated 1 trillion yuan was lent out in the first two weeks of this month. Regulators are worried by the risk of lending fueled property and stock bubbles going pop, nascent signs of inflation and the possibility of banks being left with bad loans on their books (and they have seen in America what happens when that occurs).
At the end of September, Bank of China says, its capital adequacy ratio was 11.63%. As it needs an estimated 140 billion yuan over the next two years to maintain the required 12% ratio, this may not be its last capital raising exercise. And expect the other big state-owned banks to follow suit.
The 2009 GDP figures are a triumph for central planning, or at least central spending. At the start of the year, Beijing adjudged 8% growth for the year as necessary for social stability. It delivered 8.7% thanks to the massive stimulus program that flooded into jobs-creating infrastructure investment via state bank lending. Fourth quarter growth was 10.7% — double digit growth like we were back to before the global financial crisis hit.
Now has to come the hard work of mopping up the excess liquidity to prevent inflation taking hold and the swelling bubbles in the property and stock markets from going pop. Consumer prices rose 1.9% in December over a year earlier after falling for much of the year, which will have rung some political as well as economic alarm bells. State-owned banks have been told to rein in new lending, their reserve requirements have been raised and an interest rate rise seems a sure bet. And as we have noted before, there is still the need to turn stimulated demand into the self-sustaining variety.
As for which is the world’s second largest economy after the U.S., this Bystander thinks it is still too close to call between China and Japan. Even stripping out the exchange rate factors, the margin of error, to put it politely, in the calculation of China’s GDP is too broad to provide a definitive answer while the headline numbers (and Japan’s is still an estimate) are still this close. No doubting that it is also a question of when not if, though.
Google’s search engine. James Cameron’s Avatar. Both much the same in China; cleared out to make room for local product.
The controversial $8.6 billion rail link from Hong Kong to Guangzhou where it will join China’s high-speed rail network has had its funding approved by Hong Kong’s legislature, though the protests against it continue. Objectors say it will displace many residents in the New Territories and cause environmental problems for unproven economic benefits. The link is due to be completed by 2015. Once it is built, Shanghai will be an eight-hour journey from Hong Kong and Beijing 10 hours. The railway is one of 10 mega-infrastructure stimulus projects that Hong Kong’s government is planning, including a bridge to Macau.
The yearly Global Risk Report issued by the World Economic Forum ahead of its annual meeting in Davos (again) lists “China’s growth falling to less than 6%” as one of the key risks facing the world economy. The report doesn’t give a probability of that happening, beyond indicating it is unchanged from a year earlier, though it does lay out how it could occur:
[China's growth] derives from high credit growth, which entails an increased risk of misallocation of capital and renewed bubbles in financial asset prices and real estate. These can always carry the risk of a sharp and potentially recessionary correction.
Not an unconventional concern.
The report lists the drivers and developments to watch as follows, with a plus sign denoting drivers of increasing risk; minus signs drivers that reduce risk:
+ Excess ex-ante savings over-investments in China
+/- Chinese government’s ability to stabilize domestic demand in the wake of loss in export momentum
+/- Ability of Chinese government to maintain stable renminbi in the wake of high foreign reserve accumulation
+/- Ability of Chinese government to maintain political stability in the wake of sizable loss in growth momentum.
China’s growth falling to less than 6% has turned up in each of the five past Global Risk reports, a fact that the WEF acknowledges in its latest one:
The implication of a decline in China’s growth has been a constant since the first edition of the report. Thus far, this risk has not materialized but it is clearly one that would have considerable implications for China and also for the global economy.
Nor an unconventional analysis.
One other table that caught our eye in the report was a listing of stimulus packages for the energy sector. China has committed $46.8 billion for 2009-11, second only to the U.S.’s $66 billion, but way more than third placed Japan’s $8 billion. America’s money is going to clean energy generation; China’s to energy efficiency.
Google, market cap $143 billion, vs China, nominal GDP of $4.6 trillion (2008) at current exchange rates. Not exactly an even match up. Yet David is taking on Goliath, not that Google is used to playing the David role.
The American search media company says it might pull out of China after it discovered that in December the Gmail accounts of Chinese human rights activists had been breached, albeit at a low level. In a blog post, Google’s top lawyer, David Drummond said that “we have discovered that at least 20 other large companies from a wide range of businesses–including the Internet, finance, technology, media and chemical sectors–have been similarly targeted.” In a separate post Google, which runs a distant second in the 7 billion yuan ($1 billion) China search market to Baidu’s 60%, added that it was “no longer willing to continue censoring our results” on its Chinese search engine, as the government requires, a practice it had engaged in since 2006 to obtain its Chinese license despite its “Do No Evil” self-image.
Google is not alone among foreign companies in bowing to Beijing’s wishes over matters the government considers sensitive (although it has stopped short of directly accusing the government of being behind the Gmail attack). And it will likely meet with government officials in the near future to discuss whether it will be allowed to offer an uncensored Chinese search engine. It is also embroiled in a copyright dispute over including Chinese authors in its Google Books project. But it may be better positioned than most to take a high-profile stand that will benefit it more in the places where it makes its money, and it may also be gambling on Beijing not wanting to be seen to be drumming one of the world’s best-known multinationals out of the country.
Update: a Foreign Ministry spokeswoman said Wednesday that “China welcomes international Internet companies to conduct business within the country according to law” and that the “government administers the Internet according to law and we have explicit stipulations over what content can be spread on the Internet”.
While it would be nice to think that the Great Recession could turn into the Great Recovery this year, this Bystander thinks that the more realistic question is whether it can turn into the Sustainable Recovery. The answer to that turns perhaps more on the politics of the leading developed and developing economies more than anything else with both Washington and Beijing going — in their different ways — into an election season.
That is not to say the economics is unimportant, or the macroeconomic policy management necessarily easy. Economic growth everywhere has yet to be weaned off the milk of government largesse. Demand in the developed and indebted economies remains weak while asset bubbles threaten even well-run emerging economies. The very scale of China’s stimulus and the abundance of liquidity in the economy makes it the focal point of the bubble worrywarts.
How and when monetary policymakers tighten is as tricky and crucial a decision for Beijing as the one facing Washington’s policymakers over fiscal tightening: too much too soon in China could just attract an inflow of bubble-inflating speculative money from the rich world, while too much too soon in the U.S. could prematurely choke off the fragile recovery in the developed economies.
Which is just one point where politics start to creep in. China’s dogged refusal to allow its currency to appreciate is not so much because Beijing wants to keep favoring its exporters with the advantage of a cheap currency and to hold back the necessary reorientation of the economy towards domestic demand that a revalued yuan would encourage. Quite the contrary. But its leaders dare not risk the short-term dislocation this would cause as the economy adjusted.
For one, the Party’s legitimacy overall depends on continuing to deliver economic growth; for another with its factions now jockeying for position in the run-up to the succession to the Hu-Wen leadership in 2012, all factions are potentially at risk of disadvantaging core constituents if existing economic distortions are eliminated. Switching individuals from savers to spenders isn’t the problem; it is doing that with state-owned enterprises with all the untangling of political connections and patronage that would entail. That has lead to an effective political moratorium over currency and other economic modernization reforms.
Which is where the political dimension stretches into America and its midterm election due towards the end of this year. Yuan revaluation is a hot button for the China hard-liners in Washington (and increasingly in Brussels: Americans have seen their currency ‘hold’ against the yuan even as the dollar has fallen; Europeans have taken a double hit as the yuan has ridden down against the euro on the dollar’s fall).
But even in Washington that galls; a fast growing economy with the world’s largest current-account surplus should be seeing its currency rising, and fewer and fewer in Washington are buying Beijing’s line that the yuan’s value is nobody’s business but China’s. While protectionist spirits in the U.S. have largely been kept in check during the Great Recession persistent unemployment is emboldening them–witness the recent tariffs imposed by the U.S. on tires and steel, economically pretty irrelevant but politically hugely significant. Add in some popular paranoia over China becoming the No 1. exporter, and it all makes for a potential bumpy year.
Fact has finally caught up with myth. For years, China has popularly been thought of as the world’s biggest exporter, when in fact Germany was. In December, China overtook Germany, at least when measured in current U.S. dollars. China’s exports for 2009 totaled $1.2 trillion; Germany’s $1.17 trillion.
Far more significantly than the bragging rights, which really only mean that China’s export slump was a bit less severe than Germany’s, the latest numbers from General Administration of Customs showed a larger than expected 17.% increase in China’s exports in December, the first increase in the monthly numbers in 14 months.
Exports overall in 2009, at $1.2 trillion, were still down 16% over the previous year (vs Germany’s 18%). Imports, at $1 trillion were down 11.2% over the same period, cutting the politically sensitive trade surplus by a third to $196.1 billion.
The numbers will no doubt be used to advance several agenda, both trumpeting of the success of the government’s stimulus-driven economic recovery and calls to revalue the yuan, but to this Bystander they don’t really say more than the export slump has hit bottom.