Verfasst von: markusgaertner | Januar 23, 2010

Chinas Mastercard-Strategie

Will China be a Victim of its own Success?   

Gast-Blogger / Wirtschafts-Professor Ken Moak von der Capilano-Universität in Vancouver – Ken Moak wanderte im Alter von acht Jahren von Guangdong nach Kanada aus. Er besucht regelmäßig die Volksrepublik während mehrmonatiger

Sabbaticals, zuletzt in Harbin, Tianjin und Hangzhou.

Since the “future is not ours to see”, taking a line from the Doris Day song, it is difficult to conclude whether China’s economy will encounter a “hard landing” or sustains its impressive achievement. But based on the country’s economic development process and ability to implement effective and timely policies, history supports the latter.

Indeed, the China doomsayers have been proven wrong again and again because they ignored the actions the Chinese government had taken and continue to take in addressing the country’s economic problems. And applying liberal economic models in addressing China’s economic policies and developments is inappropriate, thus producing less than accurate results.

Modernizing the economy was the top priority for the People’s Republic of China’s first generation leaders. They correctly identified that economic power is the key to build a strong national defence and modernize China. And they were not afraid to experiment with new theories or ideas to achieve economic growth. China adopted the Soviet model of focusing on heavy industrialization immediately after the Korean War. The experiment was abandoned a few years later because rural development was ignored.

Which Way China ? Sign pointing out the way to a parking lot

Not paying enough attention to rural development proved fatal because over 80% of the population lived in the countryside at the time. A policy referred to as “walking on two legs” which gave equal attention to heavy industry and agriculture development was brought in to replace the Soviet model. But Mao Zedong “reengineered” the policy to become known as the “Great Leap Forward”.

Under that policy, China was to surpass Britain in steel production within five years. The Great Leap Forward movement almost pushed China into the brink of disaster. He was quickly sidelined and Lui Shaoqi was selected to turn the economy around. He, with the help of Deng Xiaoping, tried the “material incentive” policy by which workers were rewarded for good work ethics and increased productivity. The policy worked and the economy grew twofold within three years.

This Chart was Taken from the Economist

Since then, China continued to act quickly and effectively in addressing economic problems created by domestic and foreign developments, ranging from Cultural Revolution to the 2008 global financial crisis.

Another wrong assessment was on China’s financial system. Many in the West were certain that banks would collapse and create a credit crunch when its state-owned banks made many non-performing loans to state-owned enterprises. Relatively “loose credit” in fact sustained economic and social stability. While banks did make less profit and some suffered losses, massive unemployment was avoided. The benefits of sustained employment were “priceless”, to quote a Master Card commercial.

Marc Faber / The Gloom, Boom & Doom Report – „It´s Hard to Predict When China will Implode, But It´s Not Going To Happen Right Away“ (Yahoo Finance Video)

The latest efforts were China’s policies in dealing with the global financial crisis that created the worst economic recession since the Depression. Though the developed nations went into a deep recession, China escaped relatively unscathed. It was the first major economy to implement a huge stimulus package of over US$575 billion or almost 14% of its real GDP. The money was spent on infrastructure construction, rural development, post-quake reconstruction in Sichuan, environmental protection and social programs.

These job creating spending, coupled with government subsidy to buy automobiles again discredited those in the West who predicted that China would be hard hit by the crisis because its economy is hugely export dependent.

Source: The Economist

It turned out the pundits’ assumptions are less than accurate because domestic consumption rose by 15.7% and China continued diversifying its trade relations. The percentages of its exports to the US, Japan and the EU are decreasing, even though they remain China’s largest trading partners. Trade with Africa, Latin America, Southeast Asia and Eastern Europe is rising faster than trade with the developed economies.

The trend is no accident because China has taken steps to diversify its trade relations. Today, no country or region account for more than 18% of China’s total trade. It seems that China has foreseen the danger of relying on exports, particularly to the US and the EU, as the engine of growth.

Now pundits are forecasting a property bubble and overcapacity, both of which would have dire consequences not only for China, but for the rest of the world as well. The prediction is attributed to an average of 7.8% house price rises in 70 large and medium sized cities. There is also allegation that some state-owned enterprises and corrupt officials might have used some of the stimulus money and bank loans to finance property speculation. The overcapacity projection is largely fueled by an oversupply of steel.



Both predictions may not necessarily be accurate. One, a 20% down payment is required for first time homebuyers. Anyone or organization wanting to buy two or more homes, a 40% down payment is needed. The possibility of home foreclosure is therefore remote. The over capacity scenario may also be exaggerated because China has a huge domestic market and may cleared by China’s three golden week holidays, as in the past. The steel overproduction actually provides an opportunity for China to mount aggressive price strategies in negotiating iron ore prices with foreign mine owners.

Moreover, China recently has implemented a number of measures to address the property bubble and over capacity issues. One, it has ordered the banks to raise the reserve requirement, reducing the volume of loanable funds. Two, the local governments are directed to build more social housing, providing additional affordable residential dwellings.

Three, the government has re-introduced the sales tax on property sold within five years, preventing property speculation. Four, the People’s Bank of China raised the interest rate on its one-year Treasury Bills, increasing short-term interest rates. The policies have produced results in Beijing. New home sale is down by 63% and that of “second hand” home declined by 73%.

China is likely to continue its policy of “state capitalism”. First, the Communist Party (CPC) is and will do whatever it takes to hold on to power without resorting to force. It is well aware that stable economic growth is the key to maintaining power and support. Second, the CPC is genuine in wanting to improve people’s lives. Third, the Chinese government has learned from the West that economic power is an essential pre-requisite for a strong national defence. It hears Frederick the Great’s comment that “diplomacy without a strong military is like holding a concert without an orchestra”.

 China has the resources and vision to achieve an average annual growth rate of 8% in the  next 10 to 15 years. With over US$7 trillion in domestic savings plus another US$2.4 trillion in foreign reserves, it has taken steps to secure energy and commodities needed to propel its fast growing economy by investing and lending hundreds of billions of dollars to resource rich countries in Africa, Latin America, Southeast Asia, Central Asia and the Middle East. China is also buying resources and investing these industries in Canada and Australia. Further, it is investing more and more on research and development activities to move up the value chain.

Equally important is the current and fifth generation leaders’ commitment to continue economic reform. Xi Jinping is expected to be the next president while Li Keqiang is expected to replace Wen Jiabo as premier. They, along with the other seven members of the Central Committee, have indicated they will continue with pursuing socialism with Chinese characteristics and build a harmonized society. They may well follow through with their promises.

Skyline von Pudong / Pedronet, FLICKR

The government is well aware of and doing something about China’s insurmountable problems. The government introduces a number of schemes such as allowing the citizens to contact the leaders directly on corruption matters, resulting in the prosecution of an increasingly large number of corrupt officials. Harsh punishment also proves to be an effective deterrent. China spends more money on environmental protection than any other country on the planet.

It finally comes to terms with the effects of pollution. To encourage domestic consumption, the government is providing free education up to grade 9, a rural healthcare insurance plan, rural income subsidies, and pensions. How effective are these policies in combating China’s many problems, only time can tell.

So far, the policies and actions taken by the government have proven successful. They allowed China to: i) rack up an impressive annual growth rate of over 9% per yearover the last 30 years; ii) escape the Asian Financial Crisis in 1997; and iii) gaine an impressive 8% growth rate in 2009, compared to the negative growth rates of the developed nations. It is hard to argue with success.

Still, anything can happen in the long run. The pundits may very well be correct in predicting a doomsday for China. Even the Chinese leaders admit the future holds many bumpy roads. But using history as a guide, writing China’s obituary may be premature. In any event, to quote John Maynard Keynes, “We will all be dead in the long run”.

Shanghais tallest building, the 632 meter Shanghai Tower, will be completed in 2014 / Unique Buildings, FLICKR

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