Zhu Rongji

Hard times

PUBLISHED : Tuesday, 30 December, 2008, 12:00am
UPDATED : Tuesday, 30 December, 2008, 12:00am


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For weeks, China's leading economists have been babbling away on news talk shows about how certain they are that the mainland's economy is insulated from the global financial crisis because of its 'Chinese characteristics'. The nation's leaders, however, may now be thinking otherwise, and possibly getting a bit jittery.

As the Communist Party Central Committee's economic working commission began meeting in Beijing early this month, the streets around Tiananmen Square were full of police armament and hardware. That was a far cry from the 'social harmony' the state news tells everyone to strive for.

While the leadership may seem to be from the Jurassic era when it comes to the speed with which it makes decisions, once a choice is made, the dragon tends to overreact like a lumbering Tyrannosaurus rex. China's leaders decided to boost domestic consumption, so the new attitude is: who needs America's market? China's is big enough, so just shut the trade gates. They point to China's 4 trillion yuan (HK$4.53 trillion) stimulus package as equivalent to one year of exports to America and Europe.

So Beijing thinks it can afford to isolate the country next year by avoiding exports, thereby thumbing its nose at major trading partners. That is how confident the leadership is. But didn't they try that in the Ming and Qing dynasties, too?

There might be a few intrinsic flaws in the stimulus-package-and-consumption theory. To begin with, the structure of the mainland's economy differs greatly from that of America. Savings remain strong; people rely on cash and do not borrow to consume. Americans do, and the whole financial system is structured to facilitate this. Consequently, the mainland's consumption is a mere one-thirty-fifth, per capita, of America's, and is considered lower than the average for most Asian countries. The situation has not improved in a decade. China's economy still depends on exports and fixed-asset investments, not consumption; exports currently account for almost 40 per cent of gross domestic product. There have been limited gains in value-added: for example, while 90 per cent of the world's laptops are 'made in China', all the parts are imported and China only assembles the pieces, because of its cheap labour. What happens when the cost of labour and administration goes up? That is how vulnerable the mainland's value-added economy is.

But the leadership needn't worry: the stimulus package is all about boosting fixed-asset investment. In 1998, this accounted for 34 per cent of gross domestic product, rising to 41 per cent this year. Industry - meaning overproduction of cement and steel - accounts for nearly 50 per cent of GDP; agriculture just 12 per cent.

So China will continue exploiting Africa's resources, ignoring genocide in Darfur and destroying the environment, just to keep greedy officials in the manner to which they have become accustomed. At least officials will be happy, if not the people.

How might the stimulus package work? It is estimated that only 1.18 trillion yuan will come from central government coffers - with the rest covered by local governments and business, and the issuance of 500 billion yuan of state treasury bonds per year over the next two years. But remember: local governments have hardly any fiscal income; they can only raise money by auctioning off land. That means forcibly removing people, confiscating the land for property tycoons who are usually officials' relatives.

Development will be financed by local bank loans. Local governments will ensure banks assume all responsibility; officials will also force branches to offer conciliatory loans to developers. There will be lots of highways, ports and the like - and non-performing loans will build up massively, making China's black hole bigger than America's credit pyramid.

Putting things in perspective, the 1997 Asian crisis was small fry compared with today's turmoil. In 1998, then-premier Zhu Rongji managed to control the mainland's economic contraction, calling it a 'soft landing'. In 2009, expect anything but.

Laurence Brahm is a political economist, author, filmmaker and founder of Shambhala