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 38%. In
March, car sales in China hit a record 1.1 million, surpassing sales in the US
for the third month in a row.
"Despite its severe impact on China's economy, the current
financial crisis also creates opportunity for the country," said Chinese
President Hu Jintao. 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 US$2 trillion in foreign exchange reserves, its industrialists have
gone on a global buying spree in Africa and Latin America, in neighboring
Russia and in Kazakhstan, to lock up future energy supplies for its economy. At
home, the government is investing heavily not only in major infrastructure, but
also in its much neglected social safety net, its healthcare 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 Barack Obama administration. It
views the continuing rise in China's GDP as an effective corrective to the
contracting economies of almost every other country, except India. So it has
stopped arguing that, by undervaluing its currency - the yuan - with respect to
the US 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 US and the European
Union (EU) remains clogged, 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, such as 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 and an average economic
expansion of 12% a year.
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. [1] 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 signing
many contracts for future supplies of oil and natural gas with foreign
corporations.
Energy security
Once China became an oil importer in 1993, 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 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 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.
Beijing continued to make inroads into the oil and gas regions of South
America. As relations between Hugo Chavez's Venezuela and the George W 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
this year, 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 fueled Brazil's recent economic
growth.
Similarly, Beijing broke new ground in the region by giving Buenos Aires access
to more than $10 billion in yuan. 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 Group of 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 US 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 at least nine countries had economic crises that had an impact on
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
terror attacks, the US 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 US 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 rouble, 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 US 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 US 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.
Note 1. There continues to be considerable debate on the accuracy of
statistics issued by the Chinese government. An annual report, The Analysis of
and Forecasts for Social Development (or the Blue Book on Chinese Society),
released in December 2008 by the Chinese Academy of Social Science, said the
unemployment rate in urban areas was 9.4% at that time, twice the registered
rate of 4.5% released by the Human Resources and Society Security Ministry. In
March 2009, Yin Weimin, China's human resources and social security minister,
said that the registered urban unemployment rate was at a three-year high of
4.2%.
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.
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