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How will China weather the financial storm?

China is far ahead of India in terms of planning, risk analysis and preparedness, writes John Samuel

Taxi drivers are often the best barometers of a society. They know the city they live and work in – both its glowing exterior and its dark underbelly. So I began a discussion with my taxi driver in Beijing to know what the common man thinks about China’s economic prospects. He told me that he gets less business and there were not many foreign tourists. He was worried about the financial crisis and hoped that the government would do something about it. 

China has anticipated the financial crisis and adopted a comprehensive strategy to address the situation but in spite of such preparedness, there is a sense of nervousness among the people. They spend less and save more. There is an unarticulated sense of impending trouble. But there is also a sense of confidence that the government will be able to manage the trouble.

In the last 10-15 years, around 200 million migrant labourers moved from the villages and the agricultural sector to the booming real estate and manufacturing sector. They are the ones most hit by the economic crisis. Hundreds of factories in export zones (such as Guangdong) have shut down. The maximum layoffs have occurred among the direct subsidiaries of multinational companies or the direct suppliers of big companies. So now there is a reverse migration from cities to villages.

The government has announced a $586 billion package aimed at stimulating domestic demand and building rural infrastructure. It has also announced a nine-point economic and fiscal management programme to stabilise and manage the economy. This includes reducing interest rates, a massive programme for rural credit for new ventures where local government will offer guarantee, a programme to provide loans to start new enterprises, stock market stabilisation strategies and weekly risk-monitoring and management.

Anticipating an urban-rural migration, there is a coordinated effort by the federal and provincial governments, along with the county administration, to initiate a whole range of projects for high-quality rural infrastructure. This includes rebuilding schools, improving hospitals, constructing new roads, bridges, etc. Apart from this, 140 new airports are planned across the country.  Though there is a slowdown in construction activity in Beijing and other big cities, real estate is yet to show a serious crisis here. The demand has decreased (though loans are still available). But the price has only come down 10-15% in the housing sector in the capital, Beijing.

There is a conscious strategy to encourage internal tourism and the number of people travelling within China is increasing. There is also a new effort to encourage tourism to Taiwan in the context of the new equation with the government of Taiwan. However, there is clear evidence of the decreasing numbers of foreign tourists. This may have a direct impact on the hotel and airline industries.

It seems China has a comprehensive security policy in the context of the financial crisis. There is restriction on visas. All international organisations are under new surveillance and the government is now very careful about every business proposal or financial deal. Seemingly, China is far ahead of India in terms of planning, risk analysis and preparedness. 

There are some very interesting debates going on within the country about the financial crisis. The key debate is whether the first priority should be to strengthen the Chinese economy or to help stabilise the global economy by pumping more money into the United States. This is most fiercely debated in the Chinese media and less in the English language media which is subjected to more government restrictions.

China is unique in terms of the scale of operations and also the fast pace at which policy recommendations are implemented. The country has a highly centralised form of implementation and much better coordination between the federal and provincial governments. As a result, a programme to stimulate demand, which will have mulitiple layers and dimensions, can be implemented at a much faster pace than in most other countries.

China has a three-pronged strategy to counter the economic crisis: a huge programme focusing on rural and small-town infrastructure development (in the last 15 years development has been more urban-focused); a growth stimulating programme that provides generous loans for small and medium enterprises in the third and fourth tier towns/cities closer to rural areas; and a fiscal management strategy.

Last week, China finished the fifth round of a strategic economic policy dialogue with the US. The discussions were led by US treasury secretary Hank Paulson and the Chinese vice-premier. This is part of the external strategy of building bridges and strategic positioning in the context of the financial crisis. The Chinese leadership knows very well that the US will be more dependent on China than before. At the same time, it is in the interest of China to make sure that the US economy rebounds to its earlier vibrancy. China needs an economically vibrant US to export its goods and services to. And the US needs Chinese foreign exchange reserves to stabilise its finance system. When CCTV 9, an English TV channel, did a special programme focusing on European businessmen in various cities and how they felt about the financial crisis, it went with the general trend in predicting that “it will be difficult, but China will come out with flying colours.”

In many ways, the situation in China is exactly the opposite of that in the US. In the US, everything is driven by credit – from personal spending to the consumer market to new investments. In China, it is still driven by savings. In spite of everything, people spend only a percentage of their earnings; most people who buy houses prefer to take only a 30–50% loan, instead of 80-100% mortgage as in many other countries. China has one of the best savings ratios in the world. The public debt ratio too is good. So the savings-driven economic model may actually help China in the difficult days ahead. 

Predicting the fall and doom of China has become almost a cottage industry. But don’t underestimate the quality and calibre of China’s leadership. There is a difference between the external perceptions and the multiple layers at work in China. There is an inbuilt resilience within the system of governance. Though the economy and financial sectors have opened up, there is still a strong regulation and control management system at work. Most of the big Chinese corporations are owned or controlled by the government. This is quite different from the free market of the US or Europe. 

That said, China has a huge export market which could be severely affected by the financial meltdown, particularly if many people in the US and Europe lose their jobs. Though China is confident of a growth rate of 9%, it may actually come down in the next one year. This will create some difficulties in some provinces and in the short run many millions of migrant workers may move back to their villages and countries. 

China, with its centralised economic management, a strong sense of nationalism (this has a psychological impact), and the possible stimulation of demand, may be able to cope with the financial crisis better than many other countries.  

InfoChange News & Features, December 2008