Tuesday, January 27, 2009

Article - China finds no immunity from global crisis

A tide of more than 30,000 students with polished résumés and high hopes surged into a job fair here so eager to meet with employers that they shattered four glass doors and splayed the side walls of an escalator in what became a near riot

Tuesday, January 27, 2009

BEIJING: Had it been up to him, Prime Minister Wen Jiabao might have scheduled things differently. Wen will be in Davos, Switzerland, on Wednesday to address the annual winter meeting of the World Economic Forum while China will be carrying on with the weeklong celebration of its most important holiday, the Lunar New Year.

Wen might likewise wish the agenda were different, for unlike Davos meetings of recent years, this year's talks will focus not on heady predictions about a rising China and its growing economic might. Instead, the question will be how the world - China included - will steer its way through the deepening global downturn.

Wen will visit several European countries before heading back home and, according to Huang Yasheng, a China specialist and professor of political economy at the MIT Sloan School of Management, will find a distressingly new and subdued mood upon his return. While economic activity normally slows down for one month as people take time to visit their hometowns, Huang doubts that things will return to normal afterward.

"Psychologically, the Chinese New Year is very important to people, and afterwards the feeling in China will be very different than before," said Huang, the author of the book "Capitalism With Chinese Characteristics." "The usual slowdown will happen, but the postholiday pickup will not."

Of the 200 million or more rural dwellers who migrate to Chinese cities for work, a significant percentage will be making one-way journeys home this holiday season. Whether their jobs were on urban construction sites or at factories in China's most prosperous and dynamic coastal areas, many have already been told not to come back.

Speaking on the condition that he not be quoted by name, a researcher at the Central Communist Party School, a top-level official research institution, estimated that out of the 130 million Chinese migrants who crossed provincial lines for work, 20 percent to 30 percent will find themselves jobless after the holiday.

In the current climate, Huang predicted, jobs will be no easier to find in their rural hometowns. And with the rapid pace of development and the steady conversion of arable land in rural areas, many will likewise find it impossible to return to farming.

"I'm not very optimistic," Huang said.

All this marks a sobering shift from the prevailing China narrative of recent years at international business and policy gatherings like Davos.

In certain tellings of that tale, China looked set to chug along as an increasingly huge and powerful engine of growth that would pull other regional economies along with it. In other views, China's rise was portrayed more menacingly as that of a relentless - and potentially destabilizing - upstart.

The catch phrases have varied, too, with the "Asian Century," the "Chinese Century" and the "Pacific Century" all seeing plenty of use by commentators, according to their varying views as to how much India or Japan might figure into the mix. But minor details aside, there was little doubt that in the 21st Century the world's economic center of gravity would move ever closer to China.

Now, nearly a decade into that century, things look somewhat murkier. After a slight lag, China has followed the United States and Europe into a profound economic slowdown. The annualized growth rate of China's gross domestic product declined to 6.8 percent in the fourth quarter of last year, from 9 percent in the third quarter, according to numbers released last week by the National Bureau of Statistics. That marks China's sixth straight quarter of slowing growth and its poorest quarterly performance since mid-2003.

While a growth rate of 6.8 percent might be the envy of just about any other country, it is - for multiple reasons - ringing alarm bells in Beijing.

First, it calls into question the hotly debated notion of economic "decoupling," which held out hope that emerging economies might steer clear of downward global currents and instead follow their own more positive trajectories. Because it is so large, and the inertial force of its growth is seen as so strong, China seemed especially well positioned to resist global trends.

Second, these newly reported growth numbers pull China, by the admission of its own top leadership, into a danger zone. Government economists have long maintained that a 7 percent growth rate was needed to maintain employment levels and ward off widespread social instability. Senior officials, including Wen, have publicly warned that a prolonged period of slower growth could lead to serious problems.

The fact that China has followed other economies into decline does not mark a conclusive debunking of the decoupling theory. There is no doubt that wide ranging and longstanding internal factors have also played a role.

According to Timothy Beardson, chairman of Albert Place Holdings in Hong Kong, foreign analysts are placing "far too much focus on the current global downturn" as the cause of China's problems.

"Factory closures and unemployment have been going on since the 1990s, when China undertook massive reforms of its state-owned enterprise system," Beardson said last week in a telephone interview. He also pointed to demographic factors that have been building up for years in the labor market, China's inadequate investment in research and development, weaknesses in its education system, and the quality of managers that the system turns out.

More recently, he said, China has been hurt by currency fluctuations, not so much in the value of the yuan against the dollar, which garners so much attention, but in the falling value of the currencies of other low-cost manufacturing countries, which has made them more competitive in comparison to China.

On top of those factors, tightened credit and growing job losses in the United States and other major markets for Chinese goods mean that Chinese exporters are clearly in for a rough ride.

Jun Ma, chief economist for Deutsche Bank in Hong Kong, predicts that Chinese exports, which last year rose by 10 percent, will in 2009 suffer their worst performance in 32 years, shrinking by around 5 percent.

Economists are sharply divided as to just how central a role exports play in China's overall growth picture, and in some years past the economy has sustained substantial growth even as exports have flat-lined. Whether it can do so again will depend on the government's ability to stimulate domestic demand, raise household incomes, and diversify the overall growth profile. In each of these areas, China faces significant political and structural obstacles, but it has also taken prompt and significant actions.

One crucial move was the announcement in November of a 4 trillion yuan, or $585 billion, stimulus package to be spread over two years.

Early criticism of the package focused on a lack of clarity as to where that money would come from, where it would be spent, and how much of it even represented new, previously unallocated spending. The government has since made clear that much of the stimulus spending will be directed toward large-scale infrastructure projects, a focus that has raised concern among many critics.

According to Huang, Chinese infrastructure work is far more mechanized and far less labor-intensive than it used to be.

"So the big equipment makers like Caterpillar and General Electric will be happy, but I doubt if this will do much to make the Chinese people happy," he said.

Instead, Huang said, China should put more money into people's hands, especially in rural areas where minimum living allowances for pensioners, unemployed and the disabled remain at the same level as in 1987, after adjusting for inflation.

Policy makers are aware of another significant obstacle to the expansion of domestic demand, which is China's lack of an adequate social security network. Last Wednesday, the State Council, the Chinese equivalent of a cabinet, announced a new initiative that would funnel 850 billion yuan into a universal health care plan during the next three years. Under the program, 90 percent of China's 1.3 billion people would have some form of medical coverage by 2011.

With per capita subsidies set to start at only $17 next year, the program will have only a limited impact on the need for most Chinese to rely on themselves for medical and retirement coverage, and their resulting tendency to save rather than spend.

"But even if people receive stimulus money and save it, that would be O.K.," Huang said. "High savers don't revolt, so it would buy political peace."

Even if China manages to avoid severe dislocations over the course of the current downturn, the country will have much more to do to ensure that it features in any success stories told in better times at future Davos meetings.

China needs to learn how to innovate and make the transition into a knowledge-based economy along the lines of South Korea, Taiwan or Singapore, said Beardson, the chairman of Albert Place Holdings.

"The model of being a thin-margin manufacturer working on a high-volume basis is breaking up," he said.

"It cannot work for China in the future."

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