Article - The art of Chinese massage

May 21st 2009 (From The Economist print edition)

Is China overstating its true rate of growth?

PART of the recent optimism in world markets rests on the belief that China’s fiscal-stimulus package is boosting its economy and that GDP growth could come close to the government’s target of 8% this year. Some economists, however, suspect that the figures overstate the economy’s true growth rate and that Beijing would report 8% regardless of the truth. Is China cheating?

Economists have long doubted the credibility of Chinese data and it is widely accepted that GDP growth was overstated during the previous two downturns. In 1998-99, during the Asian financial crisis, China’s GDP grew by an average of 7.7%, according to official figures. However, using alternative measures of activity, such as energy production, air travel and imports, Thomas Rawski of the University of Pittsburgh calculated that the growth rate was at best 2%. Other economists reckon that Mr Rawski was too pessimistic. Arthur Kroeber of Dragonomics, a research firm in Beijing, estimates GDP growth was around 5% in 1998-99, for example. The top chart, plotting the official growth rate against estimates by Dragonomics, clearly suggests that some massaging of the government statistics may have gone on. The biggest adjustment seems to have been made in 1989, the year of political protests in Tiananmen Square. Officially, GDP grew by over 4%; Dragonomics reckons it actually declined by 1.5%.

China’s growth in the first quarter of this year has led some to conclude that the government is up to the same old tricks. According to official figures, GDP was 6.1% higher than a year earlier. Yet electricity production in the first quarter was 4% lower than it had been a year earlier; in comparison, production grew by 16% in the year to the first quarter of 2008. In the past, GDP and electricity output have moved broadly together, although it is not a one-to-one relationship (see bottom chart). But the gap between the two lines is now wider than it has ever been. Given that power statistics are less likely to have been tampered with than politically sensitive GDP figures, is this evidence that the latter have been fiddled?

Probably not. Paul Cavey, an economist at Macquarie Securities, argues that the discrepancy is explained by the fact that energy-guzzling heavy industries, such as steel and aluminium, bore the brunt of the slowdown last year. Mr Cavey calculates that the metals industry accounted for 40% of the growth in electricity consumption in 2001-07, but only 16% of the increase in industrial production. Steel output fell by more than 10% in the year to the fourth quarter, so it is hardly surprising that energy use dropped.

Distrust of the GDP numbers has prompted Capital Economics, a research firm based in London, to create its own proxy of economic activity, which includes electricity output, domestic freight volumes, cargo traffic at ports, passenger transport and floor area under construction. It suggests that GDP growth slowed to only 4% in the year to the first quarter. However, it tracks mostly industrial activity, and thus excludes two-fifths of the economy, most notably services, which are growing faster.

Then there are government tax revenues. These have fallen by 10% over the past year, compared with a surge of 35% in early 2008, suggesting that incomes and output have tumbled. But Stephen Green, an economist at Standard Chartered, says that revenues were inflated in early 2008 by a sharp rise in taxes from the boom in land sales, which has since subsided.

Another possible distortion is that local officials may be hiding tax revenue to make their finances appear worse, in order to get more money from Beijing to finance infrastructure projects.

Overall, Dragonomics’s Mr Kroeber thinks that GDP growth in the year to the first quarter of 2009 was not significantly overstated. One reason why others are more suspicious is the fact that the National Bureau of Statistics (NBS) does not publish quarterly GDP figures as developed economies do; its year-on-year changes give it more scope to smooth growth rates (for example, output probably did stall over the past two quarters).

To be fair, many developing countries do this as well. One reason is that seasonal adjustment is tricky in such countries where the shift from agriculture to industry changes the pattern of seasonality over time, says Mr Kroeber.

Cutting the fudge

And for all today’s misgivings, Beijing’s growth estimates consistently proved to be too low until recently. One of the quirks of Chinese data has long been that the provinces reported higher numbers than the central government did—a phenomenon that was put down to the fact that local officials inflated growth rates in order to get promoted. Yet the NBS GDP figures have almost always been revised upwards. For example, growth in 2007 was first reported as 11.4%, but in January it was marked up to 13%.

The NBS has improved its data-gathering methods in recent years, by extending its coverage of services, for example. This month Beijing also introduced new penalties for officials who falsify statistics. But the real test is whether the government itself is prepared to publish politically embarrassing bad news. There are encouraging signs that it is becoming more open. On May 14th an essay on the NBS website by Xu Xianchun, the bureau’s deputy director, was surprisingly frank about some of the flaws in Chinese statistics. Mr Xu admitted, for example, that the retail-sales numbers include some purchases by companies and the government, which should not be counted as consumption. He estimated that consumer spending in the first quarter grew by 9%, compared with the 15% increase reported for retail sales.

Andy Rothman, an economist at CLSA, a regional broker, believes that Chinese statistics are much more trustworthy than they used to be. This is partly because there are alternative numbers to go on; CLSA, for example, produces its own purchasing-managers’ index. There are also more private-sector economists keeping tabs on China than there were a decade ago. The more eyes there are on China, and the more crucial its economic performance becomes for the rest of the world, the harder it is for officials to tamper with the speedometer.

Article - The great patriotic push is on in China

Straits Times 28 April 2009

BEIJING: China's Communist Party will launch a patriotic propaganda offensive celebrating 60 years of its rule, hoping the campaign will ward off economic pessimism and public discontent that could loosen its grip on power.

The 'mass patriotic education' campaign was announced on the front page of the People's Daily - the Communist Party's mouthpiece - and other official newspapers yesterday.

It underscores how even as China expands as a global economic power, officials still need to apply propaganda tools - honed over decades of one-party rule - at home to counter social strains from the financial crisis.

The 'mass patriotic campaign', which will involve a five-month blitz of pro-government propaganda on television and at concerts, cultural events and public meetings, would 'bolster confidence in vanquishing hardship', said the People's Daily, citing a directive from the party's department of propaganda.

The document described 2009 as an important year in which China would have to deal with 'complicated changes' in the global economic arena and at the same time maintain stable and relatively fast economic development.

The activities planned should 'guide people to love the party' and highlight the great achievements China has accomplished in the past 60 years.

'Guide people to profoundly grasp the incomparable superiority of socialism with Chinese characteristics,' said the directive. 'Correctly understand the new changes in the international economic environment and in our country's economic development.'

After a decade of 10 per cent-plus annual economic growth, China's leaders are contending with rising unemployment following a sharp downturn in demand from the United States and Europe for the exports which have helped drive the Chinese economic miracle.

The government is drawing up a fresh economic stimulus aimed at boosting consumption, on top of a previous four trillion yuan (S$887 billion) stimulus package to combat the global downturn by spending on new infrastructure projects around the country.

Chinese leaders appear determined that the common people should be made aware that, in these difficult times, their government is working overtime for their benefit, British newspaper the Telegraph reported yesterday.

The aim of the campaign, the People's Daily said, was to encourage the public to 'see fine prospects for our country's economic and social development' and 'even more firmly defend social stability'.

A notice issued earlier by the Ministry of Education also urges schools of all levels to launch educational activities highlighting the theme of patriotism.

It specifies that such activities should emphasise on 'improving the ideological and political education of undergraduates, as well as the shaping of the ideology and morals of non-adults'.

Vice-Party Secretary of Beijing, Mr Wang Anshun, indicated in a speech two week ago that the Chinese capital would carry through this theme of patriotism when it holds the National Day celebrations at the Tiananmen Square.

The campaign will culminate with a grand military parade through Tiananmen Square in Beijing on Oct 1 to mark the 60th anniversary of Mao Zedong's announcement of the founding of a People's Republic of China in 1949.

REUTERS

Question
To what extent will the propaganda campaigns like this be successful in today's China?

NPC and CPPCC Annual Sessions 2009

Premier Wen delivers the government work report
Premier Wen Jiabao Thursday called on the nation to strengthen conviction for victory while he envisaged "arduous and formidable" tasks in 2009 as the country tried to keep economic growth amid a global downturn. (Click for main website)

• Highlights of Premier Wen's gov't work report
• Key figures in gov't work report by Chinese Premier

==== Key figures for 2009 ===

● GDP to grow by 8%	● CPI to rise around 4%
● Fiscal deficit budget of 950 bln yuan	● To allocate 42 bln yuan to offset unemployment
● Urban unemployment rate under 4.6%	● Urban employment to increase by over 9 million
● 43 bln yuan to build low-rent houses	● 120 bln yuan added to boost agriculture

More figures >>>>

==== On Economy ===

● Real estate sector China will take measures to stabilize real estate market confidence while promote "orderly development" of the industry. More >>>	● Domestic demand China would make boosting domestic demand a "long-term" strategy and take further measures to stimulate consumer spending. More >>>
● Agriculture Chinese Premier Wen Jiabao pledged Thursday to add another 120 billion yuan to boost the country's agriculture. More >>>	● Employment China pledged Thursday it will implement an even more proactive employment policy this year and allocate 42 billion yuan to offset unemployment More >>>
● Fiscal deficit China announced Thursday a fiscal deficit budget of 950 billion yuan for 2009, a record high in six decades. More >>>	● Economic growth China will be able to achieve the economic growth target of about 8 percent in 2009, if proper policies and measures are taken, said Premier Wen Jiabao. More >>>
Premier Wen Jiabao admitted that China is facing unprecedented difficulties and challenges, with continuous drop in economic growth rate due to the impact of the global financial crisis becoming a major problem. More >>>	Chinese premier says economic slowdown becoming major problem in China

==== On Politics ===

● Political reform The development of democracy and the legal system should be strengthened in China. More >>>	● Combat corruption The Chinese government will strengthen its efforts to promote clean government and combat corruption. More >>>
● Mainland-Taiwan co-op The Chinese mainland will continue to strengthen cross-Straits economic cooperation with Taiwan to jointly respond to the global financial crisis. More >>>	● Address public complaints Social stability has become a major concern in China as it will be the most difficult year for China's economic development since the beginning of the century. More >>>

==== Others == =

● Military force China will transform its military training based on mechanized warfare to that based on informationized warfare. More >>>	● Welfare, medicare The Chinese government pledged on Thursday to increase spending on social programs including pension and medical reform in 2009. More >>>
●Emission China will continue its drive of energy saving, emissions reduction, ecosystems preservation, and environment protection in 2009. More >>>

Article - China keeps wary eye on displaced migrant workers

Tan Tianying, a migrant worker, at home with her grandparents in Tanjia village. Hundreds of employees at her uniform factory in Guangzhou have lost their jobs.

(Du Bin for The New York Times)

By Andrew Jacobs (IHT)
Monday, February 23, 2009

TANJIA, China: Tan Tianying might not look like a troublemaker, but she and millions of other workers like her have government leaders fretting about the country's stability.

A shy, delicately built seamstress who makes aprons and coveralls in Guangzhou, Tan, 24, is part of an army of migrants, 130 million strong, who have flocked to cities for jobs but whose prospects for continued employment are increasingly dim.

As the global economic crisis deepens and the demand for Chinese exports slackens, manufacturing jobs in the Pearl River Delta and all along the once-booming southern coast are disappearing at a stunning pace. Over the last few months, more than 20 million migrant workers have been cast into the ranks of the unemployed, depriving impoverished towns like Tanjia, in Hunan Province, of the much-needed income the workers sent home.

Since December, hundreds of employees at Tan's uniform factory have been fired, and wages for those remaining have been cut by a third as orders from the United States dry up. Last year, 2,400 factories in and around Guangzhou closed.

"I hope I still have a job," Tan said this month, a few hours before leaving Tanjia on a train for the 10-hour ride that in recent years has carried away most of the town's working-age residents. "I don't want to go back to being a poor farmer."

In a nation obsessed with social harmony, the well-being of China's mobile work force has become the top priority for a government that has long seen its fortunes tied to those of the country's 800 million rural residents. Mao's revolution, after all, was fueled by embittered peasants, and it has not gone unnoticed in Beijing that decades of heady growth have fed a widening gap between urban residents and those who live in the rural interior.

Although the government has not released updated information about rural unrest, officials have been strategizing about how best to keep large protests and riots from spreading, should the dispossessed grow unruly.

This week, more than 3,000 public security directors from across the country are gathering in the capital to learn how to neutralize rallies and strikes before they blossom into so-called "mass incidents." At a meeting of the Chinese cabinet last month, Prime Minister Wen Jiabao told government leaders they should prepare for rough times ahead. "The country's employment situation is extremely grim," he said.

To ameliorate the hardship of idled migrants, the central government has announced a series of initiatives that include vocational training, an expansion of rural health care, and crop subsidies to ensure that those who return to the land can make a living despite a slump in agricultural prices. A $585 billion stimulus package introduced in November, much of it weighted toward labor-intensive construction projects, is also expected to absorb some of the newly unemployed.

But here in Tanjia and the surrounding countryside of Hunan Province, most people say they have yet to see much in the way of government largess. As the Lunar New Year came to an end two weeks ago, many migrants who had come home for the holidays were anxious to return south, hoping to reclaim their old jobs or find new ones.

About 40 percent of the town's 2,000 residents work outside the province, and their remittances have been a lifeline for the children and elderly people who remain behind. Much of that money has been spent on motorcycles, high school educations and new homes, some trimmed with Corinthian columns and ceramic dragons, that are the brick-and-mortar embodiment of this newfound prosperity.

Tan's family home, like those of her neighbors, is a work in progress. Since 2005, her mother, father and brother, all migrant workers, have poured $15,000 into the two-story house, but they still need another $9,000 for appliances, fixtures and a white tiled facade.

"We have no savings," said her father, Tan Liangsheng, 52, a haggard-looking man who recently lost his job as a construction worker. "All our hard work and bitterness is invested in this house."

Just behind him sat the mud-brick structure where the extended Tan clan used to live.

In some ways, Tanjia's residents are luckier than most. Unlike China's drought-stricken north and its chronically arid west, Hunan Province is well-watered and blessed with a temperate climate that allows farmers to grow food much of the year.

Still, with 64 million people squeezed into an area the size of Kansas, most people make do with tiny plots of land; in Tanjia the average size is about 400 square meters, or a tenth of an acre. "Maybe we won't starve to death, but life would become very difficult if everyone came back home," said Long Feng, 29, who works at a car repair shop in Shenzhen, not far from the Hong Kong border.

In Zhuzhou, the nearest city of any consequence, government officials are not overly concerned about a surge in jobless farmers.

Chen Shuxian, director of Zhuzhou's employment center, said he was more worried about the 3.7 million people who live in and around this booming city, people who have become accustomed to relatively comfortable lives. "They have cellphone bills and rent to pay," he said. "The migrants don't have a lot of expectations, and they can always fall back on the land and their family savings."

Such sentiments are common in China, where rural laborers are often viewed as dime-a-dozen workhorses capable of enduring enormous hardship. He Xuefeng, a professor who studies rural life, said many manufacturers believe the most productive workers are spent by 40.

"As workers grow older, they can't work as quickly or accurately, so they are naturally eliminated," said He, who teaches at Huazhong University of Science and Technology in Hubei province. "The financial crisis will simply speed up that process by two or three years and force them to return home earlier."

After he lost his job at a glass factory in Guangzhou last year, Wang Liming, 39, returned to his home on the outskirts of Zhuzhou thinking he could find employment nearby. Things turned more dire after his wife lost her job just before the New Year festivities.

He acknowledged that there was work to be had in Zhuzhou, but those jobs generally pay less than $100 a month, about half what a semiskilled assembly-line position pays in Guangzhou.

"I couldn't even afford my daughter's high school tuition on that kind of salary," he said, standing in front of his home, a half-built box that lacks windows and a refrigerator.

A gruff, chain-smoking man, Wang said the decade he spent in the south turned him off to agricultural work. "I hate working the fields," he said as his neighbors nodded in agreement. Even if they wanted to, he and his fellow villagers could not make much money from farming: Some of the best patches of land have been swallowed up by Zhuzhou's rapid development, including the electric generating plant that dominates the view from his front door.

Asked about his plans, Wang shook his head, glanced at his cellphone and said he was waiting for friends in Guangzhou to call him about a job. "I'm just hoping the phone rings," he said.

Question:
Consider the challenge that migrant workers pose to the ruling CCP at this time of the crisis.

Article - China's mounting pink slips (Middle class tensions)

With an estimated 1.5 million graduates of the class of 2008 still jobless, the government has responded with a plan to create 9 million jobs in 2009, primarily to help build up the country’s infrastructure as well as positions in rural villages

By Christina Larson (IHT)
Sunday, January 4, 2009

Set aside Yao Ming and the furry mascots. The buoyant spirit of the 2008 Beijing Olympics already seems like a lifetime ago. A new icon has recently emerged for today's China: the disgruntled, laid-off factory worker, standing dejected outside a shuttered factory, another victim of the global economic downtown.

As startling as these factory closures have been, the fate of another less-heralded figure may be more significant: the laid-off office worker.

After 30 years of nearly continuous, even momentous, economic growth - which has lifted millions out of poverty and bolstered the ruling Chinese Communist Party - the economy's manufacturing base is slipping. Last month, exports dipped for the first time in seven years.

Mounting factory layoffs this year - around 2 million have been sent packing near the factory city of Dongguan alone - have prompted a string of noisy but isolated protests across the country's southern industrial region. The anxious Chinese government has rushed in with bailout money for companies and some compensation for workers. So far, a thousand sparks haven't become a wildfire. Fretful Chinese workers have yet to channel discontent into unified campaigns, or demands for representation in the political sphere. But whether Beijing can so easily mollify the growing apprehension among the country's middle class could be another story entirely.

That workers haven't linked arms factory to factory and city to city may seem anti-climactic. Then again, consider the realities of China's internal politics. Most linemen were farmers five years ago. They are recent migrants to the cities, on the bottom rung of status and expectations. The combination of fragmented social networks, poor education, and gray legal status (most are "unregistered" urban residents) gives them limited power to organize.

Many have learned to tolerate poor labor conditions, minimal rights, and dubious payroll practices. They are now reacting, loudly, when shunted aside, but what they're demanding is that employers fork over back pay - not any kind of systematic change.

But China's middle class (now some 100 million to 150 million strong) is a different animal. The country's economic and political fabric will face an unheralded challenge if large numbers of pink slips go to white-collar workers in 2009 - the kind of people who have grown accustomed to having more choices and a higher standard of living.

In recent years, they haven't had many complaints. But when roused, they can potentially punch back. Perhaps the most striking example of citizens exerting direct pressure on national policy came in 2004, when a network of middle-class Chinese environmental activists and lawyers, pointing to Beijing's own "environmental impact assessment law," convinced the government to halt planned dams on China's last wild waterway, the Nu River.

The last time China's middle class really got agitated, of course, was on the heels of another financial crisis. That was in 1989, following a year of spiraling inflation, price shocks, and cash-flow woes. One telling, if unsexy, demand of the university students protesting at Tiananmen was to hold accountable those who caused inflation.

Much has changed in two decades. China's financial managers are far more sophisticated. There are new unemployment and Social Security schemes that, in theory, offer more safety nets to soften the blow for laid-off urban workers. But as Pieter Bottelier of the Johns Hopkins University School for Advanced International Studies in Washington points out, those systems, created within the last few years, are still in their nascent stages.

At the same time, there is, on paper, a broader array of options for disgruntled people to blow off steam. In recent years, Beijing has passed regulations that purport to give citizens limited avenues for policy feedback - including posting draft versions of certain "laws closely related to the interests of the people" on government Web sites for public comment. Such channels have so far remained basically dormant (and may well have been created quite cynically), but a prolonged financial slump could raise their profile.

Whether China's middle class will ultimately focus on discreet issues (more unemployment benefits) or broader concerns (more freedom for the media to detail white-collar problems) remains unknown. But the deeper the financial hole, the less likely political complacency.

Related sites:

• The new middle class vents its anger with strikes;
• An end to the Chinese dream (Newsweek 2009)
  

Question

1. From the article, what are some of the more pressing challenges the CCP currently faces?
2. Discuss the possible measures the government can undertake to reduce the social problems that are likely to result from the financial crisis.
   

Article - Financial crisis deepening: Hu

ST Interactive Feb 17, 2009

PORT-LOUIS - THE impact of the economic crisis is deepening and will hit developing nations particularly hard, Chinese President Hu Jintao warned on Monday as he embarked on the final leg of a tour of Africa.

A day after inking deals worth more than US$20 million (S$30 million) in Tanzania, Mr Hu called on rich nations to help African countries cope with the downturn before flying to Mauritius, the last stop on a four-nation trip to the continent.

'The impact of the crisis on economies around the world is still deepening and its grave consequences will be felt more in the days to come,' he said in a speech at a town hall gathering in the Tanzanian capital Dar es Salaam.

'It has put developing countries in a particularly disadvantaged position Many African friends are concerned that in the face of the daunting challenges of the financial crisis, their international developing partners may scale back aid, debt relief and investment in Africa.

'The developed countries should assume their responsibilities and obligations, continue to deliver their aid, debt relief commitments, maintain and increase assistance to developing countries and effectively help them maintain financial stability and economic growth,' he added.

On Sunday, the Chinese president signed deals with his Tanzanian counterpart Jakaya Kikwete totaling US$21.9 million covering agriculture, communications and technical cooperation.

Mr Hu arrived Monday in Mauritius where he is to pen two agreements to finance infrastructure in the Indian Ocean island, home to the biggest Chinese diaspora in Africa, with more than 30,000 nationals of Chinese origin.

He was welcomed by Prime Minister Navinchandra Ramgoolam. On Tuesday he will meet a Mauritian government delegation led by Ramgoolam then visit a Chinese cultural centre before winding up his visit later in the day.

'During the Chinese president's visit, two deals will be signed to finance the enlargment of an airport and other infrastructure,' said Suresh Seeballuck, the cabinet secretary. China has funded several projects on the Indian Ocean island since 1972 when Mauritius switched its diplomatic allegiance from Taipei to Beijing.

'Mauritius is intensifying its efforts so that much of the Chinese investment in Africa goes through Mauritius,' Finance Minister Rama Sithanen said.

Head of Mauritius' chamber of commerce Charles Lee said: 'This visit shows a strong friendship between China and Mauritius, a small country without natural resources.' Mauritius' imports from China were worth more than 300 million dollars by September 2008, while Beijing has also invested in the island's textile and communication sectors. -- AFP

Other webs on China's relationship with African Countries:

• Experts Discuss China's Growing Influence on African Development (22 Jun 2007)
  
• China's African Policy (January 2006)
• China's Foreign Direct Investment in Africa (2005)
  

Questions

1. What is the role that China wants to play in the economic and social development of Africa?
2. The West is suspicious of China's intentions in Africa.With reference to the articles above and any relevant online resources, assess if this suspicion is justified.
3. Identify developments in China that are making other governments ill at ease and justify strategies that the Chinese government can take to manage their distrust of China.
   

Article - Bullish Chinese ox to save world?

Peh Shing Huei & Grace Ng
The Straits Times
Publication Date: 06-02-2009

Chinese companies had started the year on a sombre note amid a worsening economic outlook.

But firms like mould maker China Kunda are seeing a brighter side, amid signs that the storm clouds over the Chinese economy are starting to clear.

The Shenzhen-based company - which supplies moulds to industries like the car sector - notes that 'preliminary indications' from its customers show they are upbeat about the future.

"During our discussions with our customers, they have indicated that they remain optimistic about the prospects for products like certain automobile parts, personal computers and notebooks this year," Hau Khee Wee, chief financial officer of China Kunda, told The Straits Times.

Indeed, the Year of the Ox may turn out to be a bullish one for China after all.

After months of doom and gloom, analysts and experts now believe that there is a glimpse of light at the end of the tunnel for the world's third-biggest economy.

While they differ on the length of the tunnel that China still needs to claw out of, most agree that the worst seems to be over for this country of 1.3 billion.

It is a sentiment shared by the leaders of the Chinese Communist Party.

Last month, Premier Wen Jiabao gave the first signs of a rebound when he told a business audience in China that the latest economic numbers revealed an early recovery from the global financial crisis.

Earlier this week in London, Wen - who was greeted with "I Love Bao Bao" or "I Love Babe" (an affectionate play on his name) placards by Chinese students in the British capital - gave the Chinese people even more reasons for love when he reiterated his words of confidence.

"During the last 10 days of December it started to get better. The goods piled up in port started to decrease and the prices of industrial products started to rise,' he said, adding that 'there is light at the end of the tunnel".

The numbers backed up his words.

China's official manufacturing index - the purchasing managers' index (PMI) - for last month rose to 45.3, up from 41.2 in December and a record low of 38.8 in November.

There was also a surge in bank lending as Chinese banks answered the calls of the government. A record 1.2 trillion yuan (US$176 billion) of new loans were extended last month, reported the China Securities Journal on Wednesday (february 4). This suggests that more companies would now have more money to survive the crisis.

"The worst of the slowdown in the Chinese economy may be behind us now, judging from the latest PMI and lending data," said Credit Suisse economist Tao Dong.

Merrill Lynch economist Ting Lu was even more optimistic, saying that the numbers pointed to a 'V-shaped recovery' and 8 per cent gross domestic product growth for this year.

A reason behind this modest turnaround is the 4 trillion yuan stimulus package announced late last year by the Chinese government.

Although only a small portion of that largesse has been spent - largely on rebuilding the earthquake-hit south-western Sichuan province and improving road and rail networks - the effect is already felt.

Even less optimistic analysts agree that China is looking at a recovery this year, albeit only in the second half.

"I don't think there will be a sharp V-shaped recovery - we are expecting more of a U-shaped recovery: slow in the first half of the year and then a pick-up in the second half," said Standard Chartered economist Stephen Green.

HSBC economist Qu Hongbin echoed his reading, calling it 'a year of two halves' for China's economy.

"Weak in the first half with exports and the property market going down, but stronger in the second half as the government's aggressive stimulus package takes effect after winter, which is typically the slow season for the construction sector," he said.

But the Chinese are not grinning just yet.

Wen had acknowledged in London that there is still much more work needed, including a possible dip into China's huge foreign currency reserves for domestic purposes.

"We may take further new, timely and decisive measures. All these measures have to be taken pre-emptively before an economic retreat," he told the Financial Times.

And if the Chinese government needed a sobering number to forestall any premature celebrations, a top rural official provided it just hours after Wen's comments in Britain were published.

Chen Xiwen revealed on Monday morning that some 20 million migrant workers in China have lost their jobs as a result of the crisis - a figure that is two to three times higher than previous official estimates.

It is the clearest indicator that China, while inching its way out of the crisis earlier than any of the major economies, has also suffered a far more painful bite than most had anticipated at the onset of the crunch.

Economist Lu Ding of the University of the Fraser Valley pointed out that China's malaise actually started before the global crash. Reforms and adjustments to the Chinese economy - such as the removal of export tax rebates and the new labour contract law - had already hurt exports.

"The coincidental impact of the US-originated financial tsunami has accelerated the decline of exports to a crash," he told The Straits Times.

There are also experts who believe that whatever recovery China makes in the coming months would be marginal, given how the world is still mired in recession.

"We doubt there will be a V-shaped recovery despite some signs of mild recovery in the past month as we believe China is not able to jump when the global economy is still sinking," said OCBC bank economist Tommy Xie.

Even if China does indeed jump, there is little hope that it would be the global swing factor, the saviour of the world.

"China can save itself but not the world," said Tao, noting that China's recovery is driven by infrastructure investment, which will boost demand for local materials and labour.

Added Dr Green: "China has limited ability to pull the rest of the world economy out (of a slowdown) through its imports. It is a net importer of unfinished components as well as some raw materials such as iron ore and some oil products. It doesn't import much manufacturing goods from Asia or the rest of the world. So it is also unlikely to be a growth engine for Asia."

Xie disagreed, saying that China is still "one of the key engines" for the global recovery.

"Chinese high savings and huge foreign exchange reserves are the important weapons to fight the shrinking global economic activity," he said.

But whatever the impact of China on the world, a Chinese rebound that comes sooner than its rivals' - Japan in particular - would certainly have repercussions that extend beyond the crisis.

"I expect China will surpass Japan as the world's second-largest economy by the middle of next year," said Qu.

Such a switch in 'rankings' would not be as understated as China's rise to third place over Germany last month.

The long-time rivalry, and at times enmity, between China and Japan would surely engender a surge in Chinese nationalism - if and when it overtakes Japan for the world No. 2 position, behind the United States.

Happy New Year? For the Chinese, it could well be.

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

By Ted Plafker

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."

Article: China seen facing wave of unrest in 2009

Protesters sit behind a police line outside a government office in central Beijing in this October 20, 2008
By Chris Buckley Tue Jan 6, 6:27 am ET

BEIJING (Reuters) – China faces surging protests and riots in 2009 as rising unemployment stokes discontent, a state-run magazine said in a blunt warning of the hazards to Communist Party control from a sharp economic downturn.

The unusually stark report in this week's Outlook (Liaowang) Magazine, issued by the official Xinhua news agency, said faltering growth could spark anger among millions of migrant workers and university graduates left jobless.

"Without doubt, now we're entering a peak period for mass incidents," a senior Xinhua reporter, Huang Huo, told the magazine, using the official euphemism for riots and protests.

"In 2009, Chinese society may face even more conflicts and clashes that will test even more the governing abilities of all levels of the Party and government."

President Hu Jintao has vowed to make China a "harmonious society," but his promise is being tested by rising tension over shrinking jobs and incomes, as well as long-standing anger over corruption and land seizures.

China also faces a year of politically tense anniversaries, especially the 20th year since the June 1989 crackdown on pro-democracy protesters in Tiananmen Square. That date has already galvanised the "Charter 08" campaign by dissidents and advocates demanding deep democratic reforms.

While foreign commentary about risks to China's recipe of fast economic growth and one-party control are common, the nation's leaders are usually reticent about such threats.

This report and other recent open warnings may be intended to help snap officials to attention, said one Chinese expert.

"The candor about these problems reflects the severity of the unemployment problem. It's meant to attract the attention of all levels of government," said Mao Shoulong, a professor of public policy at Renmin University in Beijing.

"The government wants to show that stability is at the top of its agenda."

JOBLESS AND BITTER

The biggest threats to China's social fabric will come from graduating university students, facing a shrinking job market and diminished incomes, and from a tide of migrant laborers who have lost their jobs as export-driven factories have shut.

Factory closures, sackings and difficulties paying social security had already unleashed a surge of protests, the report said. Officials in provinces that have provided tens of millions of low-paid workers for coastal factories have reported a leap in the number returning to their farm homes without work.

State statistical authorities estimated that close to 10 million rural migrant workers had lost their jobs, the magazine said, without specifying when the sackings happened.

Including students who graduated in 2008 and had not found work, there would be more than 7 million university and college graduates hunting for jobs this year, Huang calculated.

The government's goal of annual GDP growth for 2009 of 8 percent would generate only 8 million new jobs for the whole country, he added. In 1989, discontented students formed the core of the pro-democracy protests.

"If in 2009 there is a large number of unemployed rural migrant laborers who cannot find work for half a year or longer, milling around in cities with no income, the problem will be even more serious," said Huang.

Huang is Xinhua's bureau chief in the southwest city of Chongqing, which has long been a cauldron of unrest. Other parts of China have also seen intense but brief and localized protests over police abuses, corruption and factory closures.

Ian Bremmer, president of the prominent political risk consultancy Eurasia Group, said he foresaw no departure from that pattern and no overwhelming crisis.

"The party has built a large stockpile of domestic goodwill over the past three decades," Bremmer told Reuters in an interview this week, offering a more optimistic outlook.

"Toughening economic times will erode some of that credit, but the reserves are too deep for China to reach a crisis point in 2009."

Chinese Foreign Ministry spokesman Qin Gang said the government would be able to deal with the tough times.

"We have the ability and the confidence to ensure the Chinese economy's stable and relatively fast growth and to ensure social stability," he told a news briefing.

China's economy expanded by 9.9 percent from a year earlier in the first nine months of 2008. But some economists doubt that the government can achieve its goal of 8 percent growth for 2009.

The Outlook report also stressed the nation's strains were about more than growth rates. Protests were increasingly politicized, making it harder for officials to douse them by force or cash hand-outs, the report said.

"Social conflicts have already formed a certain social, mass base so that as soon as there is an appropriate fuse it always swiftly explodes and clashes escalate quickly," said Huang.

Article - A ravenous dragon

CHINA'S QUEST FOR RESOURCES

Mar 13th 2008
From The Economist print edition

China's hunger for natural resources has set off a global commodity boom. Developed countries worry about being left high and dry, but the biggest effects will be felt in China itself, says Edward McBride (interviewed here)

BESIDE the railroad track, between two hillocks of rust-red soil in the midst of Congo's mining belt, three Chinese labourers appear as if from nowhere. There are lots of Chinese around these days, explains one of their compatriots, Harvey Lee, who is driving through the scrub to the nearby copper plant he runs for a Canadian metals firm. On his way, he points out several rudimentary smelters. “That one”, he says, waving at a clump of corrugated-iron sheds and belching chimneys, “is owned by a man from Shanghai.” Moments later, when another ramshackle compound comes into view, he adds, “and that one belongs to two ladies from Hong Kong.” In all, he reckons, Chinese entrepreneurs have set up half of Lubumbashi's 50-odd processing plants.

All around Lubumbashi, the capital of Congo's copper-rich province of Katanga, there are signs of a sudden Chinese invasion. Chinese middlemen have begun buying ore from the area's many wildcat miners and selling it on to processing plants like Mr Lee's. Locals point out several villas in the city's leafy colonial cantonment that are occupied by mysterious Chinese businessmen. Katanga Fried Chicken, hitherto Lubumbashi's most popular restaurant, now has three busy Chinese competitors.

If all goes according to plan, these fledgling businesses will soon be overshadowed by Chinese investment on a much grander scale. In late 2007 the Congolese government announced that Chinese state-owned firms would build or refurbish various railways, roads and mines around the country at a cost of $12 billion, in exchange for the right to mine copper ore of an equivalent value. That sum is more than three times Congo's annual national budget and roughly ten times the aid that the “consultative group” of Western donors has promised the country each year until 2010. The Chinese authorities, it seems, are so anxious to obtain enough minerals to sustain their country's remarkable economic growth that they are willing to invest billions in a dirt-poor and war-torn place like Congo—billions more, in fact, than Western governments and investors combined are putting in.

And Congo is not the only beneficiary of China's hunger for natural resources. From Canada to Indonesia to Kazakhstan, Chinese firms are gobbling up oil, gas, coal and metals, or paying for the right to explore for them, or buying up firms that produce them. Ships are queuing off Australia's biggest coal port, Newcastle, to load cargoes destined for China (pictured above); at one point last June the line was 79 ships long. African and Latin American economies are growing at their fastest pace in decades, thanks in large part to heavy Chinese demand for their resources.

China's burgeoning consumption has helped push the price of all manner of fuels, metals and grains to new peaks over the past year. Even the price of shipping raw materials recently reached a record. Analysts see little prospect of an end to the boom; the prices of a few commodities have fallen on the back of America's worsening economic outlook, but others, including oil, wheat and iron ore, continue to set new records. China, with about a fifth of the world's population, now consumes half of its cement, a third of its steel and over a quarter of its aluminium. Its imports of many natural resources are growing even faster than its bounding economy. Shipments of iron ore, for example, have risen by an average of 27% a year for the past four years. Western mining firms are enjoying a sustained boom.

Unwelcome advances

But China's sudden global reach is generating as much anxiety as prosperity. In 2005 America's congressmen, citing nebulous national-security concerns, scuppered the proposed takeover of Unocal, an American oil firm, by CNOOC, a state-owned Chinese one. The opposition candidate in Zambia's presidential election in 2006 made a point of attacking the growing Chinese presence in the country. Residents of Russia's far east fear that China is planning to plunder their oil and timber and perhaps even to colonise their empty spaces.

Some non-governmental organisations worry that Chinese firms will ignore basic legal, environmental and labour standards in their rush to secure resources, leaving a trail of corruption, pollution and exploitation in their wake. Western companies fret that the Chinese state-owned firms with which they suddenly find themselves competing have an agenda beyond commercial gain. The Chinese government, they say, is willing to pay over the odds for mining or drilling rights to secure access to physical resources. It also intervenes unfairly on its companies' behalf, they claim, by offering big aid packages to countries that welcome Chinese investment. All this, it is feared, will dent the profits of big oil and mining firms, stoke inflation and imperil the West's access to resources that it needs just as much as China does.

Diplomats and pundits, for their part, fear that the West is “losing” Africa and other resource-rich regions. China's sudden prominence, according to this view, will reduce the clout of America, Europe and other rich democracies in the developing world. China will befriend ostracised regimes and encourage them to defy international norms. Corruption, economic mismanagement, repression and instability will proliferate. If this baleful influence spreads too widely, say the critics, the “Washington consensus” of economic liberalism and democracy will find itself in competition with a “Beijing consensus” of state-led development and despotism.

Such fears are not entirely groundless if the recent conduct of some of Congo's neighbours is anything to go by. Angola, to the south, has been receiving so much aid and investment from China that in 2006 it decided it had no need of the International Monetary Fund's billions and all the tiresome requirements for transparency and sound economic management that come with them. Sudan, to the north, has shrugged off Western threats and sanctions over the continuing atrocities in Darfur, thanks in large part to China's readiness to invest in Sudanese oilfields and buy their output. Farther afield, China's eagerness to do business in Myanmar, and its consequent reluctance to chide the tyrannical generals that run the place, helped to prevent a forceful international response to the violent repression of peaceful demonstrations there last year.

Nonetheless, this special report will argue that concerns about the dire consequences of China's quest for natural resources are overblown. China does indeed treat some dictators with kid gloves, but it is hardly alone in that. Its companies do not always uphold the highest standards, but again, many Western firms are no angels either. Fifty years of European and American aid have not succeeded in bringing much prosperity to Africa and other poor but resource-rich places. A different approach from China might yield better results. At the very least it will spur other donors to seek more effective methods.

For all the hue and cry, China is still just one of many countries looking for raw materials around the world. It has won most influence in countries where Western governments were conspicuous by their absence, and where few important strategic interests are at stake. Moreover, as China is becoming more involved in places such as Congo, its policies are beginning to change. It has promised to co-operate with the World Bank in its development efforts in Africa. It no longer seems prepared to back its most objectionable allies in the face of international opprobrium. Its diplomats, for example, did eventually stop parroting their line about unwarranted interference in the internal affairs of a sovereign state and allow United Nations peacekeepers to be deployed in Sudan.

The saga over Sudan shows how sensitive the Chinese authorities have become to criticism, despite their impassive reputation. When Steven Spielberg resigned as an adviser to the Beijing Olympics in protest at China's failure to do more about Darfur, a shrill chorus of criticism arose from China's official media—suggesting that such gestures do indeed have an impact.

Chinese companies will inevitably find themselves in fierce competition with Western ones for natural resources, as they must if global markets are to work efficiently. For the most part, however, they do not operate very differently from their peers. To the extent that the Chinese government does subsidise oil production, it helps to bring down the price for everyone else (its subsidies for oil consumption are another matter). As the world's biggest consumer of many commodities, China naturally wants to ensure a steady supply of them to keep its economy going. But markets for commodities are global, and the risk of any one consumer cornering supplies, or securing them at a lower price, is negligible.

Own goal

The worst fallout from China's quest for natural resources will be seen not in the countries they come from, nor in the countries that are competing for supplies, but in China itself. Over the past few years the volume of raw materials it consumes per unit of output has risen sharply. In particular, China has gone from miser to glutton in its use of energy, and is now struggling to diet. That has involved bigger imports of oil, gas and coal, and so more foreign entanglements. But it has also led to the rapid depletion of resources that China cannot import, such as clean air and water.

China is building a huge stock of grimy heavy industry, just as its coastal provinces are getting rich enough to care about the consequences. Protests about environmental issues are on the increase. There is not enough water in the Yellow River basin, which covers a huge swathe of northern China, to supply both farmers and factories. Acid rain from coal-fired power plants is reducing agricultural yields, raising the spectre of increased rural unrest. As it is, the authorities are struggling to ensure that the air will be fit for athletes to breathe at the Olympics in Beijing this summer. All the while, the number of noxious steel mills, cement kilns and power plants relentlessly increases. Global warming, which is fed by their fumes, will make all these problems even worse.

Environmental concerns are unlikely to bring down the Communist regime, or even to stir as much resentment as the arbitrary confiscation of land currently does among China's poorest. But those concerns are certainly prompting the government to reflect on what sort of economic path it wants to pursue. So far, its efforts to temper economic growth, encourage energy efficiency and wean the country off heavy industry have had little effect. But continued failure would eventually make China a less prosperous and more unstable place.

Related data:

Hungry dragon (Jul 11th 2008)from Economist.com
Chinese companies are investing more abroad

AFTER 11 months of tricky negotiations, last week a subsidiary of China's state-owned oil company, CNOOC, announced that it would buy a Norwegian oil-services firm for $2.5 billion. Foreign investment by Chinese companies has grown steadily, reaching $18.7 billion last year. But striking deals is getting harder. Since 2005, when CNOOC was blocked by the American government from buying Unocal, an American oil firm, many of China's big state-owned companies have been wary of bidding for Western firms. And other countries are chary of China's appetite. An estimated $40 billion of potential Chinese acquisitions are awaiting approval by Australian regulators.

Article: Why China Is Too Scared to Spend

Boosting consumption is key to economic recovery. But that will take fixing a disastrous health system.

Mary Hennock
NEWSWEEK (Issue dated Dec 22, 2008)

This month marks the 30th anniversary of Deng Xiaoping's economic reforms in China. But rather than celebrating, officials are in a panic. The global economic crisis has rammed home the message that China's old export-driven development model won't work forever; last month exports were down for the first time since February 2002, and overall GDP growth has dropped from nearly 12 percent last year to a projected 8 percent in 2009. Economists and party leaders now agree: the only way to keep China humming is to boost domestic consumption. That means getting Chinese people spending. But there's a problem. China's social-security network is broken, badly, and nowhere are the problems worse than in health care. A serious illness can still wipe out a family's savings. As long as that's the case, ordinary citizens will keep sticking large chunks of their income under their mattresses. And while that lasts, consumer demand will lag.

It's not that China doesn't have the money. Just the opposite: Chinese householders currently sit on savings worth $3 trillion, thanks to a savings rate of more than 25 percent, or about 16 percent of GDP—which is higher than all OECD countries, according to the World Bank. In theory, that cash could help China out of its conundrum. "We have a large domestic market. Savings are high, economic reserves are high," Vice Commerce Minister Yi Xiaozhun told a nervous gathering of elite Chinese entrepreneurs on a recent weekend. The government has already tried to allay fears with a stimulus package worth $586 billion, which Beijing will use to counter the effects of factory closures. But it plans to do this largely through infrastructure spending. According to the cabinet-level National Development and Reform Commission (NDRC), some 45 percent of the package will go to projects such as new railways, ports and power stations. Meanwhile, only one percent of the total stimulus spending is pegged for health care, culture and education.

A growing pool of experts argue that that represents a missed opportunity and is unlikely to help China long-term. Huang Ming, a Cornell professor who teaches at Beijing's Cheung Kong Graduate School of Business, sums up a widely held view when he says, "It's in the interest of the government to develop the social safety net fast. It will stimulate consumption. [Chinese] save because they are frightened of getting sick." The costs of illness can be ruinous. A better health-care system would unleash domestic spending and thereby boost employment, especially in retail and services. It could even offset the social unrest Chinese leaders fear will come with slower growth. "If you have nationwide health care, people are less likely to go on the street," says Huang.

Yet tackling China's vast medical crisis is daunting. Even President Hu Jintao acknowledged in 2006 that "medical-service fairness is declining and medical fees are too high for most people to afford." He called for faster development of rural services, a network of city clinics, timely treatment and safe drugs at affordable prices.

But progress has been glacial, centered on pilot studies and exercises more visible to experts than the public. In October 2008, the NDRC issued a road map for reforms. But the document was vague and said little beyond confirming that health-care reform is "an urgent expectation of the majority of Chinese people."

That's putting it mildly. While the 30 years since Deng's reforms have brought scorching growth, in terms of health care China has moved backward. Hu Shanlian, a health economist who has been advising the Chinese government for 17 years, says there's been "great change since the 1960s," when there was "quite a good network for farmers to seek health care," including a broad system of "barefoot doctors" in village clinics as well as decent and affordable hospitals in towns. In the 1980s, this system collapsed when market reforms did away with the communes that funded such facilities. Something similar happened in cities, as state enterprises were privatized or laid off workers, cutting them off from the work-unit-based welfare net. In 1980 only one fifth of health-care costs were paid out of patients' own pockets, but by 2005 that had risen to more than half.

When the Mao-era system was dismantled, barefoot doctors disappeared and Chinese medicine became city- and hospital-based. Hospitals were permitted to charge for tests and drug prescriptions, and the more costly the procedure, the higher the revenue for both hospitals and doctors. The result has been "overprescription and overutilization of services," says Dr. Sarah Barber, who heads the World Health Organization's Health Policy and Systems team in Beijing.

With only a patchy network of primary-care clinics left, patients these days struggle to find the right doctor or diagnosis since they can rarely afford to visit many hospitals.

Hospitals charge fees way beyond the reach of ordinary Chinese. The problem is illustrated by the case of Liu Jiangtao, a 25-year-old party member who fell sick with leukemia in mid-2007. Liu currently lies in Beijing's No. 307 military hospital, where he's been trying to persuade TV and radio stations to help him raise the $58,000 he needs for a bone-marrow transplant. That sum is the equivalent of 40,000 times the annual income of his parents, who grow wheat and flax on the salty margins of the Yellow River. Liu was originally hospitalized in Shandong's Dongying City, but after eight months of ineffectual chemotherapy, his parents in May asked relatives for money to move him to Beijing. "Now most of my relatives don't want to communicate with us," says Liu. Meanwhile, delay in treatment has eroded his chances of survival.

Liu's plight points to another basic problem: the lack of adequate health insurance in China, a supreme irony for a country that's still officially communist (indeed, many capitalist countries in the West provide more comprehensive care for free). Liu has insurance, but it's China's most basic program, the Rural Cooperative Medical Scheme (RCMS). The RCMS was rolled out in the last four years. It costs participants as little as $3 a year and has been extended to 90 percent of China's farmers in record time. But the system is badly flawed. For one thing, it's a pay-first, claim-later setup, which doesn't do much good to patients like Liu who can't come up with huge fees in the first place. For another, most claimants get back only 20 to 30 percent of their costs. Many of China's poorest, sickest or least-educated citizens find the RCMS baffling and can't manage to jump through its procedural hoops.

Employer-based schemes have similar problems. Benefits aren't portable geographically so they don't help China's massive migrant population, and workers who lose their jobs can't take their contributions with them. Among city dwellers, health insurance coverage levels dropped from 45 percent of the long-term, settled population in 1998 to 39 percent in 2003. To tackle this, the government consolidated numerous employment-based deals into a single package better suited to job mobility. It then plugged a key gap for migrants with a new safety-net scheme that covers both urban and rural poor. Yet the overall health-insurance system remains so badly designed that simply adding money, as the government is doing, will solve little. Extra insurance funds simply tend to be soaked up by profit-hungry hospitals.

Still, the government is trying. Total government health spending increased from $143 billion in 2006 to an estimated $219 billion in 2007, according to Hu, the economist. And Hu and Barber say that the government is rolling out multiple new pilot schemes, experimenting with fixing drug prices, drawing up a national recommended drug-purchase list and passing price-label laws to prevent rip-offs. Village medics (of whom China has far too few) are to get guaranteed basic salaries in five poor provinces to stop them from relying on prescribing. Perhaps the most promising experiment is taking place in Chongqing, where rural and urban insurance pools are being combined to create portable, individual insurance, something China's lacked until now.

So far the government has avoided fanfare; it seems to want to avoid any big announcements and to build on the results if they turn out to be positive. That's good research practice, says Barber. "In health systems it's not one fix, so you look at your system and adjust; the key is to monitor what's happening," she says.

Yet this approach may not be politically decisive enough for these troubled times. "What China really needs is structural transformation," says Michael Shen Minggao, a former investment banker who is now chief economist with the highly regarded Caijing magazine. Without it, he argues, the Chinese economy may still manage to grow at 8 percent or more next year, but consumption won't budge. And that spells trouble long-term. Until Chinese start buying, their country's economic prospects over the next 30 years may fall far short of the world-beating growth they've enjoyed for the last 30.

URL: http://www.newsweek.com/id/174524

Related: China Builds World's Largest Social Security Network (March 11, 2001 - People's Daily)