x Abu Dhabi, UAEMonday 24 July 2017

China battles its own economic crisis

The Communist Party is struggling to bring monetary gains enjoyed in cities to the huge population that remains in rural areas.

An employee works at a textile factory in Xiangfan, Hubei province  on Oct 14 2008.
An employee works at a textile factory in Xiangfan, Hubei province on Oct 14 2008.

BEIJING // As the world watches the global financial meltdown, attention is increasingly turning to China, whose economy has been growing at a double-digit clip for decades, filling the government's coffers with a hefty US$1.9 trillion (Dh7tn) in foreign exchange reserves, the highest in the world. Chinese officials declared last week the health of the Chinese economy to be sound. The country's economy "maintained rapid growth, the financial industry is running steadily and the basic situation of economic development remained unchanged", said a communiqué from the Communist Party's central committee meeting, which concluded on Oct 12.

Unlike other large economies hit by this crisis, there are buffers in China. Savings rates are high, there is no loss of confidence, and banks in the state-controlled financial sector are lending between themselves. But despite the reassurances that China's financial motor is running smoothly, there were no promises to help bail out troubled financial markets overseas. According to Mao Yushi, one of China's most influential economists, a large part of the country's foreign reserves are already invested abroad.

"I don't think China has the ability to give a [helping] hand. The United States has appropriated $700 billion. China has double this amount in foreign exchange, but only a part can be used to save the world economy. The rest is invested in foreign direct investment and it can't be used," said Mr Mao in an interview. Indeed, in a show of transparency, the Chinese media have been reporting regular updates of its investments in the world's troubled financial institutions. To name just a few, China holds $519bn in US Treasury bonds, $300bn and $400bn respectively in US mortgage giants, Fannie Mae and Freddie Mac, $670 million in bonds with the bankrupt Lehman Brothers and a 9.9-per-cent stake in Morgan Stanley.

In reaction to the global financial downturn, China has also shelved plans by the Ping An insurance company to buy 50 per cent of Fortis's asset management company and it has abandoned a $10bn scheme by the China Development Bank to buy Germany's Dresdner Bank. "China cannot take a leadership role to help the global economy. Maybe China will give lip service. It wants to give a good impression abroad and might give a maximum of $100 billion, but it is beyond China's capability" to give more, said Mr Mao, a founder of Unirule, one of the country's first private think tanks.

"The best way China can help the world, if consumption declines, is not to give money but to supply the world with cheap commodities," he said. "Decreasing incomes in the industrialised countries means there will be more likelihood to buy cheaper Chinese products." Indeed, fuelling the consumer markets at home and abroad has been a source of much discussion and debate here in recent weeks. China's export market has been one of the engines of the country's extraordinary growth. Millions of migrant workers have left the poverty of the Chinese countryside in search of higher incomes in the factories in south-eastern China that manufacture exports.

A slowdown in trade will certainly affect these factories. Can China's economy absorb the surplus labour that will be created? The Chinese government certainly hopes so and has been preparing for a possible backlash from the global economic crisis by boosting the country's domestic consumption. "In the end, it all depends on the growth of our GDP. If GDP can stay above eight per cent, then we'll still have employment opportunities. And if people have increased incomes, then they have money to buy and to consume. Everything bought is a job opportunity," Mr Mao said.

During its recent plenum, the Chinese Communist Party announced major rural reforms that will double per capita income for the country's more than 700 million farmers and, it is hoped, help fuel domestic consumption. Although it is still unclear what the reforms will entail, it is expected that farmers, who represent about 50 per cent of the total population, will benefit from land reforms and new rural spending initiatives. For unemployed rural factory workers, this could be an incentive to return to the land.

But many farmers will stay in the cities where they have been working since the launch of China's economic reforms 30 years ago. Most have prospered from the spectacular growth in Chinese cities and have seen their once meagre rural incomes rise. They have no intention of returning to the countryside. "I went to many rural areas and there are many houses empty," Mr Mao said. And it will be in the cities where they will find work, he said confidently. "A new economy will emerge and I think the service sector is the new opportunity. This is where the Chinese economy can grow.

"There are so many new jobs in China today and this will greatly improve the efficiency of the economy. If you go out on my street and see the shops, 30 years ago half of them did not exist. And one-fourth did not exist 10 years ago, for example mobile phones shops," he said. "Chinese are also consuming in areas such as education, medical care and health clubs. In big cities there are now many health clubs. In my neighbourhood alone there are more than 10 swimming pools. If people have money, they will pay for their own demands," he said.

The urban-rural divide was never so apparent as now as China struggles to ignite domestic demand amid threats of a global recession. Per capita urban income is three times that of rural incomes and the low rural income has become a bottleneck for increasing domestic consumerism. A legacy of the country's planned economy, China's rural and urban populations have been largely divided and controlled by a household registration system.

"In the past there were only two ways to leave the countryside: one was to join the army and the second was to pass the examination and go to university," Mr Mao said. The economic reforms launched in 1978 sought to change that, but until now the focus was largely on China's industrialised east coast. Instead of improving livelihoods on the farms, the Chinese government allowed millions of rural workers to move into the urban factories and on to the construction sites that defined the economic boon of the past three decades.

Trade and construction might slow down, but if the rural population joins China's consumer market, the wheels of the country's economy could continue to turn. With that in mind, China might not be able to save the global financial markets, but it is also working overtime not to join them. * The National