By Jean Sanuk
November 15, 2011 -- Asia Left Observer -- While North America and Europe were hard hit, China
has resisted the international crisis of 2008 thanks to a rescue plan
which combined huge public spending, a low interest rate and consumption
subsidies. China’s growth rate reached 9% in 2009 and 10.4% in 2010,
dragging in its wake Asia and Latin America out of the crisis. It has
also managed to maintain unemployment to a sustainable level. China even
overtook Japan, in 2010, as the second-largest economy in the world in
terms of GDP and it is closing the gap with the US. On the whole,
China’s rise seems unaffected by the subprime crisis. A closer look
shows that real problems lie ahead.
Chinese workers don’t accept
overexploitation any longer. A wave of strikes spread during the summer
of 2010. Workers were fighting for wage increases, improvement of
working conditions and the right to organise and bargain. Inflation,
especially of food products, which accelerated since the middle of 2010,
is a new problem for workers and a concern for the government,
which fears a wave of discontent. On top of that, the government is
doing its best to prevent any contagion from the democratic revolutions
in Arab countries. Although the overall situation in China is
completely different, these democratic revolutions show to Chinese
workers that it is indeed possible to topple even the worst and most
China’s resistance to the first stage of the recession
The impact of the crisis on China and Asia, so far,
has been limited (Sanuk 2008). Asian banks were not much engaged in
subprime loans and toxic products, unlike European banks. With the
exception of South Korea, Asian countries did not rely on short-term
capital and bank loans to finance their economies. They were not caught
in a debt trap like eastern European countries or Greece. Most of them,
in particular China, had accumulated a huge amount of currency reserves
and were able to cope with capital flights that occurred at the end of
Asian countries were primarily hit by the fall in their exports
because of the slump in demand in North America and Europe. As a general rule, the recessive impact has been stronger in the most open Asian
countries whose exports were concentrated in manufacturing and where the
USA was an important customer. For instance, exports of manufactured
products represent around 70% in Malaysia, more than 40% in Thailand and
Cambodia, around 30% in China, South Korea, the Philippines and
Vietnam, but less than 10% in India and Pakistan.
explain why the three biggest and most populated countries in Asia,
China, India and Indonesia, have not experienced a single quarter of
recession between 2008 and 2009. The resilience of these three countries,
and most of all China, which is among the biggest trade partners of
Asian countries, led to a quick rebound in the second quarter of 2009
and a much stronger “V” shape recovery than in the rest of the world.
First, to absorb the shock of the fall
in exports, Asian countries launched unprecedented rescue plans, unlike during the “Asian crisis” of 1997-1999 when structural adjustment plans sponsored by the International Monetary Fund (IMF) worsened the crisis. China's rescue plan draws attention by its magnitude: US$585 billion
amounting to 13.3% of GDP to be spent on a two-year span. On average,
the rescue plans announced by Asian countries amounted to 7.5% of GDP
against 2.8% of GDP for the G7 countries. Moreover, Asian rescue plans
were more focused on public expenditure than tax cuts. On average, Asian countries dedicated 80% to increases in public spending compared with a 60% average in G20 countries. The only exception is Indonesia where tax cuts dominate.
Those public expenses were accompanied by expansionary
monetary policy. The median interest rate of Asian central banks has
decreased by 2.25 points, which is five times more than during the
previous crisis. As the banking system continued to work, this had a
positive impact on growth. In countries like Vietnam and China, the
expansionary monetary policy played a dominant role. In China, public
spending has increased by a modest 26% in 2008 up from 23% in 2007, but
it came back to 21% in 2009 and even 17% in 2010 when the rescue plan
officially ended. On the whole, public expenses did not play a crucial
role in absorbing the shock. It is in fact the expansion of credit which
took the lead in 2009 with a spectacular increase of 31% (see Figure 2. It too fell in 2010 to -4% when the Chinese government decided to cool
down the economy to prevent easy money inducing a new speculative bubble
(more on this point below).
Second, household consumption remained
steady as employment did not collapse during the crisis. In times of
crisis, there are usually no strong increases in the unemployment rate
in Asian countries, for there are no unemployment benefits except in a
few countries. Workers who lose their jobs in industry try to find one
in services, work as self-employed workers or return to the family farm
whenever it is possible. It is especially
the case in China, where hundreds of thousands migrant workers went back
to the interior in the winter of 2008 or stayed there after the end of
the new year in February 2009. But because the economy recovered in
spring 2009, a lot of them returned to the cities to find a job,
where they pay more.
Third, defying many sombre prognostics, Chinese
exports fell from September 2008 to February 2009 but did not collapse
and soon recuperated thanks to recovery in world trade. Given the high
import content component of Chinese exports (about 50%) imports fell in
the same proportion so that the current account stayed almost always
positive although by a smaller magnitude (see Figure 3). This reveals
both the resilience of China to external shocks and its weakness at the
The myth of Asia decoupling from the rest of the world
China's rapid trade success is due to its role as an assembly centre of components made elsewhere in Asia, mostly in Japan and South Korea, and to a lesser extent in South-East Asia. The final products assembled in China are in the main destined for the rest of the world, particularly Europe and North America. To be less vulnerable to the crisis stemming from the USA and Europe, East and South-East Asia need to absorb a major and growing part of its production of final products. Although East Asian internal trade has
progressed since the crisis, it has not yet reached a stage where it
could cushion worldwide trade contraction.
Although China has become the second-largest economy inf the world, bypassing Japan in 2010 and catching up with the USA in terms of the absolute value of its GDP, China and the rest of Asia are still far from supplanting the USA, which has the
biggest markets in the world. If we take into account total Chinese
population, income per capita would catch-up with the US in 25 to 50
years' time, based on current assumptions. If we now only take into
account the richest regions of China, most of them being located on the
coast, representing 42% of the Chinese population in 2005, this catch-up could occur in just 10 to 20 years.
The most optimistic hypothesis made by the Asian Development Bank shows that at the present pace, the 22
Asian countries that are classified as "developing Asia" should
outstrip the OECD countries’ consumption by 2030.
All these predictions
rest on optimistic scenarios and are far from certain given the present
international crisis. To be able to decouple from the rest of the world
(at least relatively, because there is no such thing as a completely
autonomous region in the present global economy) Asia, and most of all
China, must rebalance its economy away from export-led growth and in
favour of the domestic market. This can only be achieved if three
conditions are fulfilled.
First, China must revalue in part its
exchange rate to lower the price of imports and hence the cost of goods
it produces for the internal market and make exports less profitable
than they are. Second, and most important, China must significantly
raise the real wages of urban and rural workers so that internal
consumption can recover from its present extremely low level (35% of
GDP). This is the most sensitive decision because Chinese capitalists
and bureaucrats are used to living like fat cats thanks to the huge
profits that state-owned and private enterprises are making on the back
of overexploited workers. Third, China must increase the interest rate from its present low level in order to discourage the very high
investment in capital-intensive industry and reorient the economy in
favour of domestic services like education, health, housing, culture and
leisure, which are needed by the vast majority of Chinese people. These
are labour intensive and could generate the millions of jobs that China
requires, and they are less energy consuming and less polluting than
industry. China has made some progress in this direction but is far from
Can China resist a new recession?
In 2011, the international crisis entered a second
stage. The crisis in Europe is very serious and the USA is not in a much better situation. A second recession is coming and there will be a new
slump in world trade. Chinese and Asian exports will be hit again and
the question is whether China and Asia will be able to resist the new
trade contraction with a massive rescue plan again? There are reasons to
China and the Asian countries cannot launch massive
public expenditure or massively expand credit every two years. The last
rescue plans have already created problems that are not yet resolved: in the Chinese case, a sharp increase of non-performing loans in the
banking sector, inflation and speculative bubbles in real estate and in
the stock exchange. Like in the USA and Europe, Chinese banks will have
to be rescued with public money. And like in the USA and Europe, it is
always to the workers that governments present the bill. In China,
rescuing the banks and local authorities that are heavily indebted
would cost a lot of money and if workers have to pay for it in one way
or another, the objective of rebalancing growth in favour of domestic
demand would be postponed to the long-term and with it the myth that
China could drag the world out the crisis.
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