The Chinese New Year does not begin until January 26th
but her economic future was foretold back in September and October when
American consumer and credit spending collapsed leading the world into its
deepest recession in a generation
Chinaâ€™s exports shrank 2.2% in November; the first decline
is seven years.The Shanghai Stock
Exchange lost almost 70% of its value in 2008. Chinese factories, particularly
those feeding export industries are closing, unemployment is rising and wages and
property are shedding value. The planners of the economic politburo in Beijing
are facing the most difficult economic conditions since Deng Xiao Ping stepped
off the Communist road in 1979. And to add dangerous politics to the uncertain economic
mix this year is the 20th anniversary of the brutal repression of
the student protests at Tiananmen Square.
Predictions for Chinese Gross Domestic Product (GDP) growth
in 2009 are between 5.0% and 6.0%.Such
economic expansion would have central bankers in any other country frantically
raising rates to head off inflationary excesses.But in China, where GDP expanded 11.9% in
2007 and 9% in 2008, such a growth rate spreads fear in the ruling political and
economic classes.A 5.0% annual GDP increase
is far from the classical definition of recession but in China the practical
effect may be little different.
According to the Ministry of Human Resources China needs to
create 24 million jobs annually to maintain social stability. Granted â€˜social
stability â€™is a nebulous term.What a
Chinese government official might consider acceptably stable is probably quite
different than what a US or British civil servant would tolerate.But there is no doubt that unemployment is
hitting the Chinese workforce hard. 100 million or more rural immigrants have moved
to the cities.Many of these migrants
are or will soon be out of work. More than 10 million migrant workers have lost
their jobs in China in the first 11 months of 2008.
The Beijing government has promised four trillion Yuan ($586
billion) in additional spending over the next two years. The immediate need is to stem the job losses
and return those already unemployed to work. The potential for domestic unrest from
restive crowds of unemployed and unattached men in the cities is feared in
Beijing and this fear is underlined by the complete lack of official acknowledgement
of the Tiananmen anniversary. The bulk
of the government spending will go to infrastructure projects, roads, bridges,
railways and the like. These projects will provide immediate
employment, much of it low skilled laboring work - exactly the kind of job that
can be filled by unemployed rural immigrants.
Will Chinaâ€™s planners also return to the type of export led
economic growth that caused so much trade friction with the United States and
other countries? Despite the myriad successes of the long Chinese industrialization
one failure has been the inability to develop a domestic market capable of
absorbing a greater measure of Chinaâ€™s manufacturing output. The current five
year plan--they still have that relic of the Communist command economy in
Chinaâ€”sought to move economic growth from exports to domestic consumer consumption.It has not worked. Household consumption was
actually lower in 2007 at 35% of GDP than it had been in 1993 when it was
45%.The absolute dollar amounts of
domestic consumption in 2007 are naturally much larger since the Chinese
economy is so much bigger than it was 15 years ago but the volume of exports is
The government has also halted Yuan appreciation. The Yuan
stopped rising in value against the dollar in July, after gaining 7.05% in 2008,
6.86% in 2006 and 3.4% in 2006.
A static or depreciating Yuan and a revived export sector
could lead to renewed trade conflicts with the United States and the rest of
The incoming Obama administration promised to protect
American manufacturing jobs against â€˜unfair competitionâ€™.Candidate Obama called the failure of the
Bush administration to name China as a â€˜currency manipulatorâ€™ unacceptable. He
also supported legislation to permit US companies to seek import duties to
compensate for unfair competition from an undervalued Chinese currency, and to
permit US companies to ask for higher tariffs on specific Chinese
products.In addition, the unions which
contributed many millions to the Obama candidacy are guaranteed to pressure his
administration and the Democratic majorities in Congress for protection against
There is however, one huge obstacle.President elect Obama plans to spend $675
million or more on an economic stimulus program focused on creating jobs.The government has already promised or spent
between five and eight trillion dollars on various guarantees, loans, equity
purchases and such. And there will be much more as industries and state and
local governments line up for their share of federal largesse.
Every penny of this stimulus will have to be borrowed. This
cannot be overstated. All new Federal spending will be a loan.The funds will be borrowed from foreign
governments with their own political and economic agendas. For China the logic
is clear.China is the worldâ€™s largest
holder of US Treasury securities with $653 billion in their vaults.If Obama wants to spend on the economy he
will have to borrow from the Chinese, among others.The Chinese have a good reason to lend, since
it is American consumption that helps to keep their workers in the factories
and off the streets.But with a huge
cache of ready money the Chinese government can afford to spend its own cash to
keep its workers off the barricades.It
does not have to lend to the US government. And it can be very particular about
The Chinese have said they will not depreciate the Yuan to
gain export advantage. World consumers have been perfectly willing to buy
Chinese products as the currency has appreciated since 2005.But the actions of the Chinese monetary authorities
have made it plain they will not continue to appreciate their currency to
appease their trading partners either. The Chinese effect on the worldâ€™s
currency markets and the dollar will be noticed mostly in its absenceâ€”that is if
and when the Chinese become reluctant to fund the US federal deficit.
At the moment the cost of funding the US deficit is close to
zero.The safety of US securities has
trumped all ideas of maximum return on investment.But that may not hold. The Chinese and other
foreign governments know their influence. When the Obama administration has to
choose between increased Chinese purchase of US Treasuries and the job security
of US workers, the conclusion will be foregone, no matter the rhetoric from the
US side. It will only take a hint from
overseas for trade pressure against China to be dropped by the Obama
The dollar has become, in effect, hostage to the foreign
funding of the US deficit. As long as overseas dollars flow into the US, demand
and the prospective American economic recovery will keep the dollar strong. Even
the knowledge that inflation lurks over the two year horizon will not damage
the current dollar. But if the foreign
funding of the US deficit falters the dollarâ€™s status could swiftly slide from
safe haven to just one more devalued currency in a world full of shifting values.
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