China’s economy was slowing down well before the recent worldwide financial crisis hit. The first easily seen sign was the country’s sharp reduction of oil imports. The impact on crude oil prices began to parallel China’s slowdown and was already edging away from its highs when the financial markets were bludgeoned.
The cyclone of financial debris that has followed has been attacked by authoritative Chinese sources as a creation of the United States and they say it was wrong to expect Beijing to accept any responsibility for correcting what wasn’t its fault. Perhaps that wasn’t a very sophisticated or even diplomatic response, but it certainly has shown the direction of Chinese official thinking.
In last week’s Asia Europe Meeting (ASEM) in Beijing attended by leaders from the two regions, it had been hoped that China with its considerable current account surplus would jump in to support European plans for a restructuring of international financial regulation. The Chinese reaction was typically self-oriented, much to the dismay of the European leaders who had sought to play the “kumbayah” card.
President Hu Jintao said in exquisitely guarded terms that China would do its part by maintaining its own healthy state, which he referred to as “an important contribution” in itself. Perhaps something was lost in translation, but in banking terms it sounded like, “I don’t think so.”
It was not unreasonable for the European leaders to think the country with the largest foreign currency reserve ($1.65 trillion) would ante up to assist in stemming the world’s hemorrhaging. Asian analysts appear to agree that the Chinese are all for international financial stability, but will not sign on to any agreement that implies they would have to allow foreign hands into the regulation of their economy.
Beijing is well aware that signs point to a possibly lengthy recession in the West, and purchase orders for Chinese goods already have shown serious decline. Steel exports are down, as is an entire list of consumer products ranging from electrical appliances to textiles and furniture. To counter this weakness and shore up Chinese competitive ability, export authorities last week announced increased rebates on a list of 3,000 products.
Beijing appears committed to a stimulation of its property market not unlike the ill-fated Community Reinvestment Act of the United States. Some of the Chinese real estate measures include: reduction of down payment requirements, lower mortgage rates, cuts in closing taxes and lower capital gains taxes on resale. Apparently the Chinese are convinced that Chinese home buyers and mortgage bankers are more disciplined than their American counterparts. Of course, Chinese officialdom has considerable experience in enforcing discipline.
Government-aided low cost housing development is seen as an important aspect of the national economy. In the works is a special fund to assist in this program. It is believed that the government will be better able to control the evolution of what could become a real estate bubble if official involvement exists from the beginning. This is not exactly free market thinking, but China cannot be judged by normal capitalist principles.
One thing that all Westerners and most Asians agree on is that China is not very forthcoming about its spending plans. It is known, however, that there are differing schools of Chinese thought on the subject of development priorities. Some government economists and planners have emphasized the need to focus on road, port, and bridge construction. Another school of advisors holds that economic returns would be faster and greater through investment in transportation such as railways and subways, and basic social development through such things as health education.
China has the money at the moment to take whatever route it wishes to pay for an economic stimulus program. In the future, however, this may not be the case, as the high tax revenues it has enjoyed in the past appeared this summer to be declining precipitously.
The decision facing Beijing now is whether and how it can shift its reliance on foreign export trade to an increased domestic demand economy. The problem is that in today’s global financial crisis, China’s commitment to a hybrid socialist/capitalist authoritarian political economy may have to accomplish these goals simultaneously. It’s going to be quite a balancing act.