Is China an island of stability in the midst of the gathering global financial storm, or will it, too, soon be sucked into the vortex?
Chinese officials have said that the crisis that began in the US will not slow down long-planned reforms in the financial markets.
They insist that China will go ahead with plans to introduce margin trading, short selling and futures contracts on share prices.
But China slowed capital-account liberalization after the Asian financial crisis 10 years ago, so it is possible that the US’ troubles could make China more cautious.
China has played an important role in financing the US budget deficit in recent years, thanks to its effort to manage the yuan’s exchange rate against the dollar.
China does not want its large current-account surplus to cause the currency to overshoot on the upside, and it may now want to slow the yuan’s appreciation because of concern about the global economic slowdown.
If so, China would have to expand its foreign exchange reserves by another US$300 billion to US$400 billion, which would allow it to finance the large expansion in the US fiscal deficit.
Recent slight declines in the value of the yuan suggest that China’s exchange rate policy may be changing with the 20 percent appreciation of the currency since July 2005.
German Finance Minister Peer Steinbruck has said that the crisis will reduce US financial hegemony and create a more multipolar world.
The Sept. 26 edition of the China Daily carried an article by Steinbruck asking, “Is the Sun Setting on US Economic Supremacy?” It reviewed examples of how foreign investors have lost money in the US market and concluded: “The outbreak of the latest crisis shows that the neo-conservative revolution launched in the [1980s] has already come to an end.”
The article attributed the crisis to policies that “called on market forces to be given full play with the scrapping of government controls, especially on the financial market.”
Chinese officials have not yet echoed Steinbruck’s comments, but the US experience will naturally make them more suspicious of Western investment bankers and US-style regulation.
China has so far lost money on two of its major investments in Western financial firms (Morgan Stanley and Blackstone). It could have helped to contain the current crisis if it had accepted invitations to invest in Lehman Brothers, but given its previous losses on Wall Street, it declined.
As a result of concern about the global economy, the People’s Bank reduced interest rates two weeks ago and joined the coordinated global interest rate cut on Oct. 8 — the first time that China ever participated in a global monetary policy move.
The government also announced plans earlier this month to increase infrastructure spending by US$586 billion next year and in 2010.
The projected spending increases are equal to 15 percent of GDP, and are the largest that any country has undertaken so far in response to the financial crisis.
They demonstrate clearly that China is prepared to compensate for export weakness by stimulating domestic demand.
China must now take further action to bolster consumer spending, which slumped to only 36 percent of GDP last year from more than 50 percent during the 1980s, owing to the economy’s heavy dependence on exports and capital spending since the late 1990s.
The Chinese government’s goal will be to keep annual growth above 8 percent in order to generate sufficient employment to maintain social stability. It is currently also more sensitive to employment risks than usual, because several thousand small factories in the textile and toy sectors have closed this year as a result of the impact of rising labor costs and the appreciating yuan on profit margins.
China wants to shift from low value-added, labor-intensive industries such as textiles to higher value-added sectors such as electronics and capital goods. But it does not want to generate high levels of unemployment as this transition occurs.
China has the resources to cope with the current financial crisis. Foreign exchange reserves are an immense US$1.9 trillion. Booming tax receipts have provided the government with a fiscal surplus.
The critical issue has been policymakers’ willingness to act promptly before there is clear evidence of an economic downturn. The government’s stimulus package demonstrates that it is aware of the risks in the global economy and is prepared to act decisively.
The current crisis marks an important step in China’s evolution as a great economic power. China has been pursuing a policy of extreme Keynesianism at a time when Europe and the US are also undertaking massive interventions in their financial systems to prevent the current crisis from leading to a global financial collapse.
Therefore, there is a growing convergence between Chinese and G7 economic policy, born of the need to compensate for massive failures in both US financial regulation and monetary policy.
The US has been lobbying China for some time for economic policy changes aimed at stimulating domestic demand and open markets.
The irony is that, to compensate for a crisis that the US’ own policies have created in global financial markets, the US is now getting what it has long sought from China.
David Hale is chairman of David Hale Global Economics and a long-time analyst of China’s economic reform process.
COPYRIGHT: PROJECT SYNDICATE
US political scientist Francis Fukuyama, during an interview with the UK’s Times Radio, reacted to US President Donald Trump’s overturning of decades of US foreign policy by saying that “the chance for serious instability is very great.” That is something of an understatement. Fukuyama said that Trump’s apparent moves to expand US territory and that he “seems to be actively siding with” authoritarian states is concerning, not just for Europe, but also for Taiwan. He said that “if I were China I would see this as a golden opportunity” to annex Taiwan, and that every European country needs to think
For years, the use of insecure smart home appliances and other Internet-connected devices has resulted in personal data leaks. Many smart devices require users’ location, contact details or access to cameras and microphones to set up, which expose people’s personal information, but are unnecessary to use the product. As a result, data breaches and security incidents continue to emerge worldwide through smartphone apps, smart speakers, TVs, air fryers and robot vacuums. Last week, another major data breach was added to the list: Mars Hydro, a Chinese company that makes Internet of Things (IoT) devices such as LED grow lights and the
Today is Feb. 28, a day that Taiwan associates with two tragic historical memories. The 228 Incident, which started on Feb. 28, 1947, began from protests sparked by a cigarette seizure that took place the day before in front of the Tianma Tea House in Taipei’s Datong District (大同). It turned into a mass movement that spread across Taiwan. Local gentry asked then-governor general Chen Yi (陳儀) to intervene, but he received contradictory orders. In early March, after Chiang Kai-shek (蔣介石) dispatched troops to Keelung, a nationwide massacre took place and lasted until May 16, during which many important intellectuals
US President Donald Trump is an extremely stable genius. Within his first month of presidency, he proposed to annex Canada and take military action to control the Panama Canal, renamed the Gulf of Mexico, called Ukrainian President Volodymyr Zelenskiy a dictator and blamed him for the Russian invasion. He has managed to offend many leaders on the planet Earth at warp speed. Demanding that Europe step up its own defense, the Trump administration has threatened to pull US troops from the continent. Accusing Taiwan of stealing the US’ semiconductor business, it intends to impose heavy tariffs on integrated circuit chips
RSS