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CHINA’S INSTABILITY: Robert B. Cassidy explained how China`s policies contributed to the current global financial crisis at the hearing of the US-China Economic and Security Review Commission, held in Washington, D.C., February 17. (Gary Feuerberg/The Epoch Times)
WASHINGTON—On February 17, the U.S.-China Economic and Security Review Commission (the “China Commission”) held a hearing on Capitol Hill on the role that China played in the financial crisis and its response to it.
“Obviously, current policies in China have contributed to the current financial crisis and steps need to be taken to reverse the effects of those policies,” said Robert B. Cassidy, who was the chief U.S. negotiator on China’s 1999 market access agreement with the United States for China’s accession to the World Trade Organization (WTO).
No one is denying the fact that the recession started in America, with the problems in the U.S. financial system.
“But the roots of today’s economic problems run far deeper and are interrelated,” said Commissioner Michael Wessel, who co-chaired the hearing.
A few of the scholars who testified said that China is ready and eager to change course and has begun to do so, but most of the scholars were highly pessimistic about the communist country’s ability and willingness to wean itself from its exports emphasis, export subsidies, manipulation of currency, and other policies that have had an adverse effect on the trade balances in the world financial system.
In some of the testimonies, it was said that China’s intransigence or just plain inflexibility has consequences for the United States.
“China’s policies may threaten the ability of the United States to return to economic growth,” said Senator Jim Webb (D-Va.), who provided a written statement to the Commission.
China’s Export Growth Reverses
While interpretations vary somewhat, the scholars invited to the hearing agreed on the hard dismal facts. China’s economic growth in exports has moved quickly into negative territory: dropping in December to -2.8 percent compared with December 2007, before plummeting -17.5 percent in January compared with January 2008.
Chinese exports had been surging at a 25 percent rate, comparing monthly values with the same month one year before as recently as mid-2008, said Stephen S. Roach, chairman of Asia Operations at Morgan Stanley, where he has served as an economist for 25 years.
Michael Pettis, Professor of Finance, Peking University, spoke of the great difficulties China will have in getting through the slump in its exports. Mr. Pettis testified before the U.S.-China Economic and Security Review Commission in Washington D.C., Fe (Gary Feuerberg/The Epoch Times)
However, it is well to put these numbers in a context with other Asian countries that also rely heavily on export-driven economies. Some other Asian countries fared even worse in December. Taiwan’s exports fell by 42 percent, South Korea by 17 percent, and Japan’s by 35 percent.
“Chinese import numbers are even more dismaying. After declining 21.3 percent in December, imports dropped a staggering 43.1 percent in January,” said Michael Pettis, professor of finance at Peking University, where he specializes in Chinese financial markets. In December, Taiwan’s exports to China were down a whopping 56 percent, and Japan and South Korea were each down 35 percent, according to Roach.
China and other world “producers” are hurt by the shrinking demand and “the bigger decline in imports means that Chinese consumers are contributing an even greater amount to the contraction in demand,” said Pettis.
The number of estimated newly unemployed migrant workers was 20 million in February 2009, which was double the estimate in December, according to Wing Thye Woo, from the Brookings Institution and professor at the University of California, Davis. Dr. Woo said that the large increase in unemployment of migrant workers “was no doubt the consequences of the negative shock from China’s export market.”
“The official number reported by Beijing for it GDP growth was 6.8 percent for the last quarter of 2008 (compared to the last quarter in 2007), the slowest pace since 2001. But when compared to the third quarter, China’s economy may have even contracted, said Gordon G. Chang, author of the 2001 book The Coming Collapse of China.
China has the world’s fastest slowing economy,” said Chang. He distrusts some of their official numbers and said that when “distortions” in the statistics are taken into account—some of which are a result of “fakery”—“no economy is falling faster than China’s at this moment.”
SPEAKS TO ORDINARY PEOPLE: Alexandra Harney testified before the U.S.-China Economic and Security Review Commission in Washington D.C., Feb 17 on research she did, interviewing ordinary Chinese workers, factory managers and businessmen. She is the author (Gary Feuerberg/The Epoch Times)
“No one, not even the Chinese [regime], knows exactly how many factories have closed, or how many workers have been laid off so far,” said Alexandra Harney, author of the The China Price: The True Cost of Chinese Competitive Advantage, published in 2008.
Woo said that the pace of China’s growth slowdown exceeds the expectations of both the Chinese regime and most outside analysts. The deceleration of China’s growth from 13 percent in 2007 “to close to zero is absolutely stunning,” said Roach.
“Chinese citizens and businesses sense the end of the so-called ‘Chinese miracle,’” said Chang, who drew on estimates ranging from $126 billion to $240 billion smuggled out of the country from October through December, evading Beijing’s strict currency controls.
China Manipulates Its Exchange Rate
The majority of the scholars at the hearing argued that China deliberately uses manipulation to maintain an undervalued currency. The need to create jobs for the sake of “social stability” has led them to adopt “export led growth strategies” based on an undervalued currency, said Cassidy. This policy has the consequence of subsidizing its exports and foreign direct investment, and amounts to a tax on China’s imports.
“The undervalued currency is the cornerstone of China’s export led growth and it simply exports its savings to the United States rather than using funds for domestic investment,” said Cassidy. Since 2005, China has been appreciating its currency, but “at an anemic rate,” said Cassidy.
Many financial experts, most recently Secretary of Treasury Timothy Geithner at a Senate confirmation hearing when he was nominated, have accused China of exchange rate manipulation. The concern is that this caused the huge U.S. trade deficits, and has indirectly furthered U.S. unemployment and reduced wages. However, the consensus of the scholars was that even were China’s yuan appreciated to 40 percent—which is around what it should probably be—it still would not be the panacea for our foreign trade imbalances.
CHINA`S FALL: Gordon G. Chang described China`s alarming slide in growth at the hearing of the U.S.-China Economic and Security Review Commission, held in Washington, D.C., February 17. Mr. Chang, an attorney who worked in Hong Kong, 1981-1991 and Shangha (Gary Feuerberg/The Epoch Times)
What China Must Do, But Can’t
Besides continuing and even accelerating the rate of appreciation of its currency, China needs to foster much more domestic consumption—everyone, including the Chinese communist policymakers, agree on this point. “A pro-consumption rebalancing is the only sustainable answer for China,” said Dr. Roach.
However, China cannot change directions of its economy at the snap of the fingers of its leadership. Beijing’s heavy emphasis on exports when countries like the United States are drastically cutting consumption back, would make China’s economy “particularly ill-suited to the global economic crisis,” said Chang.
In fact, China has been moving in the opposite direction of a consumer economy. Dropping from its historical average of 60 percent to 35 percent today, China has the lowest rate in the world, said Chang. He welcomed the regime’s consumer stimulus in January to allocate $123 billion to create a universal health care system in two years, but said it had “a typical nonspecific quality to it and could end up as just another soon-to-be-forgotten pronouncement.”
“China’s leaders may understand what should be done, but they do not implement sensible policies fast enough because they are constrained by their rigid political system, which inhibits their ability to adapt to the changing circumstances,” said Chang.
The country’s stimulus package unrolled in November puts the emphasis on infrastructure. Most of the stimulus spending will go into government cement-type projects, said Chang, which is counterproductive. Why? Chang explains that the November plan will greatly favor large state enterprises over small medium-sized private firms. He says then the communist leaders will allocate funds based on politics, laden with corruption, and the financial institutions will be loaning to the regime-sponsored infrastructure. But the hope for turning things around lies in the private sector that made the China economic “miracle.”
Another problem with the November plan is it forces banks to lend “at a pace so rapid it will almost certainly lead to a future explosion in non-performing loans,” said Pettis.
Several of the scholars said the regime should put money into its health care, retirement pensions, and scholarships. But only one percent of the $586 billion spending plan will go to social services, said Chang, who cited a Wall Street Journal assessment.
“China needs to open China to China,” said Cassidy, but that easier said than done. “The marketplace is riddled with barriers,” he said. Cassidy said the restrictions on tolls, requirement of bribes, prohibitions in using roads, labor restrictions in moving freight, and inadequate road and rail infrastructure, make it difficult to establish an efficient nationwide distribution system.
On the one hand, China needs to increase employment. On the other hand, globally China “needs to reduce the amount of overcapacity it is exporting into the world struggling with collapsing demand,” said Pettis. But these two objectives are contradictory in the short run, he says.
“China’s economy has progressed about as far as it can within its existing political framework,” said Chang.
Meanwhile, China has a potential time bomb with mounting migrant labor unemployment. “China may well see more labor disputes this year than last, as factories skimp on wages and close their doors without paying staff,” said Harney. While doubting the likelihood of major worker unrest, Harney noted that workers are much more likely to strike or sue their employer than even five years ago. Moreover, their communications are better through mobile phones and the Internet.
