Inflation seems to be the major issue facing the Chinese economy at this moment in time. The Chinese government also seems to be committed to a series of interrelated policies that are aimed at curbing excessive inflation and keeping the economy on a stable course.
Last September Robert Zoellick, the president of the World Bank, commented on the need for the Chinese government to reduce the headline measure during a trip to Beijing for talks with the Chinese leadership. These discussions centred on the policies necessary to transform their economy from one powered by external demand and export-led growth to one reliant on increased domestic consumption instead. Recent figures have been encouraging and indicative of the success of government policies, as of last November inflation went from a three-year high of 6.5 percent in July, to 5.5 percent in October, and, finally, 4.2 percent.
This is not to say that the Chinese economy is without problems. It has been reported that there has been a slowdown in retail owing to a decline in vehicle demand, whilst the structure and nature of the economy as a whole should also be borne in mind. Its reliance on external demand for Chinese exports exposes it to any downturn or slowdown in its major trading partners. These are the various constituent states of the EU – which as a bloc constitutes China’s largest trading partner – the United States and Japan, the latter of which obviously suffered from the fall-out of last year’s nuclear disaster and its impact on domestic energy production. Plainly, China is not inured to any of the travails afflicting the global economy. This is because domestic consumption as it is currently constituted does not provide sufficient capacity to mitigate such exposure.
There are, however, reasons for optimism. The price of oil, the essential lubricant for all economic activity, has fallen on global markets. Given Chinese demand for it, that is one bar to economic expansion that has, though perhaps temporarily, fallen by the wayside.
One must also look to the fiscal position of the Chinese government; it has booming tax revenues, in addition to its copious foreign currency assets, whatever concerns one may have over the dollar. This position lends itself to room for fiscal manoeuvre, as witnessed by those policies that have been instituted to restrict inflation. This is in addition to potential growth over the short to medium term so as to further restrict growth in the measure.
Keeping up appearances
The great concern is over how well China manages what seems to be the unfolding transition from high, very high, growth to growth that, while still superior to anything the West is likely to see for the foreseeable future, is significantly less than the 9-10 percent that has come to be seen as normal over the past thirty years. Consideration of this aspect opens up interesting questions about the political impact of circumstances conspiring to question the implicit political bargain made between the state and the people.
This bargain, namely that, in return for political acquiescence, the party will ensure you receive high growth and visibly improving living standards, seems to be destabilised by slowing growth rates and high inflation, which eats away at the standard of living. We might, in explicating so, begin to see quite how seriously the Communist Party of China takes the inflation issue, and indeed, economic management in general.
Not only does the People’s Bank of China have the money, but it and the finance ministry also possess the ability to lower their own interest rates, having hiked them last year. This is a situation unlike in the UK where record low interest rates are employed, however ineffectively, to encourage lending. Additionally, they can also loosen their fiscal policy, having previously tightened it, should that prove useful.
How envious the bankers and finance ministers of the West must be when they consider the panoply of options open and available to their Chinese counterparts. The Chinese have also been doing their best to prevent the housing market from overheating, wary of the unintended consequences that can flow from the fetishisation of so totemic a measure; though controls on preventing rural dwellers from moving to overcrowded cities in the land of the one child policy also, presumably, help in this regard.
Good intentions
Further specific measures were outlined at a recent press conference given by Vice Premier Li Keqiang, who is expected to receive a promotion at the next leadership handover later this year, and Finance Minister Xie Xuren. It was reported that China would see faster growing fiscal expenditure with a moderate increase in deficit spending and public debt as a result. Plans include a lessening of the tax burden and the scraping of certain administrative fees. It is interesting to contrast these policies with our own, current, experience of a pronounced fiscal strait jacket.
We might also consider the potential impact of increasing global economic rebalancing on China. That is to say the transition of previously high-spending, indebted countries, to a lower spending threshold, so as to get their spending under control, as well as any impact this will have on their demand as a factor independent of external recessions. Such a description applies to trading partners such as many EU countries and the US and may present a significant challenge to Chinese policymakers some way down the road.
It would seem then, that whilst the circumstances are mainly from Beijing’s perspective, benevolent, there are some hazards and that Chinese economic policy, benefiting from those positive circumstances, has been pitched in such a way to ward off inflation, for now, and its attendant dangers. As for the longer term, it will be interesting to see the way in which policy develops in accord with Zoellick’s advice and, undoubtedly, China’s own inclinations.
This is not so much a question of China embarking upon a policy of autarky, but merely developing its own internal economy and market and, as a happy coincidence, mitigating its exposure to a fragile global economy. China has the luck engendered by its historically more sensible policies, and also benefits from other countries’ less sensible policies in this regard. It can choose its course, it has options available, far greater than we in the West possess, and not to underestimate other internal problems, such as corruption, or that previously mentioned slow down in retail, it can, as we’ve seen, decide upon its future course.
The balancing act
A more nuanced appraisal is in order; there are potential hazards, inflation, rebalancing, global recession, a possible spike in the oil price, but so far Chinese policy has illustrated the government’s capacity to navigate these rocky waters, as well as its intention to surmount any potential difficulties it encounters by sensible policy measures.
It is a certainty that growth will slow, necessarily; the more developed you become the more difficult it becomes to maintain those phenomenal growth rates, as illustrated by western economies. So, there are challenges, but there are also signs of encouragement, with, so far, on a macro level, no sign of a bubble bursting. This seems conducive to the soft landing of which commentators speak, which may be a wrench, difficult to adjust to, but doesn’t, on a fundamental level, adversely impact China’s potential, for which I can best invoke a recent Economist feature outlining a slew of measures in which China has overtaken America and, on current trends, will, within the next few years, overtake America.
China’s position is fascinating, it has benefitted from the fact that it is not an economy like America’s or most other EU countries you may care to name in the sense that, like Germany, it produces things and has invested its money wisely. This has meant that it has not exposed itself to the same systemic flaws that afflict us. It doesn’t, however, have the same liabilities, in the sense of this ostensibly communist state having no direct equivalent to the welfare state, or state pension provision. That is not to take a hard neo-liberal line, but merely to recognise an irony: Red China, which will soon be the richest country on earth has fewer, if any, welfare mechanisms than the capitalist west. This has meant that it hasn’t needed, at the behest of electorates, to over leverage itself so as to afford pensions, health and social security, which jostle for funding along with more venerable governmental concerns such as defence and foreign policy. How that reality plays out will be very interesting to see, especially when one considers the looming ageing crisis in China.
