HOW CHINA IS BATTLING GLOBAL ECONOMIC CRISIS

<em>The Shanghai Stock Exchange. China is battling the economic crisis with a string of stimulus packages. However, there are warnings that the measures could end up inflating the markets.</em>

The Shanghai Stock Exchange. China is battling the economic crisis with a string of stimulus packages. However, there are warnings that the measures could end up inflating the markets.

BY WIELAND WAGNER

The West is pinning its hopes on China to revive the global economy. Beijing is orchestrating its efforts to combat the crisis as meticulously as it once planned the country’s spectacular economic ascent.

Everything is colored a bright red, from the tent roofs protecting throngs of shoppers from the elements to the banners encouraging them to buy. Wang Shiqin, a 62-year-old farmer, hurried to the market in the early morning hours. Like most shoppers here, he already owns a television set, but now he wants to buy his first refrigerator — subsidized by the Chinese government.

The mood is a mixture of carnival and rally at the market in Feidong, a city in rural Anhui Province about a three-hour train ride northwest of Shanghai. The vendors are loudly pitching household appliances, especially domestic brands, which benefit from this government campaign to fight the global financial crisis.

The Chinese are among the world’s most diligent savers, hoarding almost five times as much of their disposable income in their bank accounts as the Germans do. But now the Communist Party wants to promote collective consumption.

The country’s 800 million farmers, in particular, are needed as new customers for China’s global factory. The same view is held in the West, where even the tiniest grain of optimism suggesting that the crisis could soon come to an end is eagerly snapped up.

<em>Protests by laid-off factory workers in southern China late last year rattled the government in Beijing. They are now working to maintain social harmony through massive spending. </em>

Protests by laid-off factory workers in southern China late last year rattled the government in Beijing. They are now working to maintain social harmony through massive spending.

Last week, European Central Bank President Jean-Claude Trichet said cautiously that the global economy is “near a turning point.” In a cover story, the German business daily Handelsblatt wrote that the “nosedive of the German economy appears to have been stopped.” Germany’s export business could be digging itself out of the red, thanks in part to Asia.

But even members of the government in Berlin are unwilling to hazard a prediction as to whether this is truly a trend reversal or merely a flash in the pan. China appears to be primarily responsible for this bit of optimism. The West, for its part, is hoping for an increase in China’s interest in its machinery, goods and know-how.

The West hopes that millions of Chinese consumers like farmer Wang will, at least in part, replace consumers in Europe and the United States, who have been buying fewer and fewer goods that are “made in China” since the crisis began. Chinese exports plunged by about 22 percent in April alone.

Massive Funds to Backward Regions

It doesn’t take much to convince the Chinese masses to spend their money, as they embark on an enthusiastic shopping spree in Anhui and other provinces — particularly in the country’s relatively backward western regions — into which Beijing is currently funneling large amounts of government funds.

<em>Chinese Prime Minister Wen Jiabao says he has more "gunpowder" to protect the country against the downturn. The government announced in November that it was to spend 4 trillion yuan (€450 billion or $608 billion) over two years on stimulus measures.</em>
Chinese Prime Minister Wen Jiabao says he has more
“gunpowder” to protect the country against the downturn.
The government announced in November that it was to
spend 4 trillion yuan (€450 billion or $608 billion) over
two years on stimulus measures.

“Jiadian Xiaxiang,” or “Electric Household Appliances for the Villages,” is the title of the campaign currently underway in China. The economic stimulus program is straightforward: Buyers must identify themselves as farmers. After purchasing their new television sets, refrigerators, washing machines or mobile phones, the customers receive a 13-percent rebate on the purchase price from their local tax offices.

Beijing is using similar government stimulus programs to boost car buying. A tax imposed on the purchase of certain small cars was cut in half, bringing it to 5 percent. The government is spending about €560 million ($755 million) in the hope of stimulating sales of vehicles in rural areas. And it seems to be working. In March alone, the Chinese bought more than 770,000 new cars, a 27-percent rise over the previous month and a new record monthly sales figure.

The stimulus programs recently helped China overtake the United States as the world’s largest automobile market. The government stimulus programs, financed with the help of its massive currency reserves, could also benefit the West.

Hardly any other country is pumping money as enthusiastically into the tired economic cycle, and almost nowhere else is the government intervening as rigorously and deeply in the market as in the People’s Republic.

China was one of the first countries to announce an economic stimulus program. In November 2008 the government in Beijing launched a two-year plan to inject 4 trillion yuan (about €450 billion, or $608 billion) into the economy. This is about seven times as much as the German government plans to invest in its economy.

<em>Beijing is trying to encourage consumerism. One measure has been to cut the tax paid on new cars. China has now overtaken the US as the world's biggest automobile market.</em>

Beijing is trying to encourage consumerism. One measure has been to cut the tax paid on new cars. China has now overtaken the US as the world's biggest automobile market.

Since the crisis began, Beijing has launched new infrastructure projects practically at the press of a button. Some projects had been planned for a long time, while others were completely new. They include the paving or repair of 300,000 kilometers (186,000 miles) of roads, as well as an investment of €68 billion ($92 billion) in new railroad lines, or about twice as much as in the previous year.

Last year, Beijing put many projects on hold, partly to reduce pollution during the Olympic Games and partly to cool what was then an overheated economy. As part of this strategy, China’s central bank increased interest rates six times before the crisis, but then it frantically reversed course and reduced rates five times in a row. Now Beijing’s economic planners are stepping on the gas once again, in all sectors of the economy.

In light of the crisis, the government and the Communist Party are quickly scaling down considerations of environmental protection and sustainability, which had been raised increasingly in recent years both abroad and in China. In only two days, the country’s Environment Ministry hastily approved 90 projects worth a total of about 240 billion yuan (€27 billion, or $36 billion), including power plants, aluminum smelters, cement factories and steel mills. This accelerated approval process is dubbed, with absolutely no irony, “Green Passage.”

China’s communists are suddenly in their element once again. They are well used to government-run campaigns, going back to when then-Chairman Mao Zedong invoked the ill-fated “Great Leap Forward” in the 1950s and later launched the Cultural Revolution.

Sitting in the Same Leaky Boat

Nowadays, the party’s Public Enemy No. 1 is the global crisis, which is mainly spilling over from the United States, Beijing’s important export market. Beijing is also worried about its financial investments in the US. With about one third of its $1.9 trillion (€1.4 trillion) in foreign currency reserves invested in US treasury bonds, China is the Western superpower’s biggest creditor. In other words, the Chinese and the Americans are essentially sitting in the same leaky boat.

To protect their borrowers from collapse, the Chinese have hardly any choice but to continue buying up American treasury bonds. Nevertheless, Beijing is also taking advantage of the crisis to portray itself as an alternative to the United States and a future superpower. It is gratifying for the Chinese leadership to look on as the West reaches for solutions that smack of state capitalism.

China’s leaders stand a good chance of winning this global competition, at least in the short term. After all, the planned market economy is their own turf. Furthermore, the Communist Party has no democratically elected parliament to worry about, one that could seek to influence its “market economy with Chinese characteristics.” And they can practically order their state-owned banks to issue loans to companies, many of which are also state-owned.

In March alone, Chinese banks increased the volume of loans to companies by the equivalent of €216 billion ($292 billion). As a result, investments in factories and real estate in urban areas rose by more than 30 percent from January to April.

Omnipotent Crisis Managers

The party has also been dispatching its officials to visit companies throughout the country. Part of the purpose of these visits is to determine which companies need government support. At the same time, the party officials have begun pressing local company managers not to let any workers go or close factories — a trend that triggered an initial wave of angry protests around the end of last year.

At first, the crisis took the party by surprise in Guangdong Province, China’s export powerhouse in the Southeast, bordering Hong Kong. When thousands of privately owned factories that produced inexpensive products like shoes and toys were shut down, about 20 million migrant workers throughout China lost their jobs. But local party officials made sure that the newly unemployed were paid back wages.

<em>A stand at the Shanghai motor show. The government is spending about €560 million ($755 million) to stimulate the sale of cars in rural areas. It is also offering a tax rebate to farmers who buy new household appliances. The West is hoping that these new consumers will make up for the drastic reduction in consumption in Europe and the US. </em>

A stand at the Shanghai motor show. The government is spending about €560 million ($755 million) to stimulate the sale of cars in rural areas. It is also offering a tax rebate to farmers who buy new household appliances. The West is hoping that these new consumers will make up for the drastic reduction in consumption in Europe and the US.

In Shanghai, the Communist Party’s crisis managers are virtually omnipotent. In this city of skyscrapers, communist city officials control the most important large companies, from supermarket chains to China’s biggest carmaker. Recently, the city spent 1 billion yuan to quietly rescue SVA, a local flat-screen TV manufacturer, from bankruptcy. “The party is the key to overcoming the economic difficulties,” says Yu Zhengsheng, the head of the Communist Party in Shanghai.

The collective goal of China’s economic planners is to achieve 8-percent growth, which the Beijing leadership sees as the minimum level necessary to preserve the constantly invoked social harmony in the enormous country.

In fact, China will likely announce a growth figure at the end of the year that is completely in synch with the planned figure — regardless of whether the actual growth figure ends up being exactly 8 percent or, for example, 7.8 percent.

Freeing China from Dependency on Exports

In the first quarter of 2009, the world’s third-largest economy grew by 6.1 percent. This is a disappointing number when compared with the double-digit growth China experienced until 2007. Nevertheless, the People’s Republic is still in good shape compared with the West, which is sliding more and more deeply into recession.

Prime Minister Wen Jiabao has already indicated that he still has “more gunpowder” available to protect his country against the downturn. But by building new roads, railroads and airports, Beijing is only driving up the unhealthily high proportion of such investments in the general economy, which had already exceeded 40 percent in 2007.

Offering tax rebates for cars and TV sets is not going to solve China’s real challenge, which is to free itself from dependency on exports in the long term and stimulate domestic consumption.

To achieve this goal, China would have to bridge the growing gap between rich and poor. In the 1980s, urban Chinese earned about twice as much on average as rural residents. By 2008, city dwellers were making 3.3 times as much as members of the rural population.

The People’s Republic urgently needs to develop a sustainable social welfare system, one that is far more extensive than current plans call for. Most of China’s 1.3 billion people have neither adequate health insurance nor any significant retirement pensions.

China, a late-comer to industrialization, urgently — and far more so than the West — needs private entrepreneurs willing to take the risks involved in developing its own high-tech brands. Instead, the country’s economic planners continue to puff up stolid government behemoths with their loans.

Even the central bank in Beijing, in its most recent quarterly report, expressed the concern that China must accelerate “innovation and reform.”

Instead, provincial party bosses vie to perpetuate the glory of the party by erecting ostentatious buildings of steel and concrete. Ni Jinjie, a prominent financial commentator, warns that if Beijing continues to hand out money indiscriminately, “the structure of our economy could quickly fall out of balance.”

The new China bubble is already beginning to quietly inflate on the markets. In Shenzhen, where the stock index has already shot up by more than 50 percent this year, market regulators felt the need to issue an official warning to Chinese investors: “Beware of the dangers of blindly speculating with stocks!”

See Related: ECONOMIC CRISIS

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