China Translated

In advance of the G20 summit in Washington at the end of 2008 I published an op-ed in the SCMP arguing that China’s main contribution would be through supporting domestic demand.  Text below:

Bretton Woods II?
World leaders meeting in Washington on November 15th have a lot to discuss.  With the US economy sliding into recession and much of the rest of the world threatening to follow, a stimulus package is at the top of the agenda.  The French, currently presiding over an increasingly hapless EU, are arguing for a new global approach to regulating the financial markets.  Gordon Brown is talking about ‘Bretton Woods II’ – hoping to match the success of the conference in 1944 that established the IMF and the post-WWII global financial order.

China’s main contribution to resolving the global financial crisis will be maintaining steady rapid domestic growth.  That was the message from Hu Jintao at the Asia-Europe summit held in Beijing at the end of October, and it was the message confirmed by the State Council following their meeting last week.

Increasing domestic demand means a RMB 4,000bn boost to infrastructure investment and social spending over the next two years.  Affordable housing, rural electricity and irrigation, roads, railways and airports, health and education, and reconstruction following the Sichuan earthquake will all enjoy increased spending. Like many policy announcements from Beijing, this one is long on objectives and short on detail.  In particular it is not clear how much of the new spending is actually new.  But it is clear a major investment package is in prospect.  Economists are talking about a two percent boost to GDP growth in 2009, taking growth to between 8 and 9% and avoiding what would otherwise have been a major slump.

China remains a developing country.  According to 2004 estimates there are 114m still living beneath the World Bank’s $1/day threshold for absolute poverty.  But it is also the world’s 4th largest economy, with a growth rate that will push double digits for 2008, and sitting on $1.7trillion in foreign exchange reserves.  What is more, it is a trading economy, with net exports accounting for 22% of growth in 2007.  Could the US and EU be forgiven for expecting more from China than simply securing its own growth objectives, if not from altruism, at least from enlightened self-interest?

Perhaps, but if they do, they have gone about it the wrong way.  First, the decision to host the meeting in the G20 format is a missed opportunity to give China the global recognition that it craves.  G8+ China and perhaps Brazil and India would have massaged egos in Beijing.  A G20 meeting equates China with Turkey, South Africa and Indonesia – important nations for various reasons - but not on a par with China and not key players in the resolution of a global financial crisis.

Second, both the EU and the US have thrown obstacles in the way of Chinese investment in their economies.  The US blocked CNOOC’s acquisition of UNOCAL and cried ‘national security’ over Huawei’s attempted purchase of a stake in 3com.  The EU threatened to review investments made by Sovereign Wealth Funds after the China Investment Corporation (CIC) got up and running, but had no such fears concerning the larger Norwegian, Kuwaiti or Singaporean funds.   Only UK Prime Minister Gordon Brown had the foresight to welcome investment from the CIC.  But with memories of a stony reception elsewhere still fresh in the mind of China’s decision makers, it is unlikely that they will now step up to the plate with a stimulus package aimed at foreign markets.

Finally, though China did not suffer the worst effects of the Asian financial crisis, it certainly learned the most important lessons.  As the West stood by and offered little but warm words and cold policy prescriptions to China’s Asian neighbours, it set a precedent which China will be happy to follow, and did much to undermine the long-term credibility of the Bretton Woods institutions. In the margins of last month’s Asia Europe summit, East Asian states reaffirmed plans to provide $80bn of their own insurance against financial crisis – a blow to the authority of the IMF.  The talk in the Chinese press is of an IMF retiring behind the curtain of history.  Gordon Brown may get the Bretton Woods II he asked for, but perhaps not the one he wanted.

Financial Crisis

For China’s 700m strong rural population, the light of property rights may finally be appearing at the end the Communist-era tunnel.  30 years of economic reform have left the countryside significantly better off than before, but neither farmers nor migrants are yet able to participate fully in the benefits of China’s ongoing modernization.  In an article published in a recent edition of the Far Eastern Economic Review, Prof Scott Rozelle and I argue that this may start to change if positive signals from China’s leaders translate into concrete policies for turning farmers’ contractual land use rights into legal title to land.  The key points are:

• The lack of formal legal title to land is a barrier to China’s peasant farmers raising money to invest in increasing on-farm productivity or making an permanent move to the city.
• Land reform could do more than any other policy to solve these problems, but implementation will be a serious challenge.  In particular: 1. a land survey needs to be conducted 2. on the basis of this survey, land needs to be divided up and titles issued 3. there needs to be a change to the current law, under which peasant’s collective land rights are subservient to state land rights 4. rules of ownership must be agreed and announced.
• With powerful interests including industrial ministries, property developers, and local government ranged against reform, it is not clear what shape the final policy will take.

You can view the article at the FEER website here.

Agriculture

In an op-ed published by the SCMP on the day of Obama’s election win I argued that relations with China would be a key challenge and priority for the 44th President.  Text below:

The Ghost of Presidents past

President-elect Obama may find the failures of his predecessor continue to haunt US-China relations

A war in Iraq, a war in Afghanistan, an economy sliding into recession, and a financial system teetering on the brink of collapse:  the 44th US President has a lot on his plate.  So much so that relations with the world’s preeminent emerging power may not be the first focus of his attention.  But the President-elect should not let China slide from view, neither should Mr. Obama underestimate the challenge of getting to grips with middle kingdom.

The most pressing problem for the US is the threat that the current financial crisis will segue into a prolonged economic recession.  The numbers and the headlines are both bleak.  A $700bn rescue plan has yet to calm troubled markets and third quarter data showing the economy suffered the biggest decline since 2001.  But with much of the rest of the world threatening to follow the US into recession, the Chinese economy continues on its path of steady rapid growth.  After 5 years of double-digit growth, 9% in the third quarter was a marked slowdown but still nothing to be sniffed at.  What is more, the Chinese government is sitting on some $1.7trillion in foreign exchange reserves – a tidy sum and a tempting target for foreign governments looking for investment to boost their flagging economies.
Unfortunately for the President elect, the white knight Chinese investor has shown no intention of taking his horse out of the stable.  At the recent Asia-Europe summit the Chinese side stopped short of supporting French President Sarkozy’s calls to wrest control of the financial system away from Washington and Wall Street.  But neither did Hu Jintao offer financial support to the flagging US or European economies.  For the Chinese leadership it appears, steady growth at home is the best response to slowing demand abroad.  With much of the Chinese economy dependent on exports, that may be short sighted, but still provides cold comfort to a US economy in need of stimulus.

Beyond the current crisis, the 44th President will be eager to promote the US values of free markets and democracy.  President-elect Obama said as much in an essay on US-China relations published by the US Chamber of Commerce in China.  On these questions, Mr. Obama may find the path to policy change in Beijing is blocked by the poor record of the US in the management of its own economy and in the prosecution of the war against terror.

On the financial sector, the Chinese government retains a tight grip on the mainland’s banking, insurance and securities industries, with foreign firms restricted in the scope of their operations.  The US has long argued that a liberalized financial sector is a win-win for the bilateral relationship – new market opportunities for the US banks and the chance to benefit from US expertise for the Chinese side.  How likely is it now, with the inadequacies of the US approach to financial regulation so evidently exposed, that the Chinese side will accept the logic of the US argument?  Quite the reverse, the financial crisis will strengthen the argument for state control of the financial sector.  Finally, on human rights and democracy, whatever the merits of the US case, the legitimacy of the US as a global advocate was lost in the extravagancies of the war against terror, extraordinary rendition, torture, and Guantanamo bay.

Neither the economic nor the foreign policy mess is the fault of President-elect Obama.  But clean hands will neither help the 44th President bring China into a global solution to the financial crisis, nor enable Mr. Obama to exercise influence on an increasingly assertive and self confident Chinese government’s domestic policy.  On US-China relations, the ghost of Presidents past may haunt the 44th President long into his first administration.

US-China Relations

With much of the economy tied to tourism, and social unrest putting a dent in visitor numbers, Tibet’s economic performance in 2008 was unimpressive.  The EIU’s review of the economy of the region, to which I contributed, takes a look at the economic data for the first three quarters of 2008 and examines the government’s plans to draw in more domestic tourists and develop extractive industries.  EIU subscribers can see the work here.

Regional