China : first to bottom – first to bounce

renminbiThe global financial crisis has forced Canada to rethink the received wisdom about fiscal management. It should also force a rethink of the international economic order and how we must position ourselves for a post-crisis world. Can we count on our traditional ties with the U.S. to sustain long-term development? If the crisis marks a shift in economic power toward emerging countries, especially China, what are the implications for international policy?

The current crisis has blunted the more extravagant claims of emerging market ascendancy: China, India and Brazil are facing the same challenges as the rest of the world. The notion of “decoupling” – that emerging markets are no longer subject to Western business cycles – has been debunked. In the case of China, a precipitous fall in exports has led to the closure of thousands of factories and added millions to the ranks of the unemployed.

To put it crudely, the U.S. is suffering from excessive debt and China is suffering from excessive savings. But there is a world of difference between a downturn precipitated by bad debt and one due to domestic under-consumption. When the toxic assets have been finally excised from U.S. balance sheets, Americans will be saddled with a massive debt. This will mean higher interest rates and below-potential growth for the foreseeable future.

China is also feeling the pain of a downturn, but the similarity ends there. Unlike the U.S., Beijing can afford a massive stimulus package. Relative to national income, the $600-billion (U.S.) spending boost announced by the Chinese last year is the largest of any major country. In terms of contributing to global reflation, China has done its share and more.

The critical question is whether the Chinese response represents a change in the country’s economic model. Skeptics say China is merely buying time for its exporters and will continue to pursue mercantilist policies (such as a weak currency) in a bid to gain global market share.

But the early signs point in the opposite direction: Beijing has recently expanded social programs and transfer payments for the needy, and introduced reforms to health insurance that increase coverage for an additional 400 million citizens. The expansion of social safety nets will reduce the need for precautionary savings at the household level, and result in increased discretionary spending. Given the low levels of debt in China and the huge pent-up demand for consumer goods, private consumption is destined to play a much larger role in Chinese growth. This will be good for China, and good for the world.

For these and other reasons, there is a growing consensus among experts that China will be the first to find the bottom of the economic crisis, and the first to come out of it.

It is surprising, therefore, that there is so little awareness in Canada about the impact of the global recession on China’s economic rise. The federal stimulus package did not give any hint that Canada has to build stronger economic ties with China. Bay Street, for its part, is looking to Washington for salvation, in the form of trickle-down from the U.S. rescue packages.

Paradoxically, the global crisis has emboldened China skeptics, who point to the fallacy of decoupling as proof of fatal flaws in China’s economy. This argument is sometimes conflated with the view that Beijing should be blamed for the crisis and that protection against Chinese imports must be part of a recovery strategy.

A more insidious argument is that the crisis exposes the fundamental weaknesses of Chinese authoritarianism, and will lead to the collapse of the Chinese Communist Party. Setting aside the obvious objections to this notion of “performance legitimacy,” the proposition that China is facing a crucial test of leadership may be instructive in thinking about China’s role in a changing world order.

If Beijing is able to keep domestic peace and China emerges from the crisis as a stronger player in the world economy, will we have any excuses left to not take seriously the rise of this new global power?

Yuen Pau Woo is President and CEO of the Asia Pacific Foundation of Canada

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One response to this post.

  1. I have always believed that China would be the first to bounce back, but how can the do that as long as they depend on the U.S. economy to make it happen. Is their stimulus package focused on improving the domestic consumer side of their economy.

    Great post!

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