Can China save the world from the economic crisis?

Poster for a talkshow on KTSF26. Posted on Flickr.

There's a theory going round amongst economists that only the dynamism of the Chinese economy and its growing internal market could put the world back on track. Not necessarily.

In order to restart its economy, the Chinese government is throwing a 4,000 billion Yuan (€457bn) stimulus package at the country, it was announced on Sunday. The rescue operation comes in response to a drop in demand from abroad, caused by the international crisis.

But if expansion in China is considered poor, it's still 9% - a number that most countries in the West, teetering on recession, can only dream of. The Chinese government has come up with the bright idea of giving the economy a boost by stimulating its internal demand, particularly in grand construction programmes (railways for example) and in increased public investment. Foreigners particularly are pleased to hear the news, as continued consumption in the China could keep companies who sell there in business, and therefore the economies of their countries on the rails.

Chinese economists however put the enthusiasm into perspective and explain that, even if China does remain less affected by the economic crisis, the country has nevertheless chosen a development model that today is reaching its limits.

"Die-hard expansion and exportation: a dangerous model of development "

Cai Chongguo is a specialist in social problems in China. He lives in Paris and wrote the book Chine, l'envers de la puissance (China, the dark side of power).

The problems of the Chinese economy don't come from the recent financial crisis. The Shanghai stock exchange has lost almost half its value since 2007, inflation is rampant and factory closures are already thought to be in their tens of thousands.

Economists here have been questioning the expansion model in China for several years now. And yet the stimulus package decided on by the government follows the same methods - die-hard expansion and exportation. Some do think this is a dangerous model of development. Mainly because it ignores interior demand and is therefore dependent on the international market. Also because it heightens the price of raw materials and generates inflation. And finally, because it is particularly harmful to the environment. So economists have been recommending for the past few years that the Yuan be revalued to make exports less attractive and push companies to interest themselves in Chinese consumers.

China is right now sliding into a disaster zone because its system is not as developed as that of the US or European countries. The majority of the banks are state-owned and so it's up to the government to avoid them going bankrupt. When I heard that they're spending $586 million dollars on a stimulus package, I had to ask myself where they got the money. It's not like the Chinese state is a rich one. There are some big reserves, nearly $2000bn, thanks to export revenues, but that's not state money. That's private money, often owned by foreign groups installed in China. If the government makes use of those funds, it's with credit. If the Chinese budget - the hard cash resources - do break even, then it's not by much. So I think the first measure the government should put in place is to lower taxes on companies. It's a loss of income, not expenditure."

"Our economic system isn't entirely open to foreign countries yet, thankfully"

Xia Yeliang is a research fellow in economy at Beijing University.

"The crisis that's ruining the US economy is bound to have repercussions here. Those affected the worst will be big coastal towns, the richest ones. Companies have already started laying people off and unsold stocks of steel are building up. The unemployment rate is also on the up. Before the crisis, it was officially 4%. But in reality, it was already 10% in towns and 20% in the country.

Most of the banks are owned by the state. When the crisis was triggered, we were able to react quickly. The banks adjusted their credit and lowered their interest rates to encourage consumption, mainly in estate agents and cars. So the government took a good decision in investing massively in the public services: the railways, social security, education etc."

Comments

A forced weak Yuan facing of

A forced weak Yuan facing of the fact that Main Bank of China Is in Need of Capital has a direct consequence in inflaction in china (to gain the money they need Central Bank of China can print more money, increasing inflaction and on the other hand China will heighten the tension with American in trade fields). China export is based on a competitiveness and the system has been based on the strong investements into foreign bonds market. Maybe we will have to calculate the consequences of a massive shift into the internal (poor)financial market.

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