China to emerge “relatively unscathed”?

It’s painful here. Worse than I ever thought it would be. Everyone, down to the taxi drivers and the lady who washes the cups at my language school, is talking about the crisis. I got a near-tearful call today from someone I know who works for a not-unprominent company here, asking if I had any suggestions for his keeping his sanity. “There are rumors everywhere. Everyone says a big reorganization is coming, that even the chairman of the company is leaving. The worse thing is that they won’t say anything formally but they’re all whispering about it. We all know the layoffs are coming, maybe up to 20 percent. But we are all in suspense. We can’t sleep, we can’t think about anything else.”

I told my friend to relax because a.) he is only 30 years old and he should thank God he is witnessing this kind of misery while he’s young and not when he’s getting ready to retire, and b.) there’s not a damned thing he can do, except keep as cool as possible and try his best to hang on to what he’s got.

But the call was deeply troubling. The anxiety level has reached the clicheed “fever pitch.” From many expats you’re hearing a lot of, “This is definitely a good time to be living in China and not America,” but also a lot of, “My company just laid XX people off, freezed hiring, cut expat packages, canceled all bonuses and stopped all travel.” Yeah, it’s a good time to be in China, but it’s not a fun time to be in China. Or at least not as fun, by a long shot, as the heady pre-crisis, pre-Olympic days, when money poured like wastewater into the Pearl River Delta.

China is scared. Everyone’s scared. Some businesses have been hit way harder than others, but everyone’s feeling the pressure. What still seems to separate China from the West, however, is the sense that even in the face of an unthinkable catastrophe, China still has more going for it than the West and this is still the better place to be. And for now, I tend to agree, cautiously. I’m not nearly as confident as I was a few months ago, when I was convinced China’s own domestic economy woud keep the engine roaring. It may keep the engine humming, softly, at least keeping the flame alive. And that is still more than you can say for the US, where it appears the lights are being extinguished one by one, leaving entire states and cities in the black. (Case in point from yesterday’s paper; this is not an exaggeration.)

Which brings us to the link of the day, an article from Foreign Affairs that begins with an agonizing description of just how deep the precipice is for the West, throwing into question the very foundations of free-market capitalism and wrenching us from what was a market-driven system to one driven by the government. After scaring us as much as he can, the author then turns to the “bright side” of the equation, i.e., the powers that may emerge stronger as US influence wanes. Need I state which of these powers comes out ahead?

No country will benefit economically from the financial crisis over the coming year, but a few states — most notably China — will achieve a stronger relative global position. China is experiencing its own real estate slowdown, its export markets are weak, and its overall growth rate is set to slow. But the country is still relatively insulated from the global crisis. Its foreign exchange reserves are approaching $2 trillion, making it the world’s strongest country in terms of liquidity. China’s financial system is not exposed, and the country’s growth, which is now driven by domestic activity, will continue at solid, if diminished, rates.

This relatively unscathed position gives China the opportunity to solidify its strategic advantages as the United States and Europe struggle to recover. Beijing will be in a position to assist other nations financially and make key investments in, for example, natural resources at a time when the West cannot. At the same time, this crisis may lead to a closer relationship between the United States and China. Trade-related flashpoints are diminishing, which may soften protectionist stances in the U.S. Congress. And it is likely that, with Washington less distracted by the war in Iraq, the new administration of President Obama will see more clearly than its predecessor that the U.S.-Chinese relationship is becoming the United States’ most important bilateral relationship. The Obama administration could lead efforts to bring China into the G-8 (the group of highly industrialized states) and expand China’s shareholding position in the International Monetary Fund. China, in turn, could lead an effort to enlarge the capital base of the IMF.

Kind of ironic, suggesting we turn to one of the world’s poorest countries to shore up the IMF. But that’s one of the peculiarities of China, verging (perhaps) on superpower status “while ranking just above the world’s poorest nations.” And yet there we are.

This is an immense article, like a book. Allow me to paste a final snip

[China] will suffer a lesser blow from the global crisis. It is experiencing some economic pain. Its export markets, led by the United States and Europe, are slowing dramatically. China is also suffering from price declines in certain urban real estate markets. Its growth slowed to nine percent during the third quarter of 2008 — a rate that other nations would envy but was China’s slowest in five years. These factors explain why the Chinese leadership is implementing a multiyear economic stimulus plan worth over $500 billion, or approximately 15 percent of GDP. Still, the IMF is projecting that the country’s economy will grow by 8.5 percent in 2009.

In financial terms, China is little affected by the crisis in the West. Its entire financial system plays a relatively small role in its economy, and it apparently has no exposure to the toxic assets that have brought the U.S. and European banking systems to their knees. China also runs a budget surplus and a very large current account surplus, and it carries little government debt. Chinese households save an astonishing 40 percent of their incomes. And China’s $2 trillion portfolio of foreign exchange reserves grew by $700 billion last year, thanks to the country’s current account surplus and foreign direct investment.

This means that although China, too, has been hurt by the crisis, its economic and financial power have been strengthened relative to those of the West. China’s global influence will thus increase, and Beijing will be able to undertake political and economic initiatives to increase it further. China and the Association of Southeast Asian Nations are just concluding an agreement that would create the world’s largest free-trade area, and Beijing could take additional steps toward Asian interdependence and play a stronger leadership role within the region.

China could also expand its diplomatic presence in the developing world, in order to further its model of capitalism and, in places such as Angola, Kazakhstan, and Sudan, satisfy its thirst for natural resources. In the midst of this crisis, it might also help finance emergency loans, either directly, through bilateral financing arrangements, or indirectly, by creating an additional facility at the IMF that could expand the organization’s available credit beyond what current quotas allow. China should also be expected to make strategic investments through its sovereign wealth funds. Given China’s appetite for natural resources, this is one likely area of interest; its relatively underdeveloped financial-services infrastructure is another.

Well, it sure sounds optimistic. I’ve written before about how well Hu has built relations with strategic partners in a Machiavellian way with only one thought in mind: how will this benefit China, morality be damned? Does China have the finesse and diplomatic skills to pull it all off? Looking at how clumsily they handle their own media relations, I would say no. But then, looking at how smoothly they ran the Games and how, when they set their minds to it, they can make things happen (again, morality – and the environment and safety, etc. – be damned), I’d say it’s not at all inconceivable.

In PR pitches, we often tell clients they are at “an inflection point,” a pivotal moment when they can achieve greatness or be lost in the crowd (which is why they need our services). The term has lost a lot of its meaning, but if ever there was a genuine, burning, 100-percent certified and documented inflection point for China, this is it. More than the Games, More than getting into the WTO. Yes, China is reeling from the shock waves and is getting hit by a sledge hammer. But the West is in a different boat, one with no life preservers. It won’t drown, but it won’t emerge from the water anytime soon, and when it comes up for air it won’t be the America we used to know. China will still be China, I believe. Its ruthless government, with money in the bank and massive support of its population, despite the fear and protests and angry anecdotes, is in a much better position to hold onto its power while keeping systems largely intact.

Sorry for all the metaphors. Read through the article if you haven’t yet reached saturation levels with grim news outlooks on our “crisis-opportunity,” as they say here. And please don’t misunderstand: I am not convinced China will achieve all that the authors claim it’s capable of. I think there’ll be misery aplenty along the way. But everything is relative. And China is in a better position than the US, relatively. For whatever that’s worth.


Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.

The Discussion: 103 Comments

Last comment before I close this thread: I’m not going to give China a lion’s share of the blame for the global economic crisis for its having done exactly what the US wanted it to do, buying US debt. The US often gets unfairly blamed for many of the world’s problems, but in this instance the fault lies squarely with the US, with de-regulation, with Wall Street’s greed, with the Fed that blessed the exotic new loans that have shaken the world, with mortgage companies and, on a whole other level, the real estate brokers and lending houses, and if you want you can even put some blame on homeowners who didn’t read the fine print (but not much). But to blame China for doing America’s bidding….well, it seems a bit much. We are big boys. If we cannot control our own greed, why should we expect China to control our greed for us? The US has been pressuring China for years to adjust the yuan, but if it really wanted to solve this problem it would have acted years ago to crack down on these loans and regulating its own financial industry that brought the house down.

About war – anything’s possible and it would certainly stimulate the world economy. But I don’t see it Yet.

Thanks to everyone for a great thread. Happy New Year and I am sure we’ll be discussing this in later threads very soon.

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