Changing China
Giant on the move
Why China can’t save the global economy this time
By Nicholas Consonery The opinions expressed are his own.
When the global economy broke down in 2008, China was the savior. At that time Beijing rolled out a massive stimulus that was one of the biggest—per size of the economy—that the world has ever seen. The resulting benefits bolstered China’s economic strength at a time when the rest of the global economy was staggering under the weight of failing banks and surging public debt.
But the success of Beijing’s stimulus has masked underlying weaknesses in the country’s growth model. And the market is now waking up to the realization that global economic growth might remain suppressed for years to come.
In this environment, investors should be aware that the Chinese economy won’t be able to serve as the beacon of global growth indefinitely. Exports and investment overshadow household consumption. Public pressure is growing on the government to make growth more sustainable. The yawn between rich and poor is widening. And the Chinese leadership struggles to negotiate such difficulties with a homogeneous 1.3 billion person population dispersed throughout a country that is in different stages of development at the same time.
Reigning over this conundrum is the Chinese Communist Party—the 80-million member strong political apparatus in the unenviable position of being responsible for ironing out the country’s massive economic imbalances.
In a new report entitled “China’s Great Rebalancing Act” my colleagues and I on Eurasia Group’s China Team offer our assessment of the Party’s capabilities.
Our conclusion? China’s weaknesses are not just economic but also political. We argue that the Chinese political system is an obstacle to economic change in China, because the top leadership currently lacks the willingness to push through bold reforms that would require picking clear winners and losers in the government and the state-supported corporate sector. These reforms would lead the Chinese economy away from public investments and toward a more robust and diversified growth model, with consumption playing a bigger role. But the results of Beijing’s efforts to “rebalance” in this way—which is the ostensible goal of the Party’s much-heralded 12th Five Year Plan—will be disappointing for foreign investors and for policymakers in Beijing alike.
www.V.cn
Heard any new theories about the likely shape of the global economic recovery?
At a financial forum in Hong Kong this week, Zhou Yuan, a senior executive from China Investment Corp (CIC), the $200 billion sovereign wealth fund, offered a mischievous twist on some previous formulations, as well as a nod to the importance of China in any global recovery. In an effort to lighten the mood among a group of foreign economists, who had been arguing about whether the global recovery would be W-shaped or V-shaped, Zhou offered a perspective he said he’d heard from another source. “Whether China’s consumers will lead the world into a more prosperous stage of economic development, I don’t know, but we certainly hear some comments to that effect,” said Zhou, CIC’s head of special investments. “It’s clear that the economy (recovery) is something going into the V-shape,” said the English-speaking Zhou. “Someone also told me that the economic development worldwide will take the shape of www.v.cn.” After a moment’s reflection, his audience understood and broke into laughter. Zhou explained: Since shortly after the collapse of the Wall Street bank Lehman Brothers last September, global markets have experienced volatility that has often seemed to take a “www” shape.
Now, Zhou said, we are starting to hear more and more economists talking about a V-shaped recovery, although some remain cautious because they are worried there may be a so-called “double dip” in the financial crisis, the worst since the Great Depression. Whether it’s a V or W shaped recovery, Zhou joked, the ultimate solution to the crisis is China, eg “CN”. Zhou noted that China’s urbanization in the next few years — turning villages into mordern towns or farmers moving to nearby cities to become workers — will be a key attraction for foreign investments in China, which will in turn help China continue its contribution to global economic growth. From urbanization comes consumption. And if China can produce enough consumption to help lift the global economy, www.V.cn may sum up the real path of this financial crisis. Or at least some Chinese bankers are banking on it.
There seems to be so much potential for a double dip recession now. The stock market ralley is based on speculation and volume has dried up; yet prices keep going higher. What gives?
There are many reasons why this we could be in for another downturn and a full out trade war between China and the US is just one reason. You might also consider the commercial real estate mortgage defaults that are looming due to increased vacancy and a high debt load or the a large drop in the US currency leading to increased prices for US consumers. There are so many reasons; I am getting nervous and considering lightening my portfolio.
Can China save the world?
China has long said that its biggest contribution to a world racked by financial turmoil would be to ensure that its own economy grows strongly, implying that a rising Chinese tide will lift all boats. The latest data show that Beijing has delivered on one part of the bargain; its economy, the toast of the world over the past five years, is once again ahead, far ahead, of the pack.
Many investors and companies are confident that the second part of the bargain will follow – that China’s recovery will be just the cure for markets still woozy from the financial battering. Such faith is not yet justified.
To be sure, China has already delivered a cortisone injection to some commodities, notably copper, the price of which has risen more than 40 percent this year. Strong stock markets, from Japan to Canada, since March are in part a play on positive sentiment spilling over from the Chinese rally that began in January. China also stands as the one growth market for global auto makers.
Yueyang Government of China robs it’s citizen’s property
Since the economic reform of the 1980′s, China’s economy has grown by leaps and bounds. With such fast-paced growth, China’s industries required ever more land for expansion. Local governments, eager to please industry, found a simple way to meet this increasing demand: expropriation. As all land in the People’s Republic of China legally belongs to the state, and not to individual citizens, local governments have devised clever ways to reclaim land. By cutting off the supply of utilities or even resorting to outright violence, governments may compel tenants or house owner to sell their land and houses at unrealistically low prices; the governments then turn around and sell this land to industry, turning a huge profit for state coffers. The following is a true story of one such “eviction”, conducted by the Yueyang government of Hunan Province against the land and property of Mr. Xiong.
In 2006, the Yueyang government decided to reclaim the land of the Yangshan Area, where Mr. Xiong’s house is located. In March of 2009, the government priced Mr. Xiong’s 252-square meter house at a nominal value of 203 RMB per meter squared. In compensation, the government will offer the Xiong family three relocation apartments at a subsidized price of 500 RMB per meter squared, but limited to 90 meters squared per every subsidized apartment. For any floor space greater than 90 squared meters, the family would be forced to pay the difference under market price. In the Yangshan Area the market price of a crude apartment is approximately 2300-2800 RMB per meter squared. Thus, whereas the Xiong family will sell their house to the government for 51,000 RMB, to purchase a comparable house from developers the family will have to pay close to 600,000 RMB. To compound the injustice, the government also offers no guarantee of when and where the subsidized housing complex will be built, thus leaving the family essentially homeless for the interim. Indeed, some residents evicted as far back as 2003 still do not have permanent housing to this day over 6 years later.
When the Xiongs initially refused to sell their house and property, the government at first resorted to intimidation, threatening to fine the family until they relented. When this tactic failed to break the resolve of the family, the government upped the ante by threatening the family with forced eviction and subsequent demolition of the house. Finally, on the morning of April 22, 2009, the government lost their patience and resorted to outright thuggery. The government paid a group of gangsters armed with clubs to march to the Xiongs’ house and threaten the family with physical violence. When the family called the police, no help came. Finally, the gangsters broke down the front door and beat the family to the point where the wife, mother-in-law, and sister were sent to the hospital for emergency evaluation. While the family was at the hospital, the Xiongs’ house was emptied of its furniture and valuables, and their house demolished. In just a single day, the Xiongs were physicially assaulted, robbed of their belongings, and left homeless, all at the hands of a brutal and greedy local government.
The hardworking men and women of rural China do not oppose industrialization, and they recognize that for China to ascend to its rightful place in the world’s economy sacrifices must be made by all. However, such transactions must be conducted under the rule of law, with provisions for the protection of property under a transparent legal system. Until such conditions are met, the actions of the local governments of China represent nothing but tyranny.
