China holds the economic high ground as others sink

The Middle Kingdom, while not untouched by the global financial crisis, is seen by many as a key player in putting things right again.

BEIJING // "Can China save the world? If so, how?" Chris Patten, Britain's last governor of Hong Kong, was pushed to answer this question last week in a meeting with a group of foreign journalists in Beijing. In the US-originated global financial crisis, the world's eyes are fixed on China, the "factory of the world". There are those, including Kevin Rudd, the Australian prime minister, who call for China to play an active role to counter the global financial meltdown.

Susan Shirk, a former US government analyst on China, was quoted as saying this week: "The global economy is now so interdependent, interwoven and we will require China's co-operation to try to put it right again." After all, in a short period of time, the Middle Kingdom has accumulated huge global wealth, with a US$1.9 trillion (Dh7 trillion) foreign reserve. That figure is comparable to twice the GDP of South Korea, the world's 13th largest economy. It is an unprecedented achievement that even Japan and the former West Germany could not match during their impressive trade surplus performance in the 1970s and 1980s.

"Who would have thought 10 years ago that America would be in a position where it needs China's growth to pull America and the rest of the world out of American-made financial crisis?" said James McGregor, the former Beijing bureau chief for the Wall Street Journal, who now runs JL McGregor & Co, a consulting firm. China's transformation from the "workshop of the world" now possibly to the "saviour of the world economy" is an open question. Actually, China itself is not unscathed by the global financial tsunami.

"The impact is gradually unfolding," said Yu Yongding, a monetary policy analyst, who formerly advised China's central bank. "At this stage, the most important impact is on the export side, which is slowing down," he said at his office at the Chinese Academy of Social Sciences, where he is director of the Institute of World Economy and Politics, which is China's top policy think tank. "We are learning. We were not well prepared for this global shock. Until recently, we thought the US financial crisis was bottoming out, passing the worst stage. Actually, it is not. Now we're very vigilant."

This week, Ben Simpfendorfer, a Hong Kong-based China economist with the Royal Bank of Scotland, spoke about China's increasing capital outflows, which, he said, in the worst case scenario, can lower China's GDP growth "markedly to near five per cent", from the usual 10 per cent. China's third quarter GDP growth was nine per cent. Mr Yu dismissed such a view, noting China has not yet liberalised its capital account and the country has the legal means to control cross-border capital flows. In fact, on Monday, China's forex regulator announced that companies must now register advanced payments of imports and delayed payments of exports, a measure seen to restrict capital flow out of the country.

Overall, China remains confident in its dealings with the impact of the global financial crisis. Mr Yu is putting his hope on China's huge $1.9 trillion accumulation of foreign reserve. That, he said, combined with the capital control on the border will be able to absorb any external shock. "There will be no problem, whatsoever. Just spending less than $1 trillion would be enough," said the Oxford-educated Mr Yu.

Mr McGregor agreed. Dissecting all complexity, he posed a much simplified view of making his point. Namely, given China's accumulation of gigantic global wealth and its sound fiscal situation, China remains the best safe refuge in the continually unfolding global financial crisis. "After all, where would you want to be right now? America or China?" he said. For China, the America-initiated global crisis is also a time to reconsider the West-led global financial order. "During the 1997 Asian financial crisis, the crisis occurred in East Asia. The students [Asian countries] failed to learn from their teacher [America]. The Asian countries therefore suffered. But this time, the teacher is in trouble," Mr Yu said.

Referring to the US government's $700 billion market intervention that goes against the textbook market-economy principle, Mr Yu said the students are discovering that whatever the teacher taught them is not actually followed by the teacher. "The teacher used to tell East Asian countries during the 1997 crisis that they should increase their interest rates, they should allow banks to go bankrupt, and they should tighten their fiscal policy. Now the teacher is doing just the opposite."

In a turn of events, the United States is the one that caused the current mess. "So, we have the right to demand the US to protect the interests of East Asian countries, which are the biggest lenders to the US. This time, the US should be modest," Mr Yu said. Mr McGregor said China is in a prime position where it can show to the world that its growth can also pump up the world. "This is an economy that has a growing consumer movement. Chinese people save 40 per cent of what they earn because they are worried about uncertainties in their lives.

"The Chinese economy can grow more when its consumers spend more money. And the way that it does is by improving its social safety net. Once there is the government assurance for that, people will begin to spend, creating a big enough market that can drive growth around the world," he said. Economists agree China can make up for its loss in export by increasing its domestic demand. For example, just as the American government in the 1930s, the Chinese economy can hedge out the global crisis and continue to grow by spending money on building more roads, airports, environmental protection facilities and power plants. "So, growth in China can pull the world out of this situation. This isn't an unbelievable situation," McGregor said.

The warning bell in all this is to make sure China does not affect a protectionist posture. Seeing the "troubles in capitalism", if the Chinese leadership decides to retreat to its old style of state-run economy it could be a real problem for the world, observers point out. That is essentially the same message Mr Patten had in his response to the question "Can China save the world?" "China will help save the world economy, provided the world doesn't go protectionist," he said, adding that if China and other Asian countries can retain a reasonable urban economic growth, it will offset the economic slump in the United States and Europe.

* The National