Hedging More Than Their Bets

Only a few weeks back, as the current global financial crisis started to spread out from the crumbling wake of bank collapses in New York, the leadership in China expressed confidence that their economic machine would be able to weather the blast. Initially, this sounded quite feasible, as the Chinese economy has been on an unfathomable upward trend of growth, particularly within the last few years (over 11% in 2007). Additionally, during the Asian Financial Crisis of 1997, China came through nearly unscathed even though the IMF had to bailout numerous economies in the region. But it now appears that such early confidence is dissipating in the face of slowed exports and investments due to the extent of the damage amongst China’s primary investors. What is unfolding is not only an economic rescue effort that many think will could dramatically change the composition of the Chinese economic machine, but it is also a glaring warning buzzer that things are not alright on the mainland.

China Slide –
As recession takes hold in the Eurozone and the US teeters on the edge, the export and foreign investment based economy in China has begun to feel the squeeze. This week, the Washington Post noted that, with 68,000 small companies in the Pearl River Delta collapsing and estimates of 2.5 million lost jobs, “For the first time in the 30 years since China began its capitalist transformation, there is a perception that the economy is in real trouble.” While that may be an overstatement (the 1989 Tiananmen protest was, in essence, a student reaction to the general feeling that the reforms were hurting rather than helping, and the liberalization of state-owned enterprises caused horrific levels of unemployment, especially in the industry heavy north), it certainly catches the current mood. Especially given that stock markets had already been on a nose-dive downward trajectory.

More disturbing is the dip in growth. Over the last few years, the Party has been trying hard to manage white-hot growth rates. Within months, the problem has completely reversed itself. While estimates for growth over the last quarter showed a drop from last year and many are predicting that the next quarter will show another significant drop as the economic crisis continues. Forbes relayed predictions that the rate would fall to 5.8% for the final quarter and level to around 7.5% for 2009. An NY Times article reports:

“Don’t count on China to get back to double-digit growth for the next few years,” said Dong Tao, an economist at Credit Suisse in Hong Kong.

Those numbers are certainly the envy of many a country, including most the developed nations being shellacked by financial upheaval, but they represent a rather significant problem for China. 8% GDP growth is pegged as the required level to keep China’s massive population from experiencing dangerous levels of unemployment. With civil disturbances, or mass incidents as they are called in the mainland – protests for short – already at a noticeably high level, the government is likely scared stiff at the prospect of 2.5 million unemployed, unhappy migrant workers heading home with legions more possibly following on their heels.

China’s Plan and Longterm Effects –
The plan is, in essence, two pronged: (1) to stimulate the economy through government spending on public works (ie, rail expansion, health care, rebuilding areas damaged by the May earthquake, etc.) and (2) to foster domestic private consumption to offset the slump in exports and foreign investment. The plan, as indistinct as it is at this point, would poor nearly $600 million dollars into stimulating the economy. Portions of the package seem to already be rolled into previously approved spending and the program will take around two years to fully run its course. This has produced mixed feelings about the possible success of the program. Simon Elegant quotes Ben Simpfendorfer as saying that he worries “the contraction in demand will take place before the fiscal policies have time to take effect." The Wall Street Journal ran an article with a much more optimistic review of the plan, casting it as the perfect way to loosen Chinese consumers’ notoriously tight fists. Either way, there is little to say about how the plan will turn out until more is known about the exact implementation and how much more damage will be done both to domestic business and to the foreign economies that primarily support them.

Reasons Why? –
Now, we should not go thinking that this stimulus package was put forth with much thought for the state of the global economy: this was a fundamentally self-serving effort. And for good reason. Experts had been clamoring for Chinese action to help in the crisis, but it didn’t seem Zhongnanhai was likely to budge until the water levels started to rise at home. The Times UK had a rather direct assessment of the situation:

The leadership's interest in safeguarding growth goes beyond a desire to preside over an expanding economy. In the 30 years since Deng launched China's market-led economic reforms, Marxism-Maoism has withered. The legitimacy of the one-party regime rests on its ability to provide increasing material well-being for its 1.3 billion people.

This more or less hits the nail on the head. For the Communist Party, ideology, in actuality if not in self-representation, has taken a serious back seat during the decades following the 1989 Tiananmen movement. Since, businessmen have been included and students heavily recruited to fill the ranks of the Party in an attempt to incorporate these two power bases into the fate of the Party. But it still stands that current Party authority remains tied to their ability to properly manage the growing economy and to the extent which nationalistic sentiments can be maintained. Thus, the economic crisis strikes at the very heart of the Party’s stability. However, as of now there may not be too much to fear. Regardless of the extent to which the Party pushes the concept of the “harmonious society” and the threat that rural mass incidents present to that projected harmony, there is likely little that the need seriously concern state leadership. Mass incidents and rural disturbances rarely pose serious threats to the overall stability of the state and the authority of the Party. It is more a question of monitoring sentiment among businessmen and students, for that is where any real threat has ever and could really materialize. As long as both groups see their collective fates as linked to the health of the Party-state, the boat may rock but it certainly won’t threaten to capsize. Count on the fact that the CCP knows this because they, like most people in China, have very long memories.