End of West's overconsumption spells trouble for China
Updated
China's economic slowdown poses a political challenge to the nation's leaders, as factories close and millions of migrants from the countryside face unemployment.
There're also one million graduates seeking employment. Already, the People's Daily is warning that China faces an arduous task in maintaining social stability, in the face of economic challenges. It's thirty years this month since China embarked on economic reforms, but quite how prepared is the Asian giant for the unchartered waters ahead?
Presenter: Sen Lam
Speaker: Michael Pettis, Professor of Finance at Peking University
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PETTIS: I think we have to divide policies into long-term policies and short-term polices. Long-term policies are aimed at improving the capital allocation mechanism and improving infrastructure and working the transition away from an export-orientation, towards a domestic-market orientation and all the other good things that economists talk about. But in the short term, the issue for China is to avoid getting caught up in the current crisis. And when I say "avoid", China can't avoid getting in the crisis. China's going to be very, very affected by the crisis, but it's not clear that there's an awful lot that can be done to deal with it in the short term.
LAM: Well, for instance, China has been concentrating quite heavily on exports and the latest figures show that demand for everything Chinese has dropped quite dramatically. How prepared are the Chinese authorities to deal with this?
PETTIS: I think they are starting to become aware of the problem. I think for awhile, there was a very misguided sense that China was in a very strong position, to avoid the effects of the crisis. But if you look at it, purely from a balance of payments point of view, you could more or less describe the world as if it consisted of two countries - the US, which was over-consuming and under-saving, and China, which was over-saving and over-producing. So that China was able to export its excess capacity to the US. And I think many people felt that because of the high production and high savings and high reserves levels, that it was actually in a strong position to withstand the crisis. It was exactly those things that helped lead up to the crisis. For example, the huge accumulation of reserves created an explosive monetary growth domestically, which was channelled into the productive system, and the increasing amounts of productive capacity. The problem is that, like in 1929, 1930, the world was going through a major shift and that shift consists of a contraction of global demand, especially among the trade deficit countries. The global balance of payments have to balance, and that means that the US, as well as Australia and parts of Europe, are going to reduce their over-consumption. Then, those countries that export overcapacity that have relied on over-consumption by those countries in order to generate growth, are also going to have to make a very significant adjustment.
LAM: Indeed, where China is concerned - it may be cashed-up, and huge reserves, but in real terms, on the ground, will it mean massive lay-offs for Chinese workers?
PETTIS: I think that's starting to happen. We're already seeing evidence that the unemployment levels are going up, although the numbers are always very unclear here. Certainly, policy-makers within China are seen to be behaving as if they thought this was a very, very serious problem. And I suspect it will be. People talk about eight percent level of growth as the minimum necessary to maintain unemployment at current levels. Actually, I think that's too low. It's probably closer to nine to ten percent, as the mininum to required to maintain employment at current levels. But at this rate, frankly I think it's unlikely we get seven percent growth next year.
LAM: Do the authorities have any kind of safety plan in mind, given that China does NOT have a social safety net? And to have millions of people who've left the countryside in search of work in the cities, and now finding themselves out of work, that can't be good politically, for Beijing?
PETTIS: China has a number of things it can do, to help manage that process. It's reasonably fiscal shape so it can go out and spend quite a lot of money, supporting domestic demand and creating a social safety net. It's just not very easy to do, and it's certainly not very easy to do in a very short period of time. And that's the biggest problem. If you look at the contraction of demand especially in the US but also in Europe and other places, it's occuring quite quickly. And China basically needs to come up with responses that are effective in a very, very short period of time, and that I think is quite difficult.
LAM: And China's success has been on the back of its masses - wages remaining low, for many labourers and workers. How can China address the wealthy gap, without jeopardising competitiveness, especially in the current climate?
PETTIS: Well, I think the focus on competiveness is misguided. Chinese exports are falling, not because China has become less competitive than its partners. Chinese exports are falling simply because global demand is contracting and exports are going to fall in the same way that trade deficit countries are going to see their trade deficits reduced. So, it's not really a question of competitiveness. I would actually argue that increasing wages for the workers might annoy corporations that are in trouble, but it's the right thing to do, because it increases consumer demand far more effectively than most other measures.
