China in the Year of the Ox

By Barker 27/01/09

Twelve months ago, most people who admitted they were sceptical about the future of China’s economy would have been labelled a deluded crackpot.

Arguing that the Chinese economic model was fundamentally flawed was comparable to arguing that black is white or a square is triangular. Not many would take you seriously. China seems to have performed a fiscal miracle over the past three decades, transforming one of the most under-performing nations on the planet into the next superpower. Or at least, that was the view until the most recent developments in the credit crunch. The reality is that the Chinese position is not nearly as dominant as previously thought, and the repercussions of such a realisation could ruin what is a surprisingly fragile economy. The American model of free markets may be on trial, but so is the Chinese model of ‘authoritarian capitalism’.

Monday 26th January, the day of writing, is officially Chinese New Year. The usual display of firecrackers and lanterns ushers in the Year of the Ox, symbolising prosperity through forbearance and hard work. Yet this significance comes with a bitter ironic aftertaste, as prosperity in 2009 will be rather difficult to find. And, surprising as it may be, this couldn’t be more apparent than in China. The Shanghai Stock Exchange has seen its index plummet by two thirds. The Chinese export sector, responsible for a huge amount of Chinese growth over the past decade, is currently stagnated. Some experts estimate that 20 percent of factories in the Pearl River delta have already closed down and half will be gone by the end of the year. Overall economic growth is likely to dip below the 8 percent mark – the point at which unemployment (and therefore unrest) begin to rise dramatically in a country that has grown accustomed to double-digit growth. Even before the current crisis, bad loans in the Chinese financial system totalled one trillion dollars.

A recent Channel 4 documentary looking at the history of finance, ‘The Ascent of Money’, broadcast an episode entitled ‘Chimerica’, in which Professor Niall Ferguson explains how China has bought a colossal amount of American debt, and why this led to a deceptive surplus of credit, in turn encouraging US banks to lend to the sub-prime. It is depictions like these that convince us that China is the insurmountable powerhouse of the future – but recent events have revealed the flaws beneath the skin. As stated in The Times newspaper recently, “The Chinese model is clearly not as sound and resilient as many believed.” The economic ramifications of this revelation are too numerous and unpredictable to fully detail here – it will undoubtedly not aid already volatile markets.

Yet perhaps the most important repercussions of this economic crisis are the possible social implications. With all its recent successes, it is easy to forget that China has been a one party state for sixty years. The Chinese Communist Party still rules the nation with an iron fist, with the persecution of political, ethnical and religious opponents widespread. However, the CCP is noticeably apprehensive about the current credit crunch, and rightly so. For years, China has maintained its astronomical levels of growth through state-led fixed investments. But this strategy is becoming more inefficient and increasingly unsustainable with every passing month. Concern has even been voiced by those at the height of the government; a rare occurrence considering the CCP always put a positive spin on domestic affairs. President Hu Jintao has, according to The Times, “issued warnings about the possibility of political and social collapse.”

Strong words indeed. Yet there is light at the end of the tunnel for the people of China. Although many are now weathering their own ‘winter of discontent’, a resulting increase of pressure on the CCP may introduce social reforms. Press censorship could be lifted. Capital punishment could be outlawed. Persecution of religious and spiritual groups could end, such as that of the Falun Gong, a movement that saw membership in the hundreds of millions before it was banned in 1999. An introduction of political democracy is not an implausible outcome, along with a multi-party state. History teaches us that just these kind of roots grow from the ashes of economic misfortune, and although an outright revolution is not yet on the cards, social reforms certainly are.