05/07/2004, 00.00
China - Europe
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" Man" at risk in China's great development

by Maurizio d'Orlando
Non-representative economic figures, difficulties in obtaining enough energy supplies and, above all, the need to maintain a repressive system are the stumbling blocks to a less than rosy future for the Asian giant.  

Milan (AsiaNews) – Chinese Premier Wen Jiabao is in Europe and starting tomorrow he will visit Italy for 2 days. The Chinese prime minister is coming purely on business and does not plan to speak about anything else,  much less about human rights issues. 

At the moment, China's economic prospects have both bright and dark sides. An analysis conducted by the UBS early this year, despite indicating some factors for minor economic expansion, did not foresee any reasons for a major economic downturn for China in 2004. Nor did the study find reasons for a financial crisis, political instability, or even drastic changes in internal economic policy. Lastly there were no projections of commercial wars to be waged against developed countries.

However, AsiaNews, while having no intention of comparing itself to the research institution and its privileged points of observation, does not share the same rosy picture the UBS report gives.

AsiaNews believes there are some aspects which must be kept in mind when making such economic forecasts: the non-representative nature of Chinese economic figures, the lack of a social ties with the consequential need for maintaining a repressive system, and the urgency to make changes to the country's energy production system.  

Economic figures not very accurate

According to the UBS study, after a 2003 marked by the best economic growth in that last 6 years, this year China's rate of growth should go down by two points and in 2005 diminish again by another two. In absolute terms, the real growth rate for 2003 was 11.5% compared to the 8.5% official statistic. Hence a 9.5% rate of growth is expected for 2004.

The UBS report says differences with the official statistics are due to the little accuracy found in the Chinese data processing system. Thus, China will maintain an enviable rate of economic growth, despite a reduced rate, which should be obtained by tightening credit (in reality already underway), with a consequential reduction in internal demand and minor growth of imports.

At the same time, China's yuan will cease being anchored solely to the US dollar in order to be linked to by a mixed bag of other foreign currencies, of which the dollar will still play a preeminent part, yet leaving room for the influence of the yen and euro. Last year, the Chinese yuan should have been revalued at a maximum 3% with respect to the dollar, thus keeping 20-25% below its intrinsic value.  

And then there is also expected to be an additional increase in currency reserves and a short-term acceleration of inflation, which might become as high as 6-8 %, as Chinese authorities finish re-capitalizing their banking system, chronically affected by under-capitalization and a high percentage of insolvency. For years China's banking system was devastated and potentially explosive from a political perspective.  Even if the re-capitalization of Chinese banks ends up being well less than what is necessary, the government measure should open up the road to the liberalization of the country's banking system. This is expected to occur by 2006 according to agreements struck with World Trade Organization.   

According to AsiaNews, however, the key point is that re-capitalization until now does not seem accompanied by genuine structural healing. If the country's savings and loan management continues to be determined by political judgments and decisions, then re-capitalization will be useless and today's problems will resursafe again within a few years

Yet in order to examine the prospects of China's economic future, AsiaNews holds that it is also necessary to evaluate the importance of some additional factors.

The first is the non-representative nature of economic data. This is not merely due to the little accuracy of Chinese data assessment systems, but also because they refer to an economic and social system quite unlike the canons of reference in the Western parameters normally used in forming standard statistics.  

Supplying, then, global growth rate data without bearing in mind existing differences is at least misleading. In the first place, regional differences in China are so marked that a cluster of data ends up being not very significant in itself, since certain Chinese regions are so different. In terms of some aspects, differences are often greater than those found in two separate European countries.

In a single region, then, differences between who is participating in the market economy and that of foreign commerce and those who do not are of such a high degree that they cannot be represented by a single statistic. Moreover, one must remember that China's 900 million farmers, (i.e. the overwhelming majority of the population) not only have an income equal to a third of that of the already low industrial and urban population wages. While earnings have increased in other sectors, farmers' incomes have decreased proportionately.


Social constraint on development

Secondly, one must bear in mind social constraints influencing Chinese development, which for the large part stem from subcontracting work, assembling products and manufacturing products for foreign companies. China, in fact, imports (for 74% of the costs related to manufacturing) raw materials and components from abroad (mostly from the rest of Asia) and exports the finished products to developed countries (particularly to the United States) while exploiting the low-wages of Chinese workers.

This type of production is characterized by a low internal added value, including salaries, equal only to  25-35% of the worth of the work order (and even less for technological products). In 2003 such offshore subcontract manufacturing reached a record level, around 405 billion dollars or 48% of foreign trade.

In the transition phase from a rigid Stalinist system, the adoption of a production model with the undoubted advantage of accelerating industrial modernization, helped shoulder the financing of foreign investors, from whom 80% of investments came. 

The type of industrial development being taken up in China, however, leads to great expenditure of resources, that is, of manpower and raw materials. In terms of labor (taken from agricultural rural communities whose residents live at mere subsistence levels and who after years of ruthless dictatorship are passive in the face of any privation), it is plausible that there will not be a shortfall of workers. However, such a condition will only last only until authorities will be able to apply the "severe" methods in which they are used to solving problems, like standards of living for farmers and retirees, migrant work conditions and solving the frustration of 40 million fired and laid-off workers at bankrupt state companies.

Yet there is also the scarcity and poor quality of infrastructures which lead to daily troubles and serious risks for the Chinese population when natural disasters, epidemics and major accidents occur.   

Above all, there is the need for the Communist Party to maintain cohesion, necessary to keep various sectors of population segregated and particularly prevent various regions of China from binding in a religious or any other alternative sense. Any nucleus or group forming outside the control of the regime is seen as a potential rebellious threat to the government's absolute political control. This is the reason why religious organizations are strongly repressed, and perhaps even more so in the case of the Falun Gong sect which has developed a capacity to organize itself beyond government controls. Falun Gong has proven superior, in this sense, to other regions like Roman Catholicism (whose faithful, while on the rise, form no more than 1% of the total population and due its sheer lack of numbers could never be a threat cause a political threat).

The other factor that could favor incontrollable aggregations of people is the rapidly rise in Internet use. Today China is second only to the United States in terms of its total number of web users (79.5 million). In 2003 the number of users increased by 20.4 million, registering a 34.5% growth. Should Chinese authorities not exercise tighter controls over Internet use, it is easy to imagine that not before too long the State will no longer have effective control over the potential forming of groups it considers aversive or threatening to the regime.


Energy constraints on Chinese development

A second important stumbling block to the Chinese model of development is seen in the country's need for raw materials. As reported by AsiaNews in other articles, China's demand for raw materials had led to a noticeable increase in international rates

The most worrying figure regards the underestimation of its demand for oil and hydrocarbon products, of which China has been a major importer since 1993. Such underestimation is not only the fault of Chinese authorities but also that of OPEC and the IEA (International Energy Agency).

In the first quarter of 2004 China's oil imports increased 35.7% with respect to the same period last year. The increase in imports during the course of 2003, compared to 2002, was 31.2%    

China's rapid industrial rate of growth leads to a heavy increase in electrical use. In 2003, 21 Chinese provinces suffered continuous power shortages. Even supposing a relatively modest 6%  (modest in terms of Chinese parameters) yearly rate of growth, in 2020 China would need to import around 6 million barrels of oil a day –over 6 times its total volume of imports in 1999 and equal to nearly all of Saudi Arabia's current total exports of 7 million barrels per day.

If such an estimate is 6 times the total amount of imports in 1999 and 3 times that of 2004, it can be considered a very rapid progression.

On the other hand, in order to continue expanding, China needs 800-900 million kW a year. In 2003, for example, China's electrical energy demand grew by about 15%. However, today China is not able to produce more than 350 million kW a year. To make up for the remaining 450-550 million kW, Beijing counts on resorting to internal resources such as coal, which in 2003 supplied 61% of the country's total electrical consumption.

In order to generate 550 million kW 1.2 billion tons of coal are needed. Yet the transport, mining and burning of such a quantity (which being mined locally does not require an outlay of foreign currency and thanks to low salaries it is made available at extremely affordable prices) inevitably leads to irresolvable environmental problems.

In fact, today many Chinese cities are already suffocating below clouds of pollution caused by out-of-date coal burning plants. Such pollution levels have already had ill-effects on precipitation, leading to extreme flooding in certain periods of the year and intense droughts and thus desertification in other regions of the country.

A greater usage of coal is therefore unthinkable. If anything, its use should decrease. Hence to make up for the addition energy need, China will have to make use of other energy resources, like oil, natural gas as well as hydroelectric and nuclear energy.

As said in a preceding AsiaNews article, to obtain more natural gas China has signed long-terms deals with Australia, Indonesia, Turkmenistan and Eastern Siberia. In terms of large hydroelectricity there are 28 dams under construction while nuclear power is expected to supply 36 million kW by 2020, a mere 4% of all electrical consumption.

However the time needed to construct new plants are long and the amount of money needed for investment is high. Resorting more to oil imports is therefore inevitable and of importance not only economically, but also politically speaking.

This is so, since in just one year China will become the second biggest importer of oil (USA being the largest). Despite having searched for alternative sources in Siberia and former Soviet-dominated central Asia countries, China imports 60% of its oil from the Middle East, a region which has been unstable for quite some time and where the United States has strong political and economic interests.

What could happen and with what repercussions? Since the start of this year, Chinese authorities seem to have realized the seriousness of the problem, just as AsiaNews has written in several other previous articles.   

The solution, however, doesn't seem effortless nor possible to carryout in a short period if time. And there are many signs that China is nervous about this. Indeed, what AsiaNews wants to point out is that the Chinese strategy of reducing dependence on Persian Gulf oil is not having much success. In fact covering China's present and future energy needs, even if impossible, must be considered be at risk by unforeseen events. Should tension between Wahabits (who hold power) and Shiite Muslims (living in oil producing regions) in Saudi Arabia lead to a splitting up of the country, should the Iraqi situation continue to be difficult as it currently is and should Iranian exports be compromised under by conflict in Iran between Reformists and the Khomenian "Guardians of the Revolution" or should the latter gather together with Shiites of the region under a potential nuclear "umbrella", even China would suffer the consequences. This would be so, at least in terms of reduced economic growth. And such an energy constraint, as linked to its model of development, is a potential risk factor for China and capable of triggering uncontrollable social upheaval.  

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