01/10/2012, 00.00
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China’s economy, as sick as that of the US

by Maurizio d'Orlando
After adopting tighter money policy to fight anti-inflation, the authorities have now decided to boost lending and increase money supply to stave off the effects of European crisis. However, state companies and party officials have appropriated 70 per cent of loans; families and small businesses are getting very little. Beijing’s economic model, which has penalised domestic consumption, must change. Confucian and US consumer materialism, which support each other, will fall together,
Milan (AsiaNews) – China’s economy has had to put up with shifting lending policies. Initially, the policy was expansionary as reserve requirements (in relation to capital and deposits) commercial banks had to keep with the central bank were reduced. The purpose was to enable them to boost lending at a time when the government had adopted a stimulus package to fund many projects. This came in the first phase of the world’s economic crisis in 2007-2008. However, when inflation followed, the government shifted gear and put a break. Banks were told to set aside more money to reduce lending. Now we are back to more expansion.

According to data released on Sunday by the People’s Bank of China (PBC), loans rose by 13.92 per cent in December, from 562.2 billion yuan to 640.5 (US$ 101 billion), following the bank’s decision to lower by 50 basis points to 21 per cent the required reserve ratios for deposit taking financial institutions, effective 5 December 2011.

The annual growth of M2 (money in circulation and deposits) rose by 0.9 per cent last month, to 13.6 per cent against 12.7 per cent in November. This is a sign that Chinese leaders are deeply concerned about Europe’s debt crisis, and that China’s economy might crash. For this reason, they are printing more money. Chinese shares have thus gained a few points.

AsiaNews is a Catholic missionary agency and missionaries cannot speculate. If this were not the case, this would be the best time to speculate in a bearish market. We make such an observation not out of spite but out of real concern for ordinary Chinese.

First, the Purchasing Manager Index (PMI) is a good indicator of short-term manufacturing activity and is based on a survey among purchasing managers' acquisition of goods and services. For China, the index is negative since it is below 50. This means that manufacturing can expect a decline in output because of lower demand.

Second, despite the PBC’s shift to tight monetary policy in December, M2 remains large, US$ 11.5 trillion, more than that of Japan (US$ 9.63 trillion) and the United States (US$ 8.98 trillion).

It must be said that last year, China’s banks lent 7.47 trillion yuan, just under the government’s set ceiling of 7.5 trillion yuan. This is less than lending in 2010, which was 7.95 trillion yuan. However, any comparison must be longitudinal. In a decade, between 2001 and 2011, lending in China grew sevenfold, whilst M2 rose more than that. Hence, the margins to stimulate the economy without stoking inflation are limited. In 2008, money supply increased by 150 per cent to compensate for the collapse in world demand. This gave Chinese leaders an opportunity to maintain economic growth without losing political control. Today, such a measure would be impossible.

Third, China can no longer rely on the past decade’s engine of growth, namely exports and fixed capital investments. In the past ten years, exports rose from 25 per cent of GDP to 42 per cent in 2008, with an average of more than 35 per cent annually for the whole period. The role of investments was disproportionate compared to any other country or period. In 2010, they represented 45 per cent of GDP. Whilst Europe and the United States progressively experienced deindustrialisation, China saw too many investments. This has enabled China to maintain high rates of growth, which have now become an unbearable burden, that of overcapacity.

This is nothing new for readers of AsiaNews. We have covered the issue since we began in 2003. If there is anything new, it is the fact that the Western debt crisis has cut sharply into Chinese exports. Consequently, Chinese economic growth based on ever-increasing exports to the West and high level of investments in China is no longer feasible.

Since China joined the WTO, 70 per cent of its GDP growth is due to the elimination of custom duties and the so-called globalisation. Domestic consumption is responsible for the other 30 per cent. This is the real sense of the term “mercantilism” when applied to China, a term that goes back to Europe’s mercantilist practices of the 17th century, something that AsiaNews has highlighted for years.

China cannot solve its domestic problems without changing its economic model to include greater reliance on domestic demand. AsiaNews has been saying this for years. However, changing an established mindset is hard for China’s leaders, especially since the old model has allowed them to keep a steady control over society during a period of transition from a Stalinist to a capitalist-communist economy.

In that same period, the income gap in the country has widened. With only 36 per cent of GDP in the past few decades, families have been the losers. Small businesses, which operate outside of a financial system controlled by China’s four major commercial banks, have also been penalised.

The major banks are state controlled, run by party officials who prefer to invest in party-sponsored infrastructural development. The same goes for big state corporations, also controlled by party officials. Small and medium size companies can only go to the “parallel” market, made up of financial institutions that require different interest rates than the big ones. For small business people, weak exports in Europe and North America have led to a higher number of suicides. For medium size businesses, the answer has been emigration.

Dominated by an export-driven GDP growth model, China’s financial authorities believe they have found the solution to monetary expansion: extending the yuan’s sphere of influence. After 2009 and following the US financial crisis, China’s central bank has launched a yuan settlement programme, signing bilateral currency swaps with 14 countries, the central bank announced on Monday. Trade settled in yuan totalled 2.08 trillion yuan (US$ 330 billion) in 2011, while yuan settlement in direct investment reached 110.9 billion yuan. However, this can only be a short-term stopgap.

The fact is that China’s rapid growth in the past 15 years was fuelled by unprecedented US money supply and, since the 1990s, the growth in US share values, accompanied by strong US demand for Chinese goods.

America’s financial and consumer-oriented material and China’s national-communist version are like twins. They role together and shall fall together. Sadly, many of those caught up in them will suffer.
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