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China Emerges As The Big Winner In 2009

  • Charles Recknagel

China celebrated 60 years of Communist rule this year, but its greatest gains were in economic growth.

China celebrated 60 years of Communist rule this year, but its greatest gains were in economic growth.

The world is used to hearing the traditional big powers -- the United States, the EU, and Russia -- speak out on just about every major issue.

But in 2009, it seemed that China, too, was always assertively at center stage.

Beijing loomed over the UN Climate Change talks in Copenhagen as it refused international monitoring of its plans to fight global warming.

It courted energy-rich countries it needs for its own future growth by opening a new pipeline from Central Asia and discouraging new sanctions on Iran.

And it hosted U.S. officials eager to make sure China, before all other nations, remained invested in the teetering U.S. economy.

In 2009, the world listened when China spoke because this was the year China proved its economic might like never before.

It did so by weathering the global recession that laid so many countries low. And then -- more amazingly -- it emerged first from the storm.

First In Economic Growth

The London-based Economist Intelligence Unit (EIU) estimates that for 2009 China will record around an 8 percent growth rate for its economy.

That is less than the country’s phenomenal average growth rates of 10 percent per year before the 2008-09 recession, but still enough to keep China in first place as the world’s fastest growing economy.

By comparison, the EIU estimates the U.S. economy will end 2009 with an overall contraction of 2 percent and the eurozone’s economy will contract by 4 percent. India’s economy will grow by about 7 percent.

According to Gareth Leather, an expert on China at the London-based Economist Intelligence Unit, Beijing confronted its recession with many of the same strategies employed by its rivals.

The domestic market is taking a growing share of cheap Chinese goods.
“The main driver of Chinese growth over the past year has been the government's massive fiscal and banking stimulus programs which were introduced at the end of 2008,” Leather said. “And what that has resulted in is massive developments in infrastructure and also cuts in certain taxes, which has encouraged consumers to go out and buy cars and the like, and that has had the effect of really pushing China's growth forward this year.”

But if such top-down measures were tried in many countries, in China they had a revolutionary effect. They stimulated Chinese consumers to go on a spending spree of a scale never seen before.

Usually, the Chinese are diligent savers, because the state provides them neither free medical care nor pensions. But in the first half 2009, Chinese banks gave out more than $1.1 trillion in loans to Chinese consumers. The credit, as well as rebate programs, encouraged even committed savers to open their pocketbooks to buy refrigerators and laptops, and even cars and new homes.

As one result, the Chinese now are on track to end 2009 having bought more new cars than did Americans -- the first year that has ever happened. Total sales for China are expected to be 12.8 million vehicles, compared to 10.3 million in the United States.

Beijing’s stimulus strategy enabled Chinese consumers in 2009 to substitute for China’s loss of its traditional export market for its manufactured goods. Beijing’s goal was to keep China’s industrial base intact when otherwise it would be in danger of shrinking dramatically with the loss of its overseas orders.

The strategy did not save all of China’s factories and jobs; 15 million Chinese lost their jobs in the global recession. But the stimulus did keep China’s industry strong enough that it could recover quickly once the recession eased.

Massive And Effective

Leather says this is not the first time Beijing has unleashed large amounts of money into the Chinese economy; it followed a similar strategy during the Asian financial crisis of 1998. But it never did so as massively or effectively as it did this year.

“It's a kind of tried and tested technique by the Chinese government,” Leather said. “I think what is different this time is the sheer scope of it, that it is much bigger than many people had ever seen before. And also its effectiveness. Certainly, in the 1998 China's economy slowed but still it did OK, but [there was] nowhere near as strong a recovery as it is experiencing this time.”

Leather says China’s strong recovery is now also helping other countries emerge from the recession. As Chinese businesses resume buying foreign commodities, they are stimulating other export economies.

Just one beneficiary is the eurozone. Its overall exports to China and other East Asian economies rose to 6.3 percent in the second quarter of 2009, after shrinking by almost the same amount in the first.

The rapid recovery puts China in an unusually strong position to pursue a confidently expansionist trade policy in 2010.

Standing Firm At Year’s End

A key goal for Beijing is to acquire new energy supplies from abroad --particularly in nearby Central Asia.

Its success to date was much on display this month as President Hu Jintao attended a ceremony on December 14 in Turkmenistan to officially open a pipeline carrying natural gas to China's northwestern Xinjiang region. The ceremony in Samandepe included the presidents of Turkmenistan and transit countries Kazakhstan and Uzbekistan.

There are other signs, too, of China’s confidence as the year ended -- including its high-profile role at the climate change talks in Copenhagen.

China, whose industrial prowess has made it the world’s biggest emitter of carbon gases, has offered to control its future emissions. But Beijing adamantly refused to allow any foreign monitoring of its progress.

That stance has angered Western countries, which hope for a single global approach to reducing emissions. But China knows it can afford to be tough at the climate change negotiations -- and in many other arenas -- precisely because of its economic strength.

One of those other arenas is the hot international dispute over the value of China’s currency, the renminbi. Beijing keeps its value artificially linked to the dollar -- part of the reason “Made in China” goods are so hard for other countries, even in Asia, to compete with in price.

Beijing often labels foreign pressure to reduce the value of its renminbi as an effort to limit China’s future growth.

Chinese Prime Minister Wen Jiabao, made exactly that argument again last month, stating that some countries “want the renminbi to appreciate but, on the other hand, engage in brazen trade protectionism against China. This is unfair. In fact, they are limiting the growth of China."

But if China’s growth is being limited, it is hard to find the evidence. Over the years, China has amassed a $2.37 trillion trade surplus, and invested much of it in U.S. government bonds.

The investment is so large that during the worst of the U.S. recession, American officials sought to reassure Beijing its investments were safe. If China were to withdraw its investments, it would severely affect the American economy.

China’s Sweet Spot

Still, if China looked strong and confident in 2009, that is only part of the story. China itself is changing, and how it changes will be one of the most fascinating stories to watch during the coming years.

Analysts say that over the past 30 years, China’s economy has grown phenomenally thanks to a special combination of low-cost labor at home and high market demand for its goods abroad. In development economics, this combination is called the “sweet spot” for growth -- the ideal conditions. In China’s case, it produced the highest growth rates for any country in world history.

But the sweet spot cannot last forever, because the labor force demands higher wages as a country’s prosperity grows. And that is beginning to happen in China now, according to analyst Leather.

“What you have seen especially over the past five years is labor costs in China accelerating quite rapidly, growing at least 10 percent per year, so that now China is not as cheap as in other places in Asia to manufacture the really low end textiles, like toys and T-shirts, and so on,” Leather said.

Leather predicts China will have to restructure its economy over the coming decade if it is to move successfully to the next stage of development. That next stage is to produce higher priced goods able to support the demands for increased wages.

The analyst predicts part of the restructuring will be to free consumers to spend more of their savings, for example by creating state health and pension plans. It will be in China’s interest to create a stronger consumer class at home in order to maximize the market at home and abroad for the higher priced goods it aims to produce.

In many ways, this makes what happened in China in 2009 -- with its display of domestic consumption -- a glimpse of China’s future.

Many questions remain about what China ultimately will look like -- including whether the rising consumer class will demand a share of power and greater human rights.

But for now, 2009 closes with a vision of China at the top of its old economic game and moving toward its new one. If there is one winner to emerge from the global recession, it is China.

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