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ECONOMY: China May Decide That Charity Begins at Home

Antoaneta Bezlova

BEIJING, Nov 11 2008 (IPS) - Internal concerns are beginning to supersede China’s ambition to play the role of responsible international stakeholder and spearhead demands for the establishment of a new global financial order.

While Beijing wants a bigger say in global financial bodies that are to emerge from the current economic crisis, its priorities lie with boosting an increasingly sluggish domestic economy.

With an eye on the upcoming emergency financial summit in Washington on Nov. 15, Beijing has preempted calls from international heavyweights to prop up cash-strapped foreign financial firms by unveiling a massive stimulus package to spur the domestic economy.

On the weekend China said it would spend nearly 600 billion US dollars through 2010 to boost domestic demand and offset a fall in exports.

The announcement released through the state news agency Xinhua said the money will be invested in the construction of airports, highways and the modernisation of railways. It said more measures like tax cuts and a possible interest rates reduction were being planned to stimulate internal demand.

The stimulus package comes as Beijing is facing pressure to play a bigger role in the search for solutions amid the global financial uncertainty. China, which sits on nearly two trillion US dollars in foreign exchange reserves, has been called upon to use some of its wealth to arrest further financial disarray and deepening of the crisis.

British Prime Minister Gordon Brown has appealed to China and oil-rich Persian Gulf states to fund a major increase in the 250 billion US dollars bailout fund at the International Monetary Fund (IMF) to assist struggling countries.

And French President Nicolas Sarkozy has said he wants emerging economic powerhouses like China and India to have a bigger say in global decision-making and help redesign the current economic architecture.

Experts are, however, voicing concerns that the price China is being asked to pay for its elevation in global financial rank is too high in the current economic slowdown. “China needs to consider carefully whether the tradeoff of capital for power is worth it in the current situation,” Ge Luosi, an expert on international relations told the Beijing Xinjing Bao.

Zhang Wenkui, of the State Council Development Research Centre, believes China’s internal challenges are much greater than the potential damage wrought by slowing external demands for Chinese manufactured goods.

“It is wrong to focus on what damage the global financial crisis may do to us when the problems the country faces internally – slackening domestic demand in particular – are far more daunting,” he says. “We must aggressively expand investment rather than just trying to stimulate domestic demand.”

Chinese leaders are taking cue. Announcing the stimulus package on the weekend, Beijing said it was reversing its previous course of “prudent” fiscal and “tight” monetary policy. The government is going to pursue “proactive” and “moderately loose” monetary policies now, the Xinhua news agency said.

Speaking at the G20 meeting of finance chiefs in Sao Paulo, China’s central bank governor, Zhou Xiaochuan, said that in the light of global economic slowdown China wanted to continue to serve as an engine of growth, maintaining its economic expansion. He forecast an 8-9 percent GDP growth in 2009.

This is the slowest rate of expansion in five years. Beijing worries that if growth slows down below eight percent or less, not enough jobs will be created and the country may face serious social unrest. Earlier this month, Premier Wen Jiabao warned that this year was going to be “the worst in recent times for our economic development.’’

Recent economic data suggest that a sharp decrease in demand for Chinese goods has caused the bankruptcies of many factories in the country’s manufacturing hubs on the east and southern coasts. Tens of thousands of migrant workers have been left out of work. In the cities, many real estate projects have been put on hold and consumer confidence has taken a hit.

At least one economic heavyweight has predicted that the current financial meltdown would afflict much greater pain on the country than what China suffered in the aftermath of the 1997 Asian financial crisis.

“China’s reliance on external economic stimulators is much greater than in 1998 and its production capacity surplus is larger too,” Wu Xiaoling, former deputy governor of China’s central bank told The Economic Observer.

“In 1998 we were able to overcome the crisis by pouring massive investment in infrastructure and freeing the markets for housing and cars. Today, these options are much more limited,” she said. “There is less infrastructure that needs to be built, people face credit crunch in buying their properties and the car industry is constrained by high fuel prices and environmental concerns.”

As more signs emerge that Chinese economy is struggling, more voices are being heard urging caution in using the country’s reserves for bailout purposes.

Domestic critics have used the example of China’s mixed record of investment overseas to call for the use of resources to stimulate China’s own economy. Stakes taken by China Investment Corp, the government’s investment hand, in Morgan Stanley and Blackstone Group LP last year have suffered big losses. Beijing has not ruled out the possibility of providing funding to any bailout plans discussed at the emergency summit in Washington, but it has said its main goal would be to seek “fairness” for developing countries.

International institutions such as the IMF and the World Bank “need reforms”, He Yafei, vice minister of foreign affairs said last week at a briefing convened ahead of the summit. China is set to ask for more voting rights for developing nations, He said.

While few specifics have emerged about what proposals China would table at the summit, academics here have suggested that China considers swapping its contribution to a bailout fund for a larger voting share in the IMF and a bigger say in global bodies like the Word Bank and the World Trade Organisation.

Earlier this year, members of the IMF approved an overhaul aimed at increasing the basic votes of developing countries. But the voting shares allocated to emerging nations like China, India and Brazil do not match their current economic clout.

China, which accounts for nearly 10 percent of the world’s economy, has only 3.66 percent of the total voting rights. The United States by contrast, holds 17 percent of the voting shares.