June 13th 2009

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Articles from this issue:

COVER STORY: Beijing mocks Universal Declaration of Human Rights

EDITORIAL: Recession: end of the beginning ... or beginning of the end?

EUTHANASIA: Dr Death's travelling road show

POPULATION: Billionaire club seeks to curb world's population

CANBERRA OBSERVED: Is Barnaby Joyce a leader in the making?

NATIONAL AFFAIRS: Why Rudd's emissions trading scheme should be defeated

GLOBAL FINANCIAL CRISIS: Fundamental change is needed, but probably won't happen

GLOBAL WAR ON TERROR: FBI foils new terrorist attack on New York

SRI LANKA: Mass carnage of Tamils in war without witnesses

INDIA: India's Congress alliance's strengthened mandate

CHINA: Growth slump worries Beijing leadership

ASIA-PACIFIC REGION: Japan set to expand its naval capabilities

OBITUARY: Jerzy Zubrzycki MBE CBE AO - A champion of human freedom and dignity

OPINION: Employee share ownership under threat

AS THE WORLD TURNS: The word is out/ Sharia law vs. prairie law

Housing affordability and land prices (letter)

Religious zeal (letter)

Fuddled logic (letter)

Contrarianism? (letter)

CINEMA: 'The Baader Meinhof Complex' - film whitewashes notorious terrorist gang

BOOKS: I AM MELBA: A Biography, by Ann Blainey

BOOKS: AN AWKWARD TRUTH: The Bombing of Darwin, February 1942, by Peter Grose

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Growth slump worries Beijing leadership

by Ian H. McDougall

News Weekly, June 13, 2009
China's leaders are worried. Their legitimacy depends on making the nation's 1.3 billion people prosperous. Ian H. McDougall reports.

China's Communist leaders are concerned that social stability is threatened as economic growth sags in the world's third-largest economy. As economies around the world contract, exports alone cannot pull China out of its slump.

All things are relative. China's economy, according to official figures, grew 6.1 per cent in the first financial quarter, ending in March. This represents a slow-down from 6.8 per cent in the final quarter of 2008. Australia would be overjoyed at these figures, but in China it is commonly believed that anything below 8 per cent growth represents a recession.

Already, more than 20 million migrant workers from rural areas have returned home as demand collapses for the budget goods that China exports to the world. In April, exports were down 22.6 per cent on last year, while imports fell by 23 per cent - said to be caused by a fall in investment in new plant and equipment.

Exports to key markets such as the United States fell in March. The US Census Bureau reports that imports from China in March 2009 stood at US$21.1 billion, way down on previous boom-time figures, while China's trade surplus with the US in March 2009 shrank to US$15.6 billion.

Engine of China's growth

If exports, the engine of China's growth, are falling, what is holding the economy up? Keep in mind that China, despite the progress it has made, is not a free country and does not have a free economy.

At the bottom of the scale, competition is intense. Vegetable-sellers and small retailers compete in traditional markets. This means food is cheap. On the other hand, at the top level, the government dominates the economy. Top managers in these favoured companies, including Rio Tinto's suitor, Chinalco, are considered to be part of the governmental elite and frequently move between business management and government.

Communist Party membership at this high level is almost mandatory. This applies to academics as well. Party membership, while not compulsory, is necessary to get ahead. Thus, when the opinions of mainland Chinese academics in Australia are sought, remember that they are in all likelihood party members, subject to party discipline.

Because China remains to a large extent a command economy, when the government announced its 4 trillion yuan (US$586 billion) stimulus package, Beijing promptly instructed banks to lend more. The banks, instead of reducing lending in the face of the slowdown, were told to boost lending. As the government either owns or controls all major banks, this is a very effective means of stimulating growth. In addition, lower-level party officials know that preferment depends on promoting economic growth in their local area.

China is still a poor country with central and western China remaining largely impoverished. Over 100 million Chinese still live on less that US$1 a day. The poverty line, set by the government, is still less than US$1000 per annum - and many millions live below that modest level.

When Chinese officials speak of "migrant workers", they mean unskilled labourers from inland provinces who are now returning home in record numbers to a life of poverty on the farm. China is still a rural nation, for the cities hold only 20 per cent of the population and are surrounded by the 80 per cent of the population who still live in rural areas.

When Chinese officials talk of the need to achieve eight per cent growth, their concern is finding these migrant workers jobs. Also, China has over seven million university students graduating from university each year who want suitable employment. This is a volatile mix.

Exports will not make China rich. Like the US in the 19th century - which is about where China is now in terms of economic development - China is reliant on domestic demand. But most Chinese are fanatical savers, because they must pay for their children's education, pay for medical and hospital treatment, and support themselves and their families in times of unemployment and old age. People, to be willing to spend more on consumption, need to be assured that they have a safety net for when times are hard.

China is looking to the future with the government announcing the beginnings of a health insurance system. Beijing aims to turn Shanghai into a world financial centre, hiring staff who have lost jobs in the finance sector around the world.

Beijing is also sitting on US$2 trillion of foreign reserves, held in an asset that is likely to depreciate - the United States dollar. So China is buying massive amounts of metals and other hard assets. It bought 57 million tonnes of iron ore in April, an all-time high, and was also a net steel importer. Of course, it is also buying assets around the world, including Australian mining companies.

China's leaders are worried. Their legitimacy depends on making the nation's 1.3 billion people prosperous. If the economy collapses, it is likely the Communist regime will soon follow.

- Ian H. McDougall

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