Introduction:
Recently a senior minister in the DLP government went on record praising the Chinese government for a paltry loan of Bds$16m – about US48m, or about £5.5m. She praised the Chinese for this ‘generous’ government to government loan and, quite clearly, from her genuflection, would have done anything the Chinese asked to get her hand on the money. It is not the first time this government and this particular minister have set about embarrassing the people of Barbados with their cap in hand approach to the Chinese.
Sometime ago they also went, this time an entourage of over a dozen people, on a begging trip to China and on their wish list was the refurbishment of the former Empire Cinema as a cultural centre. As per their bilateral policies, the Chinese indeed promised to fund a cultural centre, but on virgin land; they were not prepared to refurbish an existing building. Of course, we all knew this from the way they vandalised the Eyrie when building the community college, leaving the Eyrie grand house to collapse, while they embarked on savaging the paddocks. The Chinese also have form in these so-called deals, part of which is an estimated cost of the project (similar to the US and British giving ‘grants’), then rounding up the total as the sum total of the so-called account grant. Chinese deals do not include creating jobs for local people; they bring workers 10,000 miles to work in the Caribbean, often they bring their own materials and tools, with the workers camping on the sites with very little interaction with local people.
In Grenada in 2007, they offered to build the new cricket pavilion in time for the Cricket World Cup, but on condition that the 250 workers were granted permission to stay on and settle in Grenada. This is a problem that future generations of Grenadians will have to deal with. The big question now is what exactly is in the fine print of the so-called government to government deal that Barbados has struck with the Chinese? Does it include allowing more Chinese workers to settle in Barbados?
Economic Miracle:
For the last two decades or so the world has been astounded by the rapid pace of Chinese economic growth. In 1980, China was the 13th largest economy in the world. It is now, in 2013, the second largest and is set to be the largest by 2015, according to some projections. Consumption represents 40 per cent of its GDP, compared with 70 per cent for the US and 55 per cent for India. China’s share of the global economy grew from about four per cent in 1980 to 18 per cent in 2013 and is expected to reach 20 per cent by 2015. The Chinese economic miracle is absolutely outstanding; it is now arguably already the leading global economy, at least US politicians and the Federal Reserve think so since it is the premise on which policy is now based. But this is not just the story of a once dirt-poor nation climbing its way to the top, as many people like to pretend. China is still a communist country, controlled by the politburo and backed by a 500,000-strong Red Army. Its financial institutions, and in particular the four biggest banks, are controlled by the state; it is a nation notorious for publishing bogus statistics, none more so than at the local provincial level. There is a good reason why, despite the avalanche of statistics coming out of China, we never see unemployment figures, why the central government controls the movement of people from rural areas to urban centres.
Export-Led:
The first stage of China’s rapid growth was based on the Asian export-led model, producing low-cost consumer goods for foreign markets, mainly North America and Europe, undercutting other economies in Asia, Latin America and in its main export markets. In real terms, China became rich by setting itself up as the manufacturing factory of the world.
It was a model that attracted a lot of attention from Wall Street, at the expense of US jobs in Detroit and the Southern states. The US is still paying a heavy price for this. But it was not only the US, in micro states such as Barbados it was not unusual to find simple commodities, such as socks and flags bearing the ‘made in China’ tag.
Transition Phase:
China has now gone through the export-driven phase of its development and is now in a transition phase on its way to a consumer-driven or investment-based economy. With an official clampdown on corruption, and the move towards the much needed regularising of its property law, the new president is setting his mark on the future development of the nation. In theory this should not be hard; China has a rising middle class of about 300m, the size of the entire US population, who are nearly all in a frantic consuming mood. They need the things we in the West take for granted: cars, white goods, foreign holidays, etc. It is to meet this burning need that the Chinese government is now expending lots of energy, hoping at the same time to keep its vast ethnic minority communities, including one of the largest Muslims groups in the world, from running riot.
China’s hidden agenda:
China’s ambitions are not only economic; it is a nation in a hurry to reverse the last 200 years of history, to make the West pay for the humiliation of the Boxer Rebellion and the other perceived indignities it has suffered since the rise of mercantilism. We know that one of the many deals that China imposes on little and impoverished nations is that they cannot recognise Taiwan; whatever we may think of Taiwan it is not China’s call but the democratically elected governments of those African and Caribbean nations to decide who to recognise and who not to. So, we pay a high price to let China tickle our bellies for small sums of money.
We also know that China has territorial ambitions; just ask the Japanese and Philippine governments, American paranoia aside. As David Gosset wrote of the rise of Confucius Institutes (the Chinese version of the British Council and the US Peace Corps): “The development of the Confucius Institutes should not be interpreted as a mere linguistic phenomenon,; it reveals six of the main features defining the Chinese renaissance: economic re-emergence, speed of change, socio-political transformation, civilisational revival, China’s outward projection and the entry, through a cognitive shift, into what could be called an era of a new Sinology.” There is also a crucial seventh: a determination to face down the US, and any other Western nation or combination of nations, militarily. If Barbadians think that European slavery and colonialism were humiliating and terrible, just wait and see what the Chinese will do.
Analysis and Conclusion:
Despite the fog of misinformation and ignorance surrounding China’s rapid growth, the reality is that the US, once supreme as the world’s only economic superpower, is slowly declining, although it will remain for the rest of the century the biggest economy. The early 21st century is China’s time and it is making the most of it, but it is also walking a tight rope. Since the 1997/8 Asian financial crisis, Asia’s central banks have been holding collectively US$7trn in currency reserves, with China alone holding US$1.3trn and Japan a further US$1.1trn, mostly in US gilts. This means that, at least for the time being, the Greenback is safe since the last thing Asian central banks want is to undermine the US dollar – they have too much to lose. What was meant to be a post 1997/8 hedge against currency crisis is now a great liability, since Asian central banks are now the biggest lenders to the consumer-driven US economy – this is an unintended consequence. In other words, the Asians are lending the US households and corporates the money to buy their low-cost products. If either China or Japan try unloading US dollars on the markets their currencies will appreciate, which is exactly what they do not want.
The Japanese prime minister Shinzo Abe, came to power in December 2012 with a promise to reinvigorate the yen by depreciating it. So, Asian economies are caught between the devil and the deep blue sea: by holding down their currencies, they keep their exports competitive, but at the same time they are piling up US debt. The end result is that the US dollar’s share of global foreign exchange reserves was 62 per cent by the end of the first quarter of this year, compared with a low of 60 per cent in June 2011. And with S&P predicting US debt rising to 84 per cent of GDP by 2015, an increase on a previous prediction of 79 per cent, and up 11 per cent since the downgrade, according to the US Dollar Index. The global economy is still in crisis.
Then there is the so-called China Paradox, an economy with a trade-to-GDP ratio of 70 per cent, compared with the UK’s 37 per cent, yet does not have the rule of law as it is understood in the West, an independent judiciary or property rights, all the institutions that are associated with prosperity and democracy. The other thing to remember is that China was industrialised before it opened its society in 1979, although much of the machinery was aged and worn out.
Knowledge transfer was also important post-1979, with the Chinese industrialists effective stealing the know-how and intellectual property rights from Western partner firms. Further, as is typical in the Confucian societies, China’s household savings have been at 10 per cent of GDP in 1979, although this has grown substantially since then. There are a lot of uncertainties – known unknowns and unknown unknowns – about China’s monetary policy as it rolls out under the new president. Until recently, China was prepared to make market-to-market losses on its currency reserves caused by keeping its exports at cheap prices, which no doubt provide lessons for the minister of finance and the central bank governor in Barbados.
What is clear, however, is that both the previous regime and the new one saw a common interest in pushing back supply side developments. The biggest single uncertainty, however, is the threat to open its capital account markets to the rest of the world. The great fear is a rapid outflow of illicit capital as the emerging middle class try to diversify their wealth portfolios. The accompanying fears of a serious financial disaster, such as the much talked about housing bubble, can be over-exaggerated. One thing this view seems to ignore is that the four top banks in China are all owned by the state and the Politburo has the power to turn off the credit tap as and when it wants. It is fiscal capacity which poses the greatest threat – can the state guarantee the loan books of those banks in a real crisis? This is the elephant in the room as China experiments with liberalisation, but politicians and the financial sector fully understand these risks.
Another imbalance is that the Chinese corporate sector is subsidised by the household sector, similar to the Japan model. Chinese authorities have realised that an export-led economy depends on demand in other economies, and investment-led growth will mean an interest-rate based monetary policy and the macro-prudential reforms that will entail. Under the new post-export-led model of development, China is now focusing on a consumer-driven growth-led monetary policy, also with the option of using interest rate rules, expansion of broad money, and other such devices to achieve this growth – now targeted at 7.5 per cent although some officials are predicting as low as 6.5 per cent.
We had a glimpse of this in 2008/9 when the money supply rose by 25 per cent and for a time the authorities lost control of monetary policy. The main reason for policy going in to a tailspin is the decision to split financial regulation between different authorities for political reasons, ignoring that a centralised regulatory control is far more efficient. One manifestation of this new policy is the appropriation of people’s land by the local state, selling it at exorbitantly high prices and keeping the money, in order to help deleverage. We have already seen some of this thinking in the Caribbean and Africa with Chinese settlers grabbing land, often violently chasing the traditional owners off, and claiming it for themselves.
The other feature of the China Experiment decision to open the Shanghai Free Trade Zone, a futures market, which will become the home for Qualified Foreign Investors, shadow banks and insurance companies. In the final analysis, it must be remembered that China has a number of marginalised ethnic minorities, including one of the biggest Muslim communities in the world. If it is to keep all these disparate groups quiet it must keep them preoccupied with the belief that they too are sharing in Chinese prosperity. To sustain this, China must travel the world like Marco Polo looking for new markets. But to believe mistakenly that we have a special relationship with China is a delusion. Going cap in hand to China begging for crumbs off its table is not only humiliating to Barbadian people may look a smart move, but it fossilises the creative imagination and turns us in to a nation of bell hops and servants, that is what we mean by service economy.
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