As China forecasts another year of GDP growth above 9% and America¡¯s treasury secretary tries
again to persuade Beijing to revalue the yuan, China's government does seem to be preparing to
change its approach to economic growth. However, its main concern is not American policymakers but
China's poor
ONE could practically hear the teeth gnashing and the garments being rent in Washington and
Brussels. On Tuesday October 11th, China¡¯s planning agency announced that GDP had grown at an
annual rate of 9.4% in the first nine months of 2005, causing it to raise its forecast for the full year to
9.2%, from 8.8%. The agency also predicted a record trade surplus of $79 billion for this year, more
than twice last year¡¯s, even though the export growth rate has slowed somewhat. With workers in
the West already up in arms about low-wage competition from China, news that the peril to the east
is growing even faster than expected is the last thing politicians in the developed world wanted to
hear.
In recent months, those politicians have been battling assiduously to keep China¡¯s good fortune from
spilling too far into their domestic markets. The European Union has only recently resolved the ¡°Bra
Wars¡± contretemps, in which Chinese-made clothes piled up at European customs points thanks to
import quotas imposed at the beginning of the summer, and retailers facing empty shelves howled
for relief. The United States, too, has been pressuring China, not only because of the flood of textile
imports, but also because of its currency, which some American politicians claim is undervalued
against the dollar by as much as 40%. This makes China¡¯s goods irresistibly attractive to American
consumers, who have been on a buying binge thanks to low interest rates (in turn helped by China¡¯s
stockpiling of US Treasuries), running down savings and taking on debt to finance their spending.
This week, John Snow, the American treasury secretary, is in China to press the case for a looser
currency peg. Though China revalued the yuan in July, pegging it to a basket of currencies rather
than only the dollar, it has moved only a couple of percentage points against the American currency,
far too little to hold back the flood of imports into the United States. On Tuesday, Mr Snow said that
while he applauds steps towards a more liberal currency regime, America wanted to encourage China
to ¡°move forward¡± on the issue.
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Mr Snow is treading reasonably cautiously for now. He said last week that he did not want to
threaten China with trade sanctions over the issue, and the Treasury has delayed its bi-annual report,
which will contain its assessment of China¡¯s currency situation, until this week¡¯s meetings are
concluded. But many in Congress are pushing for bolder action. Last week Chuck Schumer, a New
York senator, told Mr Snow that he would expect the report to label China a ¡°currency manipulator¡±
unless the yuan is allowed to fluctuate more. Mr Schumer is also co-sponsoring a bill to slap tariffs of
27.5% on Chinese imports unless China revalues, which has substantial support in Congress. The
growing protectionist sentiment among America¡¯s legislators has had little obvious effect on the
Chinese, who have fiercely resisted any appearance of caving in to American demands.
This is not the first time the Chinese have stood their ground. In the late 1990s, many saw the yuan
as overvalued. But China resisted pressure to devalue in order to avoid exacerbating the Asian
financial crisis. It is also worth noting that while China does benefit in some ways from an
undervalued currency now, it has opened its markets to a greater extent than some other Asian
countries during rapid, export-led development.
Addressing inequality
Nonetheless, China¡¯s leaders may finally be readying themselves for a change in the mercantilist,
growth-at-any-cost model that has prevailed for decades. The Communist Party leaders¡¯ annual
meeting on economic policy ended on Tuesday with word of a strategic shift: from now on, there will
be more emphasis on redressing the inequality and social disruption that market reforms have left in
their wake.
The most immediate worry for China¡¯s leaders is social unrest. Last year, the government
documented more than 70,000 demonstrations, attended by some 3m protesters. The government is
caught in a bind. It needs the export sector to continue booming, in order to absorb surplus labour
from the countryside and moribund state-owned companies. But it is aware that the rapid growth of
recent years has opened fractures that could grow even wider.
If China can heal some of those rifts with a greater focus on rescuing those left behind by the new
prosperity, this may in turn take some of the pressure off the government to subsidise export
workers through currency management. It may also help China to develop domestic demand that can
take up the slack when America¡¯s appetite for cheap goods falters, as it inevitably must given the
paucity of its national savings.
But though details are sketchy, it seems improbable that China¡¯s move towards more balanced
economic growth will be anything like the kind of radical leap that foreign observers would like.
There are some brands of wealth redistribution that would make foreign investors very jittery, such
as higher taxes. Hu Jintao, China¡¯s president, is still consolidating power; even if he had a radical
vision of a China less dependent on the cravings of the American consumer, it would have to wait
until his command of the party was firmer. More importantly, it would have to wait until Chinese
consumers became sufficiently confident in the social safety-net and the provision of affordable
health care and education that they were willing to save less and spend more. But where is the
money for pensions and the like going to come from?
And though the rising tide of China¡¯s economy undoubtedly has the power to lift all boats, there are
worrying rigidities in the system, caused by the under-development of its financial system and the
fact that economic reform has not been accompanied by political reform. Officials rightly fret that
further economic changes could undermine the stability of the party¡¯s rule. Amid all the talk of
addressing the wealth gap, the party¡¯s plenum reiterated a commitment to rapid growth by
restating a goal of raising China¡¯s GDP to double its 2000 level by 2010. As long as China¡¯s
expansion remains export-driven, western politicians may just have to learn to live with a new and
unpredictable economic power.
