China: Defying the Economic Odds

The World Melts Down, China Grows

In the midst of the worst economic crisis since the Great Depression, a
new world order is emerging -- with its center gravitating towards
China. The statistics speak for themselves. The International Monetary
Fund (IMF) predicts the world's gross domestic product (GDP) will
shrink by an alarming 1.3% this year. Yet, defying this global trend,
China expects an annual economic growth rate of 6.5% to 8.5%. During
the first quarter of 2009, the world's leading stock markets combined
fell by 4.5%. In contrast, the Shanghai stock exchange index leapt by a
whopping 38%. In March, car sales in China hit a record 1.1 million,
surpassing the U.S. for the third month in a row.

"Despite its severe impact on China's economy," said Chinese
President Hu Jintao, "the current financial crisis also creates
opportunity for the country." It can be argued that the present fiscal
tsunami has, in fact, provided China with a chance to discard its
pioneering reformer's leading guideline. "Hide your capability and bide
your time" was the way former head of the Communist Party Deng Xiaoping
once put it. No longer.

Recognizing that its time has indeed come, Beijing has decided to play
an active, interventionist role in the international financial arena.
Backed by China's $2 trillion in foreign exchange reserves, its
industrialists have gone on a global buying spree in Africa and Latin
America, as well as in neighboring Russia and Kazakhstan, to lock up
future energy supplies for its ravenous economy. At home, the
government is investing heavily not only in major infrastructure, but
also in its much neglected social safety net, its health care system,
and long overlooked rural development projects -- partly to bridge the
increasingly wide gap between rural and urban living standards.

Among those impressed by the strides Beijing has made since launching
its $585 billion stimulus package in September is the Obama
administration. It views the continuing rise in China's GDP as an
effective corrective to the contracting GDP of almost every other major
economy on the planet, except India's. So it has stopped arguing that,
by undervaluing its currency -- the yuan -- with respect to the U.S.
dollar, China is making its products too cheap, thus putting competing
American goods at a disadvantage in foreign markets.

The Secret of China's Success

What is the secret of China's continuing success in the worst of
times? As a start, its banking system -- state-controlled and flush
with cash -- has opened its lending spigots to the full, while bank
credit in the U.S. and the European Union (EU) still remains clogged
up, if not choked off. Therefore, consumer spending and capital
investment have risen sharply.

Ever since China embarked on economic liberalization under the
leadership of Deng Xiaoping in 1978, it has experienced economic ups
and downs, including high inflation, deflation, recessions, uneven
development of its regions, and a widening gap between the rich and the
poor, as well as between the urban and the rural -- all characteristics
associated with capitalism.

While China's Communist leaders have responded with a familiar range of
fiscal and monetary tools like adjusting interest rates and money
supply, they have achieved the desired results faster than their
capitalist counterparts. This is primarily because of the
state-controlled banking system where, for instance, government-owned
banks act as depositories for the compulsory savings of all employees.

addition, the "one couple, one child" law, enacted in 1980 to control
China's exploding population, and a sharp decline in the state's
social-support network for employees in state-owned enterprises,
compelled parents to save. Add to this the earlier collapse of a rural
cooperative health insurance program run by agricultural cooperatives
and communes -- and many Chinese parents were left without a guarantee
of being cared for in their declining years. This proved an additional
incentive to set aside cash. The resulting rise in savings filled the
coffers of the state-controlled banks.

On top of that came China's admission to the World Trade
Organization (WTO) in 2001, which led to a dramatic jump in its
exports. An average economic expansion of 12% a year became the norm.

When the credit crash in North America and the EU caused a powerful
drop in China's exports, throwing millions of migrant workers in the
industrialized coastal cities out of work, the authorities in Beijing
focused on controlling the unemployment rate and maintaining the wages
of the employed. They can now claim an urban unemployment rate of a
mere 4.2% because many of the laid-off factory workers returned to
their home villages. Those who did not were encouraged to enroll in
government-sponsored retraining programs to acquire higher skills for
better jobs in the future.

Whereas most Western leaders could do nothing more than castigate
bankers filling their pockets with bonuses as the balance sheets of
their companies went crimson red, the Chinese government compelled top
managers at major state-owned companies to cut their salaries by 15% to
40% before tinkering with the remuneration of their workforce.

To ensure the continued rapid expansion of China's economy, which is
directly related to the country's level of energy consumption, its
leaders are inking many contracts for future supplies of oil and
natural gas with foreign corporations.

Energy Security

Once China became an oil importer in 1993, it proved voracious. Its
imports doubled every three years. This made it vulnerable to the
vagaries of the international oil market and led the government to
embed energy security in its foreign policy. It decided to actively
participate in hydrocarbon prospecting and energy production projects
abroad as well as in transnational pipeline construction. By now, the
diversification of China's foreign sources of oil and gas (and their
transportation) has become a cardinal principle of its foreign

Conscious of the volatility of the Middle East, the leading source of
oil exports, China has scoured Africa, Australia, and Latin America for
petroleum and natural gas deposits, along with other minerals needed
for industry and construction. In Africa, it focused on Angola, Congo,
Nigeria, and Sudan. By 2004, China's oil imports from these nations
were three-fifths the size of those from the Persian Gulf region.

Nearer home, China began locking up energy deals with Russia and the
Central Asian republic of Kazakhstan long before the current collapse
in oil prices and the global credit crunch hit. Now, reeling from the
double whammy of low energy prices and the credit squeeze, Russia's
leading oil company and pipeline operator recently agreed to provide
300,000 barrels per day (bpd) in additional oil to China over 25 years
for a $25 billion loan from the state-controlled China Development
Bank. Likewise, a subsidiary of the China National Petroleum Corp
agreed to lend Kazakhstan $10 billion as part of a joint venture to
develop its hydrocarbon reserves.

Similarly, Beijing continued to make inroads into the oil and gas
regions of South America. As relations between Hugo Chavez's Venezuela
and the Bush administration worsened, ties with China strengthened. In
2006, during his fourth visit to Beijing since becoming president in
1999, Chavez revealed that Venezuela's oil exports to China would
treble in three years to 500,000 bpd. Along with a joint refinery
project to handle Venezuelan oil in China, the Chinese companies
contracted to build a dozen oil-drilling platforms, supply 18 oil
tankers, and collaborate with PdVSA, the state-owned Venezuelan oil
company, to explore new oilfields in Venezuela.

During Chinese Vice President Xi Jinping's tour of South America in
January 2009, the China Development Bank agreed to loan PdVSA $6
billion for oil to be supplied to China over the next 20 years. Since
then China has agreed to double its development fund to $12 billion, in
return for which Venezuela is to increase its oil shipments from the
current 380,000 bpd to one million bpd.

The China Development Bank recently decided to lend Brazil's
petroleum company $10 billion to be repaid in oil supplies in the
coming years. This figure is almost as large as the $11.2 billion that
the Inter-American Development Bank lent to various South American
countries last year. China had established its commercial presence in
Brazil earlier by offering lucrative prices for iron ore and soybeans,
the export commodities that have fuelled Brazil's recent economic

Similarly, Beijing broke new ground in the region by giving Buenos
Aires access to more than $10 billion in yuans. Argentina was one of
three major trading partners of China given this option, the others
being Indonesia and South Korea.

Will the Yuan Become an International Currency?

Without much fanfare, China has started internationalizing the role of
its currency. It is in the process of increasing the yuan's role in
Hong Kong. Though part of China, Hong Kong has its own currency, the
Hong Kong Dollar. Since Hong Kong is one of the world's freest
financial markets, the projected arrangement will aid
internationalization of the yuan.

In retrospect, an important aspect of the G-20 Summit in London in
early April centered around what China did. It aired its in-depth
analysis of the current fiscal crisis publicly and offered a bold

In a striking on-line article, Zhou Xiaochuan, governor of China's
central bank, referred to the "increasingly frequent global financial
crises" that have embroiled the world. The problem could be traced to
August 1971, when President Richard Nixon took the dollar off the gold
standard. Until then, $35 bought one ounce of gold stored in bars in
Fort Knox, Kentucky -- the rate having been fixed in 1944 during World
War II by the Allies at a conference in Bretton Woods, New Hampshire.
At that time, the greenback was also named as the globe's reserve
currency. Since 1971, however, it has been backed by nothing more
tangible than the credit of the United States.

A glance at the past decade and a half shows that, between 1994 and
2000 alone, there were economic crises in nine major countries which
impacted the global economy: Mexico (1994),
Thailand-Indonesia-Malaysia-South Korea-the Philippines (1997-98),
Russia and Brazil (1998), and Argentina (2000).

According to Zhou, financial crises resulted when the domestic needs
of the country issuing a reserve currency clashed with international
fiscal requirements. For instance, responding to the demoralization
caused by the 9/11 attacks, the U.S. Federal Reserve Board drastically
reduced interest rates to an almost-record low of 1% to boost domestic
consumption at a time when rapidly expanding economies outside the
United States needed higher interest rates to cool their growth rates.

"The [present] crisis called again for creative reform of the existing
international reserve currency," Zhou wrote. "A super-sovereign reserve
currency managed by a global institution could be used to both create
and control global liquidity. This will significantly reduce the risks
of a future crisis and enhance crisis management capability."

He then alluded to the Special Drawing Rights (SDR) of the
International Monetary Fund. The SDR is a virtual currency whose value
is set by a currency "basket" made up of the U.S. dollar, the European
euro, the British pound, and the Japanese yen, all of which qualify as
reserve currencies, with the greenback being the leader. Ever since the
SDR was devised in 1969, the IMF has maintained its accounts in that

Zhou noted that the SDR has not yet been allowed to play its full role.
If its role was enhanced, he argued, it might someday become the global
reserve currency.

Zhou's idea received a positive response from the Kremlin, which
suggested adding gold to the IMF's currency basket as a stabilizing
element. Its own currency, the ruble, is already pegged to a basket
that is 55% the euro and 45% the dollar. Within a decade of its launch,
the euro has become the second most held reserve currency in the world,
garnering nearly 30% of the total compared to the dollar's 67%.

Treasury Secretary Timothy Geithner's immediate reaction to Zhou's
article was: "China's suggestion deserves some consideration." Nervous
financial markets in the U.S. took this as a sign from the Treasury
Secretary that the dollar was losing its primacy. Geithner retreated
post-haste. And President Obama quickly joined the fray, saying: "I
don't think there is need for a global currency. The dollar is
extraordinarily strong right now."

Actually, maintaining the customary Chinese discretion, Zhou never
mentioned the state of the U.S. dollar in his article, nor did he even
imply that the yuan should be included in the super-sovereign currency
he proposed. Yet it was clear to all that at a crucial moment -- with
world leaders about to meet in London to devise a way to defuse the
most severe fiscal crisis since the Great Depression -- that a China
which had bided its time, even though it had the third largest economy
on the planet, was now showing its strong hand.

All signs are that Washington will be unable to restore the status quo ante
after the present "great recession" has finally given way to recovery.
In the coming years, its leaders will have to face reality and concede,
however reluctantly, that the economic tectonic plates are shifting --
and that it is losing financial power to the thriving regions of the
Earth, the foremost of which is China.

Join Us: News for people demanding a better world

Common Dreams is powered by optimists who believe in the power of informed and engaged citizens to ignite and enact change to make the world a better place.

We're hundreds of thousands strong, but every single supporter makes the difference.

Your contribution supports this bold media model—free, independent, and dedicated to reporting the facts every day. Stand with us in the fight for economic equality, social justice, human rights, and a more sustainable future. As a people-powered nonprofit news outlet, we cover the issues the corporate media never will. Join with us today!

© 2023