Limits to Growth in China, too

Barbara Unmüßig

By Barbara Unmüßig

With its gigantic domestic market, its allure to foreign investors, and the world’s largest currency reserve, China should be better prepared to weather the financial crisis than other emerging markets. Yet China’s exports account for 40 percent of its GDP and it has thus been deeply impacted by the worldwide recession, especially by the drop in U.S. demand. Indeed, state controls on capital transactions and the sound financing of its banks and most of its corporations have prevented an all-out catastrophe. The largest portion of the Chinese currency reserve is invested in relatively secure American treasury bonds. But rather than a well-considered sustainable development strategy, the current national stimulus package lays the groundwork for an energy-guzzling development model that will quickly deplete spending power, not enhance it. The opposite is required: A Green New Deal promising an ecological and sustainable recovery.

The economic and financial crisis has exacerbated structural and home-grown problems as double-digit growth rates have withered away. In March the World Bank again reduced its growth forecast for China’s economy to a mere 6.5 percent while Chinese leaders continue to promise a GDP increase of around 8 percent for 2009. China needs this to create additional jobs: The official figure for urban unemployment is 4.2 percent while other sources cite a range from 9 percent to 12 percent. 1.5 million university graduates are out of work and seven million more are flooding the job market this year. Most notably, however, official reports declare that 26 million migrant workers have lost their jobs in factories for export goods and can no longer find the means to support themselves in their villages.

Toy Crisis: No Playing Around

Looking at the industrial sector, the toy industry stands out. Plunging global demand has left it in crisis, which has included large-scale product recalls of toys and soaring production costs. The southern province of Guangdong alone saw 1000 toy factories close last year.

East coast growth centres and their global-market factories have long been faced with stiff competition by other low-wage nations like Bangladesh, Vietnam, Laos, and the Philippines. The yuan has been affected by the dollar’s appreciation: Chinese exports, especially those in work-intensive industries, have once again become more expensive. Alarmingly, these developments are jeopardizing social peace. Just in the past year a series of violent protests have broken out in factories.

Domestic market stimulation is the government’s old and new mantra. In November 2008 a stimulus program totalling 458 billion euros was initiated with the hope of keeping the wheels of growth and employment in motion. In addition, the government announced significant liberalization of the financial sector. The lowering of interest rates at the central bank—which have been at five percent since September 2008—and the loosening of state controls over bank lending policies should at least facilitate credit for small and middle-sized firms. As all large banks are owned by the state and their directors appointed by the government, these decisions have already shown results: bank loans to firms rose in December 2008.

Comprehensive Stimulus Package

The stimulus package is a mixture of investments, social programs, and subsidies. The largest allocations are intended for infrastructure, housing construction, and the development of rural regions, as well as for the reconstruction of parts of the Sichuan province that were devastated by earthquakes in May 2008. A massive investment in public housing projects was announced in order to jump-start local building industries. However, this news prompted observers both inside and outside of China to voice further scepticism of the high share of infrastructure projects and the comparatively small share of investments in human resources.

Billions of euros of investment in health insurance is planned as well as a subsidization scheme for grain prices that alone amounts to 12 billion euros. Special attention has been given to the economic development of rural regions that have suffered from many years of neglect. A wide range of measures is in the works to improve living conditions in these areas. The boom years featured much too little investment in agriculture and rural infrastructure. Millions of farmers lost acreage to industrial zones, oftentimes without adequate compensation. The contamination of land and water, erosion, and flooding are additional problems. Since 2005 the leadership under Hu Jintao has driven the development of agricultural regions while exempting farmers from taxes and eliminating fees for the nine years of compulsory education. Now, however, the economic crisis has arrived in the countryside in the form of a crisis of purchasing power. Millions of migrant workers have less money to send home, or none at all.

The importance placed by the government on the political stability of rural China, home to 840 million people, is evidenced by the lump-sum payments recently made to China’s 70 million poorest citizens and by the distribution of food products such as rice, fish, and oil. Yet the “Household Goods for the Farmlands” campaign appears to be short-sighted and ineffective. Those who buy televisions, washing machines, air conditioners, microwaves, and mopeds get a 13 percent rebate from the state. Up to 10,000 retail outlets will be built across China as part of this endeavor. In 2009 alone the government plans to spend 1.7 billion euros for the program that is scheduled to run until 2013. This subsidization program will help relieve the massive overcapacity of the manufacturers of electronics and household appliances.

The stimulus program is a boon for Chinese companies and international joint ventures in light of their large inventories of washing machines, refrigerators, and air conditioners. These are slow-moving goods that are sold to the people regardless of whether there is any great need for them. The resulting economic and ecological costs play no obvious role. It is doubtful that the pretty new consumer goods will appease the social and political dissatisfaction.

Siemens Hopes

The stimulus program does not only interest the Chinese. International concerns like Siemens also hope for new investment. For decades the corporation has been doing billions of euros worth of business in China. Most recently, Nokia Siemens Networks has signed a general agreement with the telecommunications firms China Mobile and China Unicom over the delivery of mobile phone equipment and services worth 880 million euros. Siemens is also hoping for large orders in subway construction and for new high-speed trains. Negotiations over 100 ICEs are still in progress.

China would also like to invest in the development of energy infrastructure in rural areas and, in addition, is setting aside 24 billion euros for environmental protection and energy efficiency. Originally 40 billion euros was allotted for this project, a plan praised by the World Resources Institute as a step towards the green reconfiguration of the Chinese economy.

Siemens is interested in this green market as well. The company would like to invest in energy and emissions reductions, above all by getting involved in rural infrastructural measures. Here it intends to provide technologies for electrical current production, power distribution, and power consumption.

Siemens would also like to get involved in wind and solar energy. The ambitious goals for renewable energies—10 percent by 2010, 15 percent by 2020—create investment incentives for foreign companies as well. Richard Hausmann, chief of operations in China, stated in an interview with the business magazine €uro that the company’s aim is to grow twice as fast over the course of the Chinese fiscal year as the country itself. This goal is indeed realistic: Siemens possesses the technologies that China wants to invest in for its future.

The biggest criticism of the Chinese stimulus program is its lack of transparency. After the announcement of the package in November 2008, a nationwide movement formed that demanded the publication of the program’s details on the Internet. The media supported the campaign and a lawyer from Shanghai threatened a lawsuit concerning a new transparency law, should the current authorities not reveal exactly how the money will be spent. Even the state news agency Xinhua rallied behind the movement. The government finally relented by announcing that it would publish the details following the vote in the National People’s Congress.

The annual People’s Congress, China’s legislative body, met in March. This year’s priority was the enacting of the budget and stimulus package. More than 400 of the 2898 representatives voted against the package or abstained. If anything, this unusual dissent in the one-party parliament was a reaction to the lack of transparency.

Further details of the stimulus package are not yet available, but the numbers show that criticism of the package was overblown: Investments in education and social affairs have been significantly increased. Resources for education and medicare were more than tripled from 4.6 billion to 17 billion euros. The availability of funds for research and innovation will now also be significantly expanded: Instead of the originally announced 18.3 billion euros, the total will now be 31 billion euros. This shows that Beijing has decided to tackle the long-term reconfiguration of the economy by bringing it away from being the workbench of the world and toward a more knowledge- and service-based economy. Funds for infrastructure and transportation were reduced but still constituted the largest segments of the budget. In addition, expenditure for environmental protection was cut 40 percent in the course of this reworking of the stimulus package.

Environmental Protection

The financial crisis cannot solve China’s development dilemma. When in doubt, the government will prioritize the development of its poorest provinces over environmental protection if social stability is at stake. There will be no radical rethinking in this case. Nevertheless, the investments in infrastructure and innovation still create opportunities for a Green New Deal. Upgrading railroads and providing assistance for energy and resource efficiency are a good start. After all, 24 billion euros is allotted for direct environmental protection. Now it is not only critical which measures receive the flow of funds, but also whether China will be in a condition to put them to sensible use. The devil is in the details: The stimulus package is doomed if it fails to boost demand among households and small businesses while only managing to encourage more short-sighted investments by provincial governments.

From January to April, foreign direct investment into China fell by 32.6, 15.8, 9.5 and 22.5 percent respectively compared to last year. However, China has been the world’s largest recipient of FDI for the past 13 years, and as the country with the world’s largest domestic market, China will remain attractive for investors and continue to contribute appreciably to global economic development. Whether future generations can maintain this development depends on whether we can profoundly change our patterns of consumption and production. Our chance is now.