China joins the ranks of damaged economies

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The last few months of 2008 saw most of the world, if not all of it, affected in some way by the financial crisis.

In the case of China, most of us have read that the central government is launching a plan to invest 460 billion Euros over the next two years to kick-start the economy.  This amount, representing about 15% of annual GNP and on a par with figures announced in the US, is mainly intended to cover the construction of new infrastructures including railroads, airports, highways and heavy industry. Unfortunately, this was in many ways already planned before the crisis and does not really answer many of the current concerns.

Skeptics indeed feel that the plan will not really encourage consumers to start spending again, nor help medium and small-size companies to improve their situation, which has become critical in many areas of the country, especially in the manufacturing industries. On the contrary, they argue, it would only help large state-owned enterprises. The government’s argument is that it would actually create employment for six million workers. This is in fact roughly the number of jobs lost in the last few months and it is seen as essential to create new jobs to alleviate this increase in unemployment.

Another perceived flaw in the rescue package is the very small investment portion earmarked to improve health and education services (2%). These services have become important sources of expense for families, which partly explains the high percentage of saving that Chinese have traditionally needed to maintain. Thrift, of course, is a traditional Confucian value and has long been part of Chinese culture. In fact the overall saving percentage is 25%, a level unheard of in the western world. In the current difficult economic situation, many Chinese will, without any problem, further reduce their spending.

For the last few years, China’s GDP growth rate has been hovering around 10% and this level has been critical in assuring employment for new entrants in the market and in coping to some extent with the flow of migrants from the countryside to the cities (200 million since 2001). It is forecast that the percentage of GDP growth could eventually decrease to 7.5% or even 5%, which would in Chinese terms be quite catastrophic.

Undoubtedly the Government will need to announce new measures in the near future to counter a further slowdown in the economy and in the all-important level of exports and, last but not least, to avoid possible social unrest. Such measures could include creating special banking institutions to help small and medium-size companies, decreasing various taxes, and operating further cuts in interest and lending rates. Part of the solution will also hopefully come from the economic recovery in the US and Europe.

It would be tempting to say that the slowdown in the Chinese economy is more of a problem than a relief for the West. On one hand, many western companies are deeply involved in China and a slowdown in the economy and consumer consumption can only damage these companies. On the other hand, thousands of Chinese-based companies have closed down in the last few months mainly due to the consumption slowdown in the West. These companies, Chinese and foreign-owned, have for many years provided cheaper products to Western consumers, thereby helping to keep living costs lower. The consequences of these company closures could therefore have an impact on our lives. We can hear nowadays in China that concentrating on exports was maybe a mistake and that future efforts should rather focus on developing the domestic market.

China has in its long history endured many hardships and its population has always shown a strong will to recover from them. Among the many Chinese cultural characteristics, values such as stoicism, tenacity, a strong work ethic, family closeness, loyalty and, last but not least, a dutiful adherence to Confucian precepts should again do well for them. Added to the spirit of entrepreneurship of the people, always seizing new opportunities, China will continue to progress.

The current situation should also hopefully trigger needed improvements in the social sphere, just to mention one area. The central government, while still keen to maintain strong control of its population, is aware of the situation and has introduced positive changes but with a population of 1.3 billion scattered over a huge territory, it is an unheard-of challenge. The government is also keen to improve the conditions of the people in the countryside who have been economically left behind. During the last Congress, President Hu Jintao promised to address social fissures, a degraded environment and rampant corruption. He also spoke extensively about his “scientific view of development” supporting harmonious economic, social and political development. One often hears criticism in the West of the Chinese government but one needs to realise that China is at a different stage of societal evolution and barely recovering from a very difficult political period. The overall progress made has been outstanding and is the result of hard work and dedication to  traditional Chinese cultural values, which are unlikely to change for the foreseeable future. 

On January 26th, China will celebrate the New Year (Yuan Tan) and the year of the Ox will replace the year of the Rat. Following tradition, many citizens will make trips back to their hometowns to celebrate with their  families. Last year, snow was a big cause of disruption in many parts of the country. Let’s hope that this will not happen again and that the current economic situation will still allow people to enjoy what is, for Chinese people, a very important cultural event. I will actually be there to witness it!

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