Tuesday, September 30, 2008

The world is observing what China will do amid crisis

Rowan Callick, China correspondent, The Australian Business | September 29, 2008

"The biggest contribution we can make to the world economy under the current circumstances is to maintain China's strong, stable and relatively fast growth, and avoid big fluctuations." -- Chinese Premier Wen Jiabao, Tianjin, Saturday WHAT Asia needed China to do in 1997, the whole world is looking for it to do right now. Premier Wen Jiabao won't find much disagreement.

As to how it's done, China's officials and economists, national and regional, seem to be increasingly at odds. Do they concentrate on crushing inflation or on stimulating growth?

The official media are reflecting a cocky, Olympics-fuelled sentiment among some party elite that China is simply better than the rest, especially than the West. But the big story in China since the Games remains - despite the impressive distraction of Saturday's space-walk - the milk poisoning calamity, which has raised fresh questions about the sustainability of the country's distorted market system.

When inputs to an economy as crucial as land and labour are not truly market driven, when price caps remain the major weapon used against inflation, and when the Government continues to own most companies in strategic sectors, as well as regulating them, then such problems will keep recurring, as indeed they have in recent times.

As a result, Made in China is a brand that has yet to win real trust - including, crucially, at home, adding to the difficulty in accelerating domestic demand as Beijing has long sought to do, especially now when export markets are sagging.

At least the current crisis in the dairy industry, from which some of China's bigger companies may never fully recover, serves to provide a clear-cut lesson to those who have argued for China's exceptionalism, claiming that the usual economic rules don't, or shouldn't, apply.

Shanghai-based marketing outfit Access Asia's newsletter says of the plight of New Zealand dairy giant Fonterra, 43 per cent owner of state-controlled Sanlu, the biggest culprit in the poisonings of thousands of babies: "We'd suggest that one reason this situation got so bad was that many of the executives involved had read several of those dreadful China business books that always say something like: 'Never, ever, under any circumstances, embarrass or openly confront your Chinese business partners as they will suffer loss of face, and this is absolutely the worst thing that can happen.

"We beg to differ. The worst thing that can happen is that people die because executives read stupid business books and swallow them whole. (This) is exactly the kind of 'China is somehow different' excuse-mongering that creates an environment where foreign companies feel culturally obliged to turn a blind eye to corruption, nepotism and outright criminality."

Sadly, one of the lessons likely to have been learned by some Chinese interests from this disaster is a very different one: keep foreign firms out of such sectors; they only ultimately cause trouble - it was the New Zealand Government, alerted by Fonterra, that eventually blew the whistle.

There are few enough openings for foreign investors in Chinese agriculture. And the services sector - where China especially needs international management, expertise and technology - is similarly largely closed to the outside world, beyond limited retail areas.

And the mood in much of the ruling party remains resolutely nationalist. There is less patience now for those who believe China still has much to learn.

But the reluctance of the great state-owned conglomerate Citic to take over Morgan Stanley when the opening beckoned, leaving the sovereign wealth fund China Investment Corp to build its passive stake instead, illustrates that those at the top in the finance sector are aware of their lack of sufficient experience to start operating such companies globally, however badly the Americans have messed up.

Academics and commentators, though, are pumped up. Ye Hailin, with the Chinese Academy of Social Sciences, wrote in a China daily last week: "It had been some people's view that the Olympics would carry Western cultural values to China. However, to their surprise, the Western formula was not copied.

"In order to host such an outstanding Games, China paid a high economic price. But the Eastern philosophy, which stresses that an individual realises self-value in a collective atmosphere, was shining during the Olympics instead.

"Athletes, volunteers, the audience and even local residents all sent one clear message: that the Chinese people act according to their own mode of conduct, and will not succumb to any allegedly superior Western values.

"The Games proved not only the existence of the China model, but also its success."

And Shi Jianxun, a professor at Shanghai's Tongji University, said in the global edition of the party mouthpiece People's Daily: "The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the US."

But Wang Qishan, a rising power in the hierarchy and vice-premier responsible for finance, stressed instead to US trade officials last week that "the US, the world's largest developed country, and China, the largest developing country, should have constructive and co-operative economic and trade relations".

He and People's Bank of China governor Zhou Xiaochuan are bearing the burden of the continuing fight against inflation - bringing the consumer price index rise down to 4.9 per cent last month, although the producer price index still rose 10.1 per cent.

Zhou, especially, appears to be coming under fire from those who would rather see more effort put into stimulating growth - though the miserable state of the stock exchanges, a third of their level of last October, attracts scant sympathy in Beijing.

The share market is viewed as disconnected from the real economy. But given how limited are the places Chinese people can save, the loss of so much money by the 130 million gumin, the stock investors, naturally restricts their appetite to consume.

Willy Lam, an astute commentator writing in the Jamestown Foundation's China Brief, anticipates an awkward third plenum of the party's central committee, meeting in October. He says that although the agenda is ostensibly focused on agriculture, the issues discussed will be far broader. "There are signs that the nightmare the party leadership fears most may come to pass sooner than anticipated: members of the middle class joining 'disadvantaged sectors' such as peasants and migrant workers in staging protests and even riots to vent their grievances."

Lam says that plenum members from the regions will be lobbying aggressively for Beijing to loosen its tight monetary policy as well as to boost transfer payments and preferential policies for provinces and cities hard hit by the downturn, such as from the closure of smaller factories and the slowdown of the property sector.

He adds that the "warlords" - resourceful regional party secretaries, governors and mayors - are continuing to resist the decade-long drive of the zhongyang, the central authorities, to streamline the grassroots bureaucracy. The regional leaders are less inclined to oblige, because they and their colleagues get bonuses substantially based on the local growth performance.

The milk poisoning disaster, in which regional officials have been complicit, with many already sacked or forced to resign, would appear to provide support for the zhongyang. But the central party propaganda department had also played its part, informing the media in the run-up to the Olympics, in the eighth clause of its 21-part instruction, that "all food safety issues are off-limits".