Dear EsteemedReaders -- I welcome my Guest Blogger PY CHIN again to share an article that should put Malaysians on alert that we, especially the leaders, cannot continue to wear blinkers on our eyes even as the Barbarians of Globalisation are at the gates. We shall have one forty winks too many at our own peril. Mr Prime Minister, please wake up. Then Malaysians may comfortably take an afternoon nap.
HARD TO TAME A DRAGON'S ECONOMY
China should have been left alone to continue with its
sleep. Now that it is awake, there's no stopping its
economy from growing. There is still room for it to
expand even bigger. And it will continue to play a
pivotal role in Asian economic growth. The problem
lies mainly with the US: how to accept China as its
equal, especially as a member of the exclusive Group
of Eight club.
By P.Y. Chin
The great 18th century French Emperor and military
leader Napolean Bonaparte was right when he predicted
that "when China awakes, the world will tremble". He
could have intimated that everyone should have left
the "dragon" alone -- let it continue with its deep
sleep. It would not be to anyone's advantage to wake
But China did wake up -- thanks to the
persistence efforts of the United States. In
furthering its strategy in a global geo-political map,
the US somehow pushed China into becoming a member of
World Trade Organisation (WTO) in 2001 -- that was
when the "dragon" decided to fully stay awake, and not
go back to slumber.
In reality, China had woken up since 1978 when
the country undertook radical reforms to turn itself
from a planned economy under the rule of communism
into a modernised, free-market capitalist economy
under a form of "restricted" democracy.
But the early stages of the transformation were
rather slow, and uncertain, as China grappled with
selecting the kind of free-market economy that would
be suitable for a country that contains one-fifth of
the world's population.
The rapid transformation of the Soviet Union
from a similarly planned economy into a free-market
capitalist economy, which eventually saw the collapse
of the Soviet political system, was no help to China's
economic planners and political masters. China did not
wish to follow the Soviet Union's way, which many
maintained was chiefly the handiwork of the Americans.
In the end China opted for a gradual
transformation, first changing the coastal cities'
economic landscape from north to south, without
disturbing the traditional economic fabric of the
rural interior, and then moving westwards into the
interior. It is today at the stage of starting to open
up the interior.
In moving into a free-market capitalist economy,
China has almost overnight become an economic
super-powerhouse, spreading a cloud of distrust and
fear across Asian, especially among Southeast Asian,
The initial fears were that China would become
so powerful a magnet that it would pull away almost
all foreign investments from developed countries
destined for South-east Asian countries. In this
context, China was undoubtedly looked upon as a
However, as ex-Prime Minister Tun Dr Mahathir
Mohamad often advised local businessmen: "Consider
China not as a threat, but a land of opportunities".
This fear of a threat soon subsided to a belief that
co-operation as a partner would be the best means of
economic survival for the Southeast Asian states.
To this end, Southeast Asian as well as Asian
countries are re-defining their economic priorities
and redrawing their economic future. Many have opted
for joint ventures with Chinese businesses, putting
into practice the economic theory of international
Under the theory, these ventures producing
consumer products that would have been produced in the
home Southeast Asian countries are now done in China
due to lower labour and materials costs. The finished
goods are then exported back to the home Southeast
In a sense, both the peoples of China and its
Southeast Asian partners prosper are putting into
practice the economic philosophy of "prosper thy
neighbour" well preached by Mahathir.
Indeed, after the 1997 financial crisis, China
became the world's largest factory, producing every
conceivable consumer product for its domestic, as well
as the export, markets.
The emergence of China has certainly created a
new economic landscape for Southeast Asian countries
-- one that they could benefit from, and not be made
victims of. The rest of the world, including the US
and European Community, also felt China's "economic
quake". The "dragon" has finally awakened. The whole
world trembled, as it was predicted by Napoleon, and
it is still trembling, more out of fear of not knowing
how to engage an economic super-powerhouse such as
China, where everything is so humongous and
Its population base of 1.3 billion people -- the
largest from a single nation in the world -- is a
dream market for consumer products, although at
present selling a single product to 1.3 billion people
is by no means an easy task. The population is so
widespread that logistics of supply becomes a
Undeniably, the performance of the economy as a
whole has been nothhing less than "spectacular" for
China. It has been experiencing an economic boom ever
since it undertook market reforms in 1978.
Today, the economic engine is still booming --
and there seems to be no end in sight. According to US
investment bank Goldman Sachs Group, the boom "will
probably last at least another two years", making it
the longest and least volatile expansion in world
From 1992 to 1996, economic growth was between
10% and 14.2% a year. In the beginning of this
millennium, growth was hovering at 10% a year -- 10%
in 2003, 10.1% in 2004, and 10.2% in 2005.
For this year, the World Bank has estimated the
China economy to grow at 10.4% -- the fastest pace
since 1995. Next year, Goldman Sachs sees the world's
fourth-largest economy growing at 9.8% and in 2008 at
In a span of 30 years (1978 to 2008), China's
economy will have grown to become the world's third
largest, estimated to be worth USD3trillion (RM11
trillion), overtaking Germany's, which was worth
USD2.5trillion (RM8.9trillion) last year.
This phenomenal economic growth is due largely
to the massive inflow of foreign direct investments.
From January to November, contractual foreign capital
totalled USD167.46bil (RM592bil), while the amount of
foreign capital actually used was USD54.26bill
On another front, the economic growth is also
the result of an explosion in foreign trade. In 2001
when China joined the WTO, its exports amounted to
only USD245bil (RM930bil). But this year, exports are
expected to leapfrog to USD963 billion
(RM3.4trillion), up 27%, while imports are expected to
be at USD795bil (RM2.8trillion), up 20%.
Total trade volume is expected to jump 24% to
hit USD1.758trillion (RM6.2trillion) this year, with
annual trade surplus set to reach USD157bil (RM554bil)
this year, expanding to USD180bil (RM635bil) by next
year. In due course, the balance-of-payment surpluses
are set to exceed 10% of the gross domestic product
The massive trade surpluses have brought about
another explosion that boggles the mind -- foreign
exchange reserves, which are set to hit the
USD1trillion (RM3.5trillion) mark this year. By
November 2006, China's reserves had reached
The reserves have always been an envy of some
western countries, to the point that they become a
bone of contention. China has been criticised for not
doing enough to cut its reserves.
Last month, the Governor of the People's Bank of
China, Zhou Xiaochuan, said that China was pursuing "a
policy of diversifying its reserves". Last week,
Vice-Premier Zeng Peiyan announced that China planned
to use part of its reserves to expand its stocks of
strategic resources, such as oil, gas, coal, and
China had not wasted any time in implementing
that policy. As far back as November 2004, China
already took the bold step to transform its economic
power into what was known as "a decisive shift in the
global political balance".
That month, Chinese President Hu Jintao toured
Latin America buying up as much iron ore, copper, tin,
bauxite and soyabeans as he could find. The next
month, Venezuela's President Hugo Chavez visited
Beijing and signed a long-term oil deal, followed by
more such deals with African countries such as Sudan,
as well as with Iran.
In essence, analysts were saying that as the US
was focusing its sight on the "war on terror" in the
Middle East, China was "building alliances in
America's backyard and making friends of (President
Geroge W.) Bush's enemies".
Said Philip Stephens of The Financial Times last
year: "Only recently have the geostrategic
implications of China's economic power gained serious
attention beyond the think-tanks".
There were also suggestions that China should
follow the example of Singapore and Norway in setting
up a special vehicle to better manage the lion's share
of its reserves.
According to Jiang Dingzhi, Vice-chairman of the
China Banking Regulatory Commission, China's "pace of
growth in its reserves are considered excessive", and
that the country would need no more than USD700bil
(RM2.47trillion) in reserves, with the rest invested.
(The USD700bil figure takes into account import
payments, bond payments, and foreign firms'
However, many believe that China's foreign
exchange reserves would continue to swell over the
next few years, especially in view of the trade
surpluses, which Jiang said would also be expanding
due to China's advantage as a location for global
"The quite large external trade surplus, as a
reflection of our country's characteristics at this
stage, may continue for quite some time. At the same
time, given the impact of a changing structure of
imports, the scope for accelerating and raising
imports is not large, and the trend of trade surpluses
will continue," he said.
Indeed, the rapid growth in foreign exchange
reserves and trade surpluses has put great pressures
on the value of the yuan. Jiang argued that world
economic development "shows that a rapidly growing,
low-inflation economy will inevitably experience a
rise in its currency".
But he added: "We must steadily strengthen
elasticity of the exchange rate while also preventing
and averting the economic turbulence brought about by
a major appreciation." China knows this far better
than any other country.
In July last year China re-valued the yuan by
2.1% to 8.11yuan to the US dollar, saying that this
was a one-off move that would not be repeated.
However, since then, the yuan through market forces
has moved up a further 3.7%, under the guidance of the
Beijing monetary authorities.
The pace has picked up in recent months. Today,
the yuan is reported to be rising at an annualised
rate of about 6%, double the rate since China
abandoned the fixed peg to the US dollar in July 2005.
Many see this rate as continuing till next year, which
would mean reaching an exchange rate of 7.5yuan to the
US dollar by the end of 2007.
The explosion in foreign exchange reserves has
also made it more difficult for China to manage its
internal monetary polices, as such huge reserves are
fuelling excessive credit growth domestically. China's
bank lending is expected to reach three trillion yuan
(USD383.6bil or RM1.35trillion) this year -- the
highest in the past four years.
Despite the official revaluation, and the market
appreciation, of the yuan, critics mainly from the US
feel the yuan is still "seriously undervalued",
judging from the 3.7% appreciation on the top of the
2.1% official revaluation.
Thus, more need to be done about its currency
value, which US Treasury Secretary Henry Paulson
called "greater exchange rate flexibility", as the
present undervaluation would provide China's exports
with an unfair advantage in pricing in global markets.
The yuan's exchange rate has been a sore thumb
in the ongoing US-China trade tussle for quite a long
while. The US tries to force China into adopting a
more "flexible exchange rate policy", but China has
been resisting such a move.
On the other hand, China has argued that the
bulk of its reserves are mainly in US bonds, which
means investing in US dollars -- reported to be some
US$340bil (RM1.3trillion) in American Treasury debt.
Jiang pointed out that although the liquidity in
US bonds is quite good, the rate of return is not
high. Worse still, he said: "The US dollar shows a
very clear long-term softening trend, and we face the
risk and pressure that the real value of the bonds we
hold will shrink".
In many ways, the US-China trade war boils down
to what many analysts feel is an issue of engagement.
They feel that the US does not understand how to deal
with China as a new economic super-powerhouse -- that
new kid on the block. A dismal learning curve as
America has been engaging the Chinese leadership for
almost three decades, since the late 1970s.
As Jeffrey E. Garten, Dean of the Yale School of
Management, said recently, "China's key position in
the world economy is increasingly obvious. A slew of
indicators, from car usage and steel output to
population size, shows that China cannot be ignored.
Americans and others should wake up to China's
importance for even their daily lives."
He argued that China's significant purchases of
American Treasury bonds have influenced mortgage rates
and stock prices in the US; China's low-wage workers
are driving down global prices of consumer goods and
increasing demand for Chinese goods; and Chinese
commodity importation is spurring renewed economic
growth in Latin American nations.
Yet, China is still not a member of the Group of
Eight, which comprises the world's top eight economies
-- Canada, France, Germany, Italy, Japan, the United Kingdom, the United States, and Russia -- which
together account for more than two-thirds of the
world's economic output.
In two to three years' time, China's economy
will be ranking as the world's third largest, and US
Congressmen have warned recently that by 2050, China's
economy will overtake the US's.
Thus, as Garten argued, "inviting China to join
the G-8 would grant it the recognition it deserves as
a modernising, expanding, and increasingly important
member of the global community".
Even more pertinent today is that while China's
economy has been blossoming on the back of rapid
foreign investments and an explosion in trade
surpluses, many are asking:
Can China's economy continue expanding its
export sector without expecting more protectionist
pressures and stiffer competition from its competing
nations in a world economy whose growth is expected to
slow in the years to come?
Economists have argued that China should develop
its domestic consumption to offset the heavy
dependence on foreign investments and trade surpluses
as factors of growth.
According to Tom Miller, deputy editor of the
China Economic Quarterly, "consumption figures show
that wealthy urbanites living on the east coast are
becoming enthusiastic shoppers". Consumption -- the
holy grail of the Chinese economy -- increased by
about 12% in real terms this year, up from 11% last
year, and should rise again slightly next year.
There is still plenty of city-folks with fat
wallets to ensure that China will be the world's
largest market for private cars. Car sales are
expected to reach 7mil units this year, and increase
by 15% next year to reach 8mil, making China the
world's third-largest car market after the United States and Japan. It is optimistically estimated that
in 2009, production and sales will surpass 10mil,
making China the world's largest car market by 2015.
According to China's Ministry of Commerce,
retail sales of consumer goods reached 6.21trillion
yuan in the first 10 months of this year, up 13.6%
over the same period last year -- the biggest
year-on-year increase since 1997. Retail sales next
year are predicted to surge 13% to hit 8.6trillion
yuan (USD1.075trillion or RM3.8trillion).
However, another article in the China Economic
Quarterly said recently: "The truth is that the retail
market in China is only about half as big as commonly
reported, and the so-called 'Chinese middle class' is
smaller, more scattered, and has far lower purchasing
power than many hopeful salesmen imagine. For the most
part, China remains what it has long been: a large
country, inhabited by many people, most of whom do not
have any money."
Miller argued that China's economy is growing
quickly, but not wildly, with inflation muted. Fears
of overheating have been said to be exaggerated, just
as fears of a hard landing had proven to be unfounded.
Much of the talk of overheating are focused on
fixed-asset investment, whose annual growth slowed to
26.6% in the first 11 months compared to 31.3% in the
first six months, following measures the central bank
undertook in late April 2006. These include raising
interest rates twice, and setting three times reserve
requirements for banks. Approval procedures for new
investment projects were also made stricter.
But over-investment is only a problem if there
is not enough demand to soak up supply. There is
little evidence that this is happening, as seen in the
robust property prices across the nation.
Jonathan Watts of The Guardian newspaper argued
that although the China economy was growing more than
twice as fast as Japan's did during its "bubble"
heydays in the late 1980s. Beijing's problem "is one
of balance more than speed".
Comparatively, the US economy industrialised
rapidly in the 19th century, but "suffered periodic,
painful and relatively short-lived boom-bust cycles as
investors speculated wildly on often uneconomic
Watts added that China is unusual in many ways:
It is the largest-ever developing country; it is the
largest country to make the transition from a planned
economy to a market economy. It is also ageing fast,
and it exports capital to the rest of the world rather
than importing it.
In a sense, Miller commented that the Chinese
"dragon" is a difficult beast to tame, though many
analysts have said that the trigger for a medium-term
economic decline in China could be a severe recession
in the US that put a stop to its spending spree. This
is expected to knock a point or two off China's GDP
But then, some argued that by spending more
themselves, China consumers might avert an economic
crash, and so keep their jobs intact. And these
analysts really do not know if an economic crash in
China will be an isolated event, or have consequences
that would reverberate around the globe.
One thing is certain: US investment bank
Standard and Poor's predicts that for next year, China
will continue to be "a key driver of regional growth"
in Asia, with the slowdown in the US dampening its
growth only marginally.
~~~~~~~ Dear ER, take a respite should you reach here on one reading ~~~~~~~~