John Rapley - FOREIGN FOCUS
IN RECENT months, the Chinese authorities have been taking measures to slow the growth rate in their economy. Why anyone would want to rein in a booming economy may be a mystery to some of us. But the problem is that economies can overheat. If demand grows too fast, it can outstrip supply. Inflation can result. As prices rise, producers can price themselves out of the market and consumers can stop buying. At that point, the whole edifice can come tumbling down.
It is this scenario the bursting of a bubble that the Chinese are trying to avert. Some China-watchers have been saying that by allowing their economy to grow at the speed it has, the Chinese have allowed a financial bubble to inflate. As happened to US stocks in the 1990s, soaring asset prices are drawing investment for no other reason than that prices are rising. The result could be oversupply, especially in the property market.
It was this sort of scenario that produced the Asian Crisis of 1997-98, when asset prices around the world collapsed as the contagion spread from Southeast Asia. China weathered that storm fairly well. Her economic fundamentals were sound and she maintained her currency peg. This prevented the sort of run on the currency that launched the Asian Crisis elsewhere.
Still, there are some analysts who say China's turn may be coming. Financial crises have become a regular fact of life in the new globalised economy. Managing them is one of the most pressing challenges facing world leaders. But a financial crisis in China would be more worrying than most, since it would be difficult to contain.
Growth in China is currently running at an estimated annual rate of nearly 9 per cent, having recently peaked at just over 10 per cent. The government would like to bring that down to about 7 per cent. At these rates, the country's economy will double every six to seven years.
In short, China's growth record is, for the rest of us, the stuff of dreams. Its industrial growth rate is even more impressive, as the economy continues shifting from agriculture to industry.
Nevertheless, for all its vigour, the Chinese boom could be fragile. The banking sector is overextended, and would be vulnerable to a sharp downward correction in asset values. Mindful of this, the government has stepped in to try and restrain growth before the market does things for itself.
Normally, the main tool the authorities have to slow an economy is monetary policy. By raising interest rates, they can raise the costs of both investment and consumption, thereby curtailing growth. But the Chinese are in a peculiar and, to many governments, enviable position. Because the Chinese Communist Party has retained so much control over the economy and society throughout the process of liberalization, it has many levers it can apply to the economy.
For example, the authorities can refuse to issue building permits and arrest any violators. That is, in fact, what they have been doing. As a result, construction activity has slowed noticeably in China, with attendant results in the rest of the economy.
As China slows, its ravenous appetite for the primary imports needed to feed its industrial sector has eased. In the last couple of months, world commodity prices have dropped from their recent peaks, simply because the hedging prompted by China's growth has eased up. Equally, shipping costs have dropped globally, since less of the planet's fleet is tied up by orders from China.
So far, the signs out of China have been encouraging. The recent bounce in world commodity prices suggests that Chinese demand, scaled back, may have now stabilised at a sustainable pace. That would be good news for the world economy. With prices on both industrial and primary goods increasingly determined by Chinese supply and demand and lately, both have been moving in favour of developing countries a strong Chinese economy benefits most everyone. A crash, on the other hand, would hurt us all. It could well tip East Asia into recession and cut into global growth. China is not yet out of the woods. Its government's campaign to cool the economy is thus one we will watch with a keen eye.
John Rapley is a senior lecturer in the Department of Government at the University of the West Indies, Mona.