China’s rumble with globalisation - part II

China’s changing labour and social patterns are linked to developments stemming from its global entanglement. The era of China as the overwhelming source of cheap products may ebb as workers’ expectations and demand for skills push up wages. Shoemakers in the original manufacturing base of Guangdong in southern China are loud in their complaints about the threat from Vietnam and South Asia.

A middle class that may number 80 million is boosting demand for everything from milk and meat to cars and furniture made of fine imported timber. Input costs in industry soar as China must compete on world markets for oil, iron ore and metals. Inflation has more than doubled in a year, and there are signs that productivity no longer fully absorbs costs - Chinese exports to the US moved from being deflationary to inflationary last summer.

Though inflation means that real interest rates are negative, they are still higher than those now practiced by the US Federal Reserve. Combined with expectations of a continued rise in the yuan, that has attracted a flood of hot money which creates a lake of liquidity that adds to monetary instability. Committed to ensuring continuing growth and creating 10 million jobs a year but also wanting to establish control and let air out of the bubble, the authorities dither over policies. Progress towards the “harmonious society” appears halting and tens of thousands of protests break out each year over causes ranging from land seized by officials to pollution and corruption.

In all this, China’s globalised role and the path charted since 1978 mean that the mainland cannot retreat behind the walls of a command economy. The balance of exports is shifting, with the EU replacing the US as the main destination and sales to other emerging economies growing. That could shelter the mainland somewhat against a global slowdown. But, until the day when domestic demand is strong enough to soak up production from an economy still forecast to grow at 9 to 10 percent this year, exports - and thus, the world - will stay at the heart of the expansion the leadership needs to retain support and keep the country on its dictated path.

As a result, China needs a peaceful world with open trading channels. Protectionist noises from the US campaign trail or from European politicians evoke scornful remarks from Chinese officials about the West not embracing the globalisation it launched. But the political threat is not one Beijing can ignore; a trade war would be a disaster, one that the People’s Republic would be ill-advised to encourage through its heavy-handed actions elsewhere.

Hu and Wen have an extraordinarily complex balancing act to perform, perhaps the most challenging management task on earth. While they cannot retreat, the way ahead is understandably unclear for a regime that took power after decades of national turmoil following the sweeping away of old imperial certainties and then spent its first 27 years under a willful, murderous but charismatic potentate who increasingly became out of touch with reality, but still presented himself as the incarnation of a reborn nation.

The first generation of China’s globalisation may prove, in retrospect, to have been the relatively easy part. The work in progress ahead will be the true test.