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The China house of cards - a 2009 scenario

By Arthur Thomas - posted Monday, 12 January 2009


A new economic dawn

As 2007 closed, China's growing economy appeared recession proof.

2009 heralds both harsh economic times and new opportunities for a newly evolving global economy.

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The high expectations of an economic flow-on from the Beijing 2008 Olympic Games did not eventuate. As media spin doctors attempted to smother the economic failure of the Games, Nouriel Roubini's earlier predictions of a widespread recession emerged as reality, defying containment strategies and taking centre stage.

Post September 2008, China's massive foreign exchange reserves, and economic surpluses suggested a stabilising economic power that could contribute to reinvigorating the global economy.

Developed nations devised stimulus packages to resuscitate sliding economies.

The China illusion

China announced a US$586 billion stimulus package and sought direct involvement in future global economic management. China's package raised the combined total of global stimulus packages to US$2 trillion, or 2 per cent of global GDP; double that originally estimated by the IMF to overcome the looming recession.

The US$586 billion emerged as a sham intended to boost China's economic and international image. Included were projects in progress and/or allocated in earlier budgets, as well as foreign aid and loan projects. It relied heavily on local government and corporate funding. There was little "new money". Local governments denied they had the funds to meet Beijing's demands.

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China's incentives to drive domestic demand to absorb massive inventories of household appliances, electronics, cars, and motorcycles to cushion the economy against sustained recession, defy reality. Domestic demand alone cannot replace the exports and foreign direct investment for China's economic survival.

China then made it very clear - China's money was for China and China alone.

Are China's numbers trustworthy?

The credibility of China's economic disclosures raised doubts about the veracity of its economy and reserves. The September 2008 economic crisis appears capable of pushing a declining Chinese economy over the edge. A notoriously opaque financial reporting system, classification of key data as “state secrets”, manipulated statistics, and a compliant state-controlled media effectively conceals the true state of the economy and real impact of the crisis.

Is China's GDP growth real?

China claims that it can maintain 8 per cent GDP growth. Flawed methodology, omissions, and manipulated statistics however discredit the 8 per cent.

A 2007 World Bank report estimated total cost of China's air and water pollution at around 5.8 per cent of GDP.

Combining realistic levels of unemployment and hidden national debt with realistic statistics on agriculture, environmental degradation, social security, and health will reveal China's real GDP growth already below sustainable levels.

The CCP considers continuing high economic growth crucial for the survival of China and the CCP itself. It is a job for the spin-doctors.

Are China's reserves real?

China's massive foreign exchange reserves and surpluses amassed during years of record double-digit economic growth may yet emerge illusionary, concealing massive, increasing national debt.

"Innovative bookkeeping" may conceal massive subsidies and the true level of huge losses by iconic state owned enterprises, including banks.

Unemployment

Flawed methodology and manipulated statistics also hide real levels of unemployment and its impact on GDP growth. About 20 million new workers will enter China's 2009 workforce to compete with growing millions of recent and longer-term unemployed, for decreasing numbers of jobs.

The farcical 4.5 per cent official unemployment figure is for registered urban populations only. Adding the more than 150 million rural unemployed and others excluded from the official statistics could push China's real unemployment beyond 12 per cent.

The current frantic quest for efficiency and profitability is forcing closures, cutbacks, and layoffs at coalmines, steel mills, metal processing, construction, and power generation and distribution networks. Tourism, hospitality, and China's airlines are also in line for major restructuring and job shedding.

China's goal to become the world's biggest shipbuilder will take a back seat as China and the world face an over supply of dry cargo bulk carriers and tankers.

Shattered dreams  and civil unrest

Before Beijing classified data on "mass incidents", (demonstrations) in 2005, they were growing in number, frequency, size, and causations.

Today, demonstrations are increasing against official corruption, land theft, unemployment, pollution, industrial contamination related deaths and illness, environmental degradation, and a rapidly widening wealth gap.

China's failed health system, lack of social security net, a rapidly growing greying population, and gender imbalance are creating a massive social debt. A continued slowdown will shatter the dreams of 2008's growing middle class and hopes and aspirations of the rural and urban poor.

The CCP will respond in the only way that it knows - an iron fist and minimal media coverage.

China's new demonstrators

Police and military response, usually reserved for ethnic minorities, peasant land demonstrators and events such as Tiananmen Square, could be unleashed against demonstrating unemployed Han Chinese. Demonstrator profiles are changing as rising numbers of the new middle class, who have lost their jobs, highly leveraged homes, cars, and stock market investments, blame the government for their woes.

These new networking demonstrators bring organisational and communication skills plus the ability to trigger spontaneous widespread demonstrations, as did the farmers and taxi drivers in 2008. This has the potential to unite both sectors in a common cause and create critical mass for widespread demonstrations and declining confidence in the CCP and seek scapegoats for their shattered dreams.

In China, regime change is by revolution, not elections.

Environmental degradation factor

Shelving the Green GDP trial in 2005 now conceals the horrendous economic impact of environmental degradation and rising pollution, plus increasing shortages and contamination of water resources.

Expanding and merging deserts, soil contamination, infrastructure development, industry, and urbanisation projects continue to displace and enrage increasing numbers of farmers.

Scrutiny of publicised "successful" regeneration projects reveals massive failures, rorts, cover-ups, and "innovative" statistical reporting.

Stimulus package bailouts

To prevent collapse of iconic state-owned enterprises, China is pumping billions of dollars into bailouts across the board. Oil, steel, aluminium, mining, car making, construction, aviation, energy sector, and the newly upgraded airlines, are just a few.

The CCP chooses to ignore the problems, exudes confidence, and trumpets its urbanisation program as the solution to employing displaced farmers and rural workers.

Crunching the numbers however, discredits the claims.

Importance of the 1st half of 2009

The economic mirage was rapidly fading by late 2008. The real state of China's economy will emerge early 2009, as overcapacity in several strategic industries accelerate closures, slowdowns, and unemployment.

The global community will closely monitor China's progress during the first, and especially second, quarters of 2009. The Chinese New Year period will cause some confusion for the first quarter results of 2009.

2009 and beyond

China ignores the basic laws of supply and demand and the need for an orderly economic expansion of nations other than China.

The massive expansion programs to provide the jobs for the millions of new urban workers will push output beyond global demand. The flow-on effect of such massive expansion will dramatically increase pollution and greenhouse gas emissions that, in turn, will destroy the efforts of the developed nations' global warming reversal commitments.

China must accept that the unrestrained and unsustainable credit practices and consumer-spending splurge of the developed nations that had driven its double-digit growth, is no longer.

While nations' banks received lifelines, financial managers learned the harsh lessons of September 2008 and prepared for falling demand to trigger ongoing defaults, failures, and rising global unemployment.

Oversupply in key sectors, greater equity, unemployment, and a decimated credit worthy client base will restrain the global lending environment. Post crisis recovery requires strong credit growth and that will not happen overnight.

Kyoto and greenhouse gas emissions are not on China's radar, except for the increasing revenues from exploitation of CDMs.

By the third quarter of 2009, China could mutate from an export driven economic powerhouse to a polluted and water starved import-reliant nation With natural resources restricted to massive coalmines. The residues of China's once vast natural resources and fertile land are already incapable of sustaining its population let alone rapid economic and industrial expansion.

Even the planned exploitation of Tibet's water, minerals, and fragile environment will not sustain China's increasing demands.

The ripple effect

Beyond China, the ripple effect flows south into the sub continent and adjoining south Asian nations, west into central Asia, the Middle East, and north into Russia.

Beyond the continent, the ripples will cross the oceans where rumours of an economically weakened China could create chaos and rising unrest in countries governed by regimes allied to China and reliant on its financial largesse and protection from UN sanctions.

Many regimes, reliant on oil exports to repay China's huge debt in loans, aid and infrastructure projects are experiencing unsustainable cuts in oil prices and a second hit from falling demand from China and other consumers. This will jeopardise many regime leaders' grand plans, fuelling internal unrest as populations see their governments failing to deliver on promises. In these countries, regime change from within is always close to the surface.

China may yet face the real possibility of a new round of nationalisation by panicked regimes to protect and salvage what they can and seek channels to negotiate with alternative partners and defer their China debt.

In a weakened global economy, China may face another problem as millions of Chinese entrepreneurs and workers flee Africa, Latin America, Central Asia, Middle East, and the Pacific to return home to a restless economy and widening unemployment. China's huge army of guest workers in many developed countries will also return as jobs disappear.

The unemployed in Africa claim the Chinese take their jobs. Thousands in once prosperous textile mills lost their jobs to closures as Chinese traders exported local cotton to China for processing, and imported cheap clothing and other goods. Chinese displace local traders. Miners work under slavish conditions for Chinese owners.

Opportunites squandered

It is a matter of population and flawed planning processes of a centralist government.

Globalisation provided China with the unique opportunity to raise the standard of living and individual wealth for its 1.3 billion people who in turn, would create massive domestic demand. But the rural and urban poor saw little to no benefit for their efforts in producing a decade of record economic growth. Official corruption deprived farmers of their land. Unsustainable demands on China's farmlands created new and expanding deserts, displacing more farmers.

Instead of using the massive revenues to nurture domestic demand and reduce savings, an orgy of mianji (making of face) and self aggrandisement plundered the windfall to create ostentatious edifices to the CCP at both local and federal levels. These were surpassed by the more than US$28 billion on the unnecessary premature grab for the 2008 Beijing Olympics.

An estimated 100 million rapidly grew into a consumer ravenous middle class with high expectations, flaunting their new wealth. It was quick to embrace the opportunities to gain greater wealth from leveraging only to discover stock markets can travel up and down.

The middle class is still only a minority of China's population, but one more willing to embrace debt that the majority. The rural majority however have long memories of starvation and deprivation and the necessity to have cash.

A bonus for global warming

A recession for the world's major polluter and greenhouse gas emitter will be a major bonus in reducing global warming as all of the heavy coal and energy consumption industries cut back. The environment will benefit from a reduction in across the board emissions and pollution discharge.

A worldwide reduction in emissions will give climate change scientists a unique opportunity to observe the impact of sudden declines in greenhouse gas emissions on global warming and global dimming.

After the crisis - losers and winners

China, a nation with depleted natural resources, depleted and contaminated water resources, high levels of pollution, environmental degradation and high unemployment faces rising levels of civil unrest. It faces a world less reliant on its cheap consumer goods and desperate to reduce the effects of global warming and restructuring their own economies.

China’s influence on the world's economic stage is declining. Too preoccupied with its own social conscience and pressure from lobbyists, the West failed to interpret the signals coming out of Russia and lost an early opportunity to de-escalate global military threats. While experiencing the effects of the global recession, Russia emerges in 2009 as a stable and professionally managed nation with increasing national pride and in control of its future.

Russia now has the opportunity to focus on the repopulation and development of the Far East's extensive natural resources where unrest is on the rise because of the huge numbers of illegal Han Chinese migrants settled throughout the region and Chinese dominate the construction and other strategic sectors.

A new era in world peace?

It is conceivable that an economically weakened China could raise the potential for new global co-operation, as a new administration appears willing to bring about change and improve US relations with Europe, Africa, Russia, Asia, and the Middle East.

This possibility, combined with continuing low oil prices, could also prove effective in reducing terrorism and calming militant factions in Central Asia and the Middle East.

A new globalisation model

The social conscience of developed nations' consumers may demand a realistic level playing field in which import and export tariffs reflect the producer countries footprints of environmental degradation, global warming, wealth gaps, human rights abuse, health, and education.

2009 and 2010 has the potential to lay the foundations for a new global economic era in which Russia will most likely replace China.

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About the Author

Arthur Thomas is retired. He has extensive experience in the old Soviet, the new Russia, China, Central Asia and South East Asia.

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