China's chance to lead the global economy
SCMP September 24 2008
There is no point in trying to predict where so-called financial markets
will go in the next few days and probably weeks. As astonishing as
the price gyrations has been the praise heaped on US Treasury Secretary
Henry Paulson for adding massively to the US public debt to help save
the un-transparent system of investment bank derivative scams and gambles
that he, as head of Goldman Sachs, had helped create.
So he let Lehman Brothers go down. But Goldman Sachs, with its assets
23 times its capital base, would quite likely have gone the same way
but for the billions in public funds injected to try to save a rotten
system. Contracts, understandings and trust, hallmarks of well-run
markets, have been torn up or sidestepped to help out the least worthy
of all institutions.
If this were Indonesia or Malaysia, the commentators from Goldman
Sachs would be crying about the evils of crony capitalism, the corruption
of the system of government, the impoverishment of the public purse
to save the well connected - all things that happened in Asia a decade
ago when banks that had been robbed by their owners and should have
been allowed to fail were bailed out.
This is described as a global crisis. It is actually far more a crisis
of New York and London. Others have suffered serious peripheral damage,
but there is no crisis in Germany or Japan, China or France. They have
not been printing IOUs on an unprecedented scale to the save the face
of a corrupted financial system.
But recent events have caused global damage to capitalism and market
systems - and to Hong Kong. This city had itself become too dependent
on being a branch office of an overwrought western financial structure
with its plethora of activities that have supported property, lawyers,
hotels and restaurateurs.
The panic of recent days has also had some salutary effects. It has
brought the world face to face with what should have been obvious for
a long time but was obscured by new financial instruments and monetary
excess. The latter emanated from the US with its easy money policy
magnified both by its reserve currency role and by a China willing
to absorb limitless amounts of US dollars into its reserves for lending
back to America, while inflating its own money supply.
For China, the question now is whether it has the courage to change
economic course, admit that export-led growth is no longer viable and
that it has better uses at home for the assets now parked in the US.
These are sure to decline in value thanks to a US preference for printing
money, ensuring future dollar devaluations, than squarely face the
consequences of a decade or more of excesses.
For its population's sake, China needs to stimulate consumer demand
- now less than 40 per cent of gross domestic product - as well as
infrastructure investment. It must accept that there is a probability
that domestic demand-driven expansion is likely to eliminate its trade
surplus, perhaps even push it into deficit.
Unfortunately, it has come to see surpluses and forex reserve levels
as symbols of strength rather than burdens on its own people, who are
for the most part badly in need of better health services and education.
Wage rises, particularly for the lower paid, need to be encouraged
by the state, which itself has ample fiscal room for increased outlays
on the recurrent as well as the capital account.
A rapidly falling trade surplus will eventually benefit the US - the
fewer Treasury bonds China buys, the sooner the US will see the return
of positive real interest and the end of its money-printing delusions.
Aside from the benefits for its people, domestic stimulus at this
time would be extremely well received by China's neighbours. It can
take a lead in a way that Japan, with its high incomes but declining
workforce, cannot. China and others will suffer from the sudden change
in the global climate. But this can also be its chance to show a real
maturity of vision and claim to be a leader, not a follower, of the
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