The Hindu Business Line : Engaging China

While most analysts are unconvinced that new solutions are likely to be obtained in the ongoing gabfest at Davos a.k.a. the World Economic Forum, eyes and ears are nevertheless trained on the statements and sound bytes from the world leaders assembled there. This year’s Davos Forum has gained added significance as it is the first event of its kind after the open accusation by the US Treasury Secretary, Mr Timothy Geithner, that China is “manipulating” its currency to gain unfair trade advantage.

It is expected, that in addressing whether Beijing’s policy actions will be able to cushion the current recession, the Chinese Premier, Mr Wen Jiabao, will likely seek to lower expectations that China can extract the world from the economic crisis. But more critically, he is also likely to address the emerging global concern that Mr Geithner’s recent comments may lead to a trade war; the US-China ties are already strained by trade disputes and could worsen during the current slowdown.

Important role

It is in this backdrop that we try to evaluate the role that China can potentially play in minimising the impact of the weak economic conditions worldwide. Though, pinning hopes on Chinese consumers to pull the world out of the slump seems downright misguided given that the country remains a relatively poor nation with a weak social security system, it has nonetheless an important role to play in stabilising the world demand by maintaining an open trade regime. Jeopardising those prospects through tactless comments and ineffective muscle-flexing appear costly pandering of US lawmakers’ bellicose instincts.

With about half its growth still export-driven, China itself has been hit by the global downturn. The situation is direr than most analysts have presumed. With export growth in negative territory, investment in export-oriented industries are also tanking, generating a very large downdraft. Non-export related investment for a slowing economy is also bound to decline, creating all the ingredients for a vicious cycle of slowdown.

To prevent it, the country needs a large expansion of domestic consumption. But Chinese policy makers face a steep challenge in turning the country’s growth and production inward. Notwithstanding the public investments in infrastructure and related activities, job losses are mounting, weakening domestic demand. Also, weak social protections, such as meagre health care insurance and lack of adequate social security net, push Chinese consumers to save more than their peers.

import demand

But the Chinese trade engine can still keep some part of the global economy humming. For, what is generally glossed over in popular discourse is that Chinese domestic production is also highly import-dependent and several Asia-Pacific economies are dependent on China for their exports. China is also Australia’s largest two-way trading partner and the second largest importer of Australian produce. The rise in imports was most notable vis-À-vis South and West Asia, rising by a phenomenal 75 per cent, of which India was a major beneficiary with a 77.8 per cent rise, according to the data.

In the interest of sustaining this import demand, and mindful of its consequence on the exporting economies, it is imperative that international policy assist China in re-orienting its growth patterns. Persuading China to redefine perceptions of national interest would be a better option than raising its resistance to external pressures on its sovereign prerogatives.

(The author is a Visiting Research Fellow with the Institute of South Asian Studies, National University of Singapore. Her views are personal. blfeedback@thehindu.co.in)

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