America's Pain, China's Gain
by John Delury
Originally published in The Daily Times, Ooctober 27, 2008
In their efforts to pass a bailout plan for America’s financial
system, Bush administration officials invoked the spectre of the Great
Depression of the 1930s. But, for most Asians, economic Armageddon is
far more recent.
The Asian financial crisis
of a decade ago brought banks, corporations and governments to their
knees. The bonfire was sparked by the collapse of the Thai baht in the
summer of 1997. Contagion soon spread across East Asia, with the ripple
effects of serial currency devaluations reaching as far as Russia and
Brazil. The long running “economic miracles” of South Korea and Hong
Kong ended, as did surging growth in Indonesia and Thailand.
The central lesson taken from that crisis was to maintain large
foreign-exchange reserves. This became a virtual article of faith among
East Asian governments. Back in the 1990s, Asia’s fast-growing
economies maintained small reserves, despite booming exports and
foreign investment. Once the tailspin began in 1997, governments’ lack
of reserves hampered their ability to rescue failed banks, forcing them
to appeal to international institutions for relief.
But the International Monetary Fund’s bailout came with strings
attached, including demands for more of the rapid capital market
liberalisation that induced the crisis in the first place. Indeed, what
the West calls the “Asian financial crisis” is known in Asia as the
“IMF crisis”. The political humiliation and economic frustration of
dealing with IMF imperatives confirmed the central importance of
maintaining large reserves, as an issue not just of currency stability,
but also economic sovereignty.
One Asian economy emerged from the 1997-1998 crisis relatively
unscathed: China. There were many reasons for this, but foremost among
them was that China had already amassed more than $100 billion in
reserves, and refused to revalue its currency, when the crisis hit.
Since then, China has aggressively pursued a fast-growth, export, and
investment heavy model of economic development. By capping the exchange
rate and producing far more than it consumes, China’s reserves grew
into a Leviathan, hitting the $1 trillion mark in 2005. Even after
China (under pressure from US Treasury officials) let the yuan
partially float in 2005, the Leviathan kept growing by about $200
billion annually. Over the past year and a half, China’s reserves
skyrocketed to $1.8 trillion, far and away the world’s largest.
The Chinese state probably hasn’t sat on so much lucre since the
halcyon days of the Qing Empire, when insatiable European demand for
porcelain, tea and silk flooded the central coffers in Beijing with
silver bullion. But the paradox is that today’s reserves are not real
wealth that can be pumped back into the domestic economy. Instead,
China’s reserves mostly underwrite America’s debt.
Even before Wall Street hit the skids, there was growing consensus in
China that its reserves had grown far beyond what was necessary to
avert another 1997-style crisis. Calls for a more diversified
investment strategy intensified. Investing in US Treasuries, after all,
was a sure loss-maker, given the gap between their modest yield and the
steady appreciation of the yuan.
With the creation one year ago of a $200 billion sovereign wealth fund,
the China Investment Corporation, Beijing positioned itself for more
equity investment (although its early investments, in the Blackstone
Group and Morgan Stanley, were widely criticised). Economist Andy Xie,
formerly with Morgan Stanley, proposed last week that China trade its
dollar assets for shares in US companies on a grand scale, challenging
America to overcome its financial xenophobia in order to avert a
disaster of undercapitalisation.
But many in China, from nationalist bloggers to social justice
activists, advance a deeper critique of the Leviathan reserve. Why bind
up Chinese capital to finance America’s debt-consumption economy, they
ask, when so many needs go unmet at home? China was one of the world’s
most egalitarian societies as late as 1985. Today, it suffers one of
the world’s biggest gaps between haves and have-nots. Chinese-style
capitalism is flaunting its defiance of one Confucius’ basic teachings
— don’t worry about poverty, he warned, worry about inequality.
China’s physical infrastructure in booming central cities is undergoing
radical modernisation, but the social and environmental infrastructure
is falling apart, especially in the interior and for the huge rural
population. For years, the central government has talked about creating
“social harmony” — with a “new-type rural cooperative medical services
system”, by increasing spending on education to 4 percent of GDP and
eliminating school fees, and implementing “sustainable development”
models.
The promises are grand, but the actions have not measured up. And the
economic costs of restricted access to healthcare and education, on top
of the scarcity of clear air and potable water, will be crippling in
the mid- and long-term.
The challenge for China in the years to come is to divest itself of
American debt, and begin investing in the health, education and
environmental well being of its own people. Growing the economy at an
average annual rate of 10 percent, it turns out, may have been the easy
part.