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China is For Real and is Here to Stay

But at the turn of the century when Americans got themselves busy with fighting terror, the Chinese juggernaut moved on making its way to do just that. And at the end of the first decade of the new century the speculation has turned to reality and countries around the globe are struggling to deal with it.

The year 2009 was a year of dismay and distress for most across the world. Even as the world steered clear from a deep recession, in the aftermath of the worst financial crisis it has seen in decades, millions lost their jobs and most economies found themselves stagnant at best.

But for China 2009 was a watershed. In the doom and gloom that enveloped rest of the world, the Chinese economy emerged as a beacon of hope. Encouraged by its economic prowess Beijing also took the center-stage in global politics. It loomed over the UN Climate Change talks in Copenhagen as it refused international monitoring of its plans to fight global warming. It courted energy-rich countries it needs for its own future growth by opening a new pipeline from Central Asia and discouraging new sanctions on Iran. And it hosted US officials, including President Barack Obama, eager to make sure China, before all other nations, remained invested in the teetering US economy. In 2009, the world listened when China spoke, as this was the year the Asian giant proved its economic might like never before. It did so by weathering the global recession that laid so many countries low. And then, more amazingly, it emerged first from the midst of the storm. Most forecasts put China’s economic growth for 2009 at around eight per cent. That is of course less than the country’s phenomenal average growth rate of 10 per cent a year before the 2008 crisis, but still enough to keep it at the top of the list of the world’s fastest growing economies. In contrast, the US economy will likely end 2009 with an overall contraction of 2 per cent and the European Union is set to contract by about 4 per cent.

Beijing confronted the global threat of recession with many of the same strategies employed by its rivals. Like elsewhere, the main driver of Chinese growth over the year was an easy monetary policy and the government’s massive fiscal stimulus which were introduced at the end of 2008.

While such top-down measures had only a soothing impact elsewhere, in China they had a revolutionary effect. They stimulated Chinese consumers to go on a spending spree on a scale never seen before. That in itself is a major step towards transformation of the Chinese economy into a domestic demand-driven economy from an export-led one.

Chinese, like most Asians, have traditionally been diligent savers. But in the first half 2009, Chinese banks gave out more than $1 trillion (nearly as much as the combined GDP of the GCC states) in loans to Chinese consumers. The credit, as well as rebate programs, encouraged even committed savers to open their wallets. The Chinese now are on track to end 2009 having bought more new cars than the Americans did for the first year ever. Total sales in China are expected to hit 12.8 million vehicles, compared to 10.3 million in the US. No wonder China’s carmakers are eager to buy American and European brands.

Beijing’s stimulus strategy enabled Chinese consumers in 2009 to substitute for China’s loss of its traditional export market for its manufactured goods. Beijing’s goal was to keep China’s industrial base intact when otherwise it would be in danger of shrinking dramatically with the loss of its overseas orders. The strategy did not save all of China’s factories and jobs; 15 million Chinese lost their jobs in the global recession. But the stimulus did keep China’s industry strong enough that it could recover quickly once the recession eased.

This is not the first time Beijing has unleashed large amounts of money into the Chinese economy; it followed a similar strategy during the Asian financial crisis of 1997-98. But it never did so as massively or effectively as it did this year. China’s strong recovery has not only helped its own people but is now also helping other countries emerge from the recession. As Chinese businesses resume buying foreign commodities, they are stimulating other export economies.

The beneficiaries include the European Union. Its overall exports to China and other East Asian economies rose to 6.3 per cent in the second quarter of 2009, after shrinking by almost the same amount in the first. The rapid recovery puts China in an unusually strong position to pursue a confidently expansionist trade policy in 2010.

China often labels foreign pressure to reduce the value of its yuan as an effort to limit China’s future growth. But there is now little incentive, for both the US and Europe to do so. And it is not just the hope of China eventually importing more than it exports. Over the last couple of decades, China has amassed nearly $2.5 trillion in trade surplus, and invested much of it in US bonds. The investment is so large that during the worst period of the crisis, American officials had to reassure Beijing that its investments were safe. They knew that if China were to withdraw its investments, it would severely affect the American economy.

China’s new-found confidence on the world stage is just the beginning of a new era for the country itself. China itself is changing and that will have a profound impact on the world.

Ovais Subhani is Executive Editor of Khaleej Times and can be reached at ovais@khaleejtimes.com