Financial staying power gives China an edge

Gwyn Morgan, Globe and Mail – October 11, 2009

If Americans have been the world’s greatest consumers, the Chinese

have been its greatest savers

The highest point on Hong Kong Island still bears its British colonial name.
On these rare days when offshore breezes blow away the industrial pollution
spewing from the mainland, Victoria Peak offers a spectacular vista toward
the fastest-growing economic colossus the world has ever known.

The International Monetary Fund estimates that China's share of the global
economy will triple by 2050, surpassing the United States' current share of
22 per cent. It wouldn't be the first time that China will lead the world: Its
share of the global economy peaked at more than 30 per cent in the early
1800s, before Europe's Industrial Revolution and the emergence of the
Americas displaced the Middle Kingdom economically. Then came
subjugation and savagery at the hands of the Japanese during the two world
wars, followed by Chairman Mao's brutally disastrous rule, leaving the
population traumatized and impoverished.

It is testimony to the resilience and resourcefulness of the Chinese people

that, so soon after these terrible times, their country is positioned to lay
claim to the paramount role in a new world order of the 21st century. Only
15 years ago, China's manufacturing output was only one-fifth that of the
United States. Now, it is about two-thirds and rising; IMF data show a
dramatic rise of annual per capita income to $3,180 (U.S.) in 2008 from only
$350 in 1990, lifting more than one-third of a billion people into China's
standard of middle class.

The 60th anniversary of Mao's declaration of the People's Republic of China

featured the obligatory socialist trappings, but the country's current leaders
are intensely focused on continuing the market and private-sector reforms
that have unleashed an economic miracle. Their biggest worry is how to
sustain it: Unless massive numbers of new jobs can continually be created,
millions upon millions who have yet to see their lot in life improve will lose
hope – and their faith in the Communist party.

The major driver of personal income growth has been mass migration of
rural unemployed to the construction sites and factory floors of the big cities.
The current downturn resulted in the layoff of up to 30 million of these
workers; meanwhile, China's universities and trade schools will graduate 20
million this year, resulting in 50 million of the urban population looking for
jobs. This doesn't include the many impoverished millions in the countryside
wanting a new future in the cities.

Building the economy isn't China's only challenge. On most days, the view
from Victoria Peak to mainland Shenzhen province is obscured by a choking
blue haze. Just as coal-fired steam engines drove the smoke-darkened
European cities in the Industrial Revolution, China's industrial miracle is
driven by coal-fired electric power. Until the downturn of the past year, a
new coal-fired power plant was coming online every five days. Annual
consumption of thermal coal is about 2.6 billion tonnes and China's coal is
“dirty” – contaminated with compounds that yield a noxious soup of gaseous
emissions along with airborne, toxic ash particulates, much of which hitches
a ride on the jet stream to the west coasts of Canada and the United States.

While the United Nations and G8 continue to pressure China to clean up its
act, it is the people of China who will drive the most change, and not only for
air emissions. Angered by enforcement officials who either fail in their duties
or accept payoffs to look the other way, rural communities are rising up
against factories that pollute farmland and poison drinking water. In the new
People's Republic of China, it is the people that Beijing's powerful need to
fear most.

China's biggest post-recession economic challenge is building domestic

consumption to offset a precipitous drop in the export of consumer goods to
the West. If Americans have been the world's greatest consumers, the
Chinese have been its greatest savers. Given generations of pain and
poverty, such prudence is not surprising. Add to this the lack of a social
safety net when citizens get sick, lose their jobs or become too old to work,
and the challenge of moving the wary proletariat into those futuristic new
malls becomes clear.

China's surprisingly buoyant growth, despite a 25-per-cent drop in the export

of manufactured goods, is mainly attributable to enormous public stimulus
spending. Eventually that will have to end, but what China's treasury has
that the United States lacks is financial staying power. China's $2-trillion
(U.S.) in foreign reserves stand in sharp contrast to the United States'
rapidly growing $8-trillion net national debt. In the competition for global
economic leadership, this may be the most important factor of all.