Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.

 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate


On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.


RSS 2.0

Divergence grows between China and the West - part I

By Xu Sitao - posted Wednesday, 31 December 2008

As the world economic crisis deepens, there is a growing divergence over how China with its US$2 trillion reserve can clean up the mess left by a Wall Street financial bust. US and European leaders urge China to step up to its role as a global financial leader, by lifting restrictions that keep its currency artificially low, easing global trade imbalances, doing more to fight global warming, and being more willing to help the rest of the world.

While China is willing to help its neighbour - as with the recent currency swap arrangement offered to South Korea - it is focused on dealing with economic crisis by taking steps to promote exports and growth. For China, maintaining an 8 per cent growth rate is not just an economic but political imperative, and it trumps any supposed failure to provide world leadership. Government economists anticipate that China needs at least 8 per cent growth in order to create ample new jobs. Rising unemployment combined with the growing rural-urban economic gap could bring the most serious challenge to the government.

However, the stance China seems to be taking to meet the challenges, by investing in domestic infrastructure and lowering its exchange rate, is certain to provoke a confrontation with the incoming Obama administration. As candidate for the US presidency, Barack Obama accused China of keeping the value of its currency artificially low to boost exports. On top of that, international pressures continue to push China to make immediate drastic changes in food safety, climate change, labour standards - an ever-growing laundry list of issues.


Yet in China, maintaining social harmony depends on growth which in turn depends on exports. Confronting a large surplus of labour, with several million of immigrant labour in China’s export-based economy already laid off, Chinese leaders hesitate to force industries to restructure during an economic downturn. China questions why it must abandon using the exchange rate as a tool for boosting the economy when almost every other country pushes currencies lower. Chinese economists also point out that allowing the renminbi to appreciate may not convince consumers - largely concerned over the lack of social safety nets - to open their wallets.

Export growth in China contracted by 2.2 per cent in November, the first outright contraction in decades. China took steps in mid-November to boost the economy with a stimulus package that inherently favours infrastructure investment over consumption - an implicit endorsement of the falling value in the renminbi against the dollar, despite urgings to the contrary by government officials in Europe and the US, who argue that China’s high savings rate discourages Chinese demand for international goods.

The government's effort to revitalise domestic growth is made doubly hard by the fact that China faces the first synchronised recession in all major Western economies since 1978, the year it embarked on economic reform. Preventing a freefall of economic growth and reversing the adverse effects that the export sector has suffered are the country's immediate objectives at least for the next two years. The carnage in Guangdong province, where thousands of export-oriented factories have gone bust this year, suggests how vulnerable the Chinese economy is to weakening external demand.

China must take a multi-pronged approach by, first, sustaining economic growth with all tools available; second, liberalising certain prices (for example, energy) so that imbalances can be reduced within the economy; and third, maintaining a strong bias towards job promotion when fundamental improvement of farmers' interests is being constrained by political factors. Indeed, despite the landmark decision in extending farmers’ leases, it’s unrealistic for farmers’ incomes to increase substantially in the short term when 40 per cent of their incomes is derived from migrant workers.

The harsh reality is that the wages of migrant workers that make up a huge portion of Chinese peasant income cannot be easily or quickly replaced. For now, their hardships are obscured by the fact that many are forced to return home after factories closed during a time that coincides with annual closings for the Chinese New Year.

Like it or not, the West must come to terms with the fact that China has its own set of complex and weighty issues such as widening income disparity and millions of lost jobs in the slowing economy that add strain to an already-tense national state that has endured natural disasters and international scandals.


The trade off between economic growth and job creation in China is far more acute than many China watchers appreciate, and the leadership is taking steps to protect jobs. Minimum wage rules are no longer enforced, and employers’ contributions to pension schemes have been lowered to mitigate job losses.

Looking far beyond the global recession, China knows that it must simultaneously pursue sustainable growth as characterised by economic growth with more efficient energy consumption and reduced income disparity, particularly between affluent coastal urban areas and the vast Chinese hinterland.

Therefore, China must introduce countercyclical initiatives in re-inflating its economy while also making gradual shifts towards more balanced growth. To take energy demand as an example, subsidising companies and consumers with low fuel prices has been positive for manufacturing and auto industries. But energy prices must be normalised, and beginning January 1, a fuel consumption tax will be levied - a clear signal and big step by the government to discourage energy consumption to achieve medium-term growth with lower energy intensity.

  1. Pages:
  2. Page 1
  3. 2
  4. All

Reprinted with permission from YaleGlobal Online - - (c) 2008 Yale Center for the Study of Globalization.

Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

7 posts so far.

Share this:
reddit this reddit thisbookmark with Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Xu Sitao is chief representative, China, with the Economist Group; director of advisory services, China, with the Economist Intelligence Unit; and former chief economist of Industrial & Commercial Bank of China (Asia), overseas flagship of China's largest bank, and chief Asian economist of Société Générale.

Other articles by this Author

All articles by Xu Sitao

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 7 comments
Print Printable version
Subscribe Subscribe
Email Email a friend

About Us Search Discuss Feedback Legals Privacy