Can it just be a coincidence that we are seeing signs of an early recovery in the Chinese economy at the same time as the European Union and the United States are ganging up together to confront China at the World Trade Organisation over its allegedly unfair trading practices? Whatever the connection between these two phenomena, the implications are worrying: with unemployment still rising in Europe and America, the likelihood of a protectionist assault on perceived Chinese success and unfairness is rising.
Rahm Emanuel, President Barack Obama’s Chief of Staff, has famously declared that it would be a big mistake to waste the opportunity provided by the financial crisis to bring in radical changes. To my mind, an assault at the WTO on Chinese trading practices would be just that sort of waste, leaving all sides bogged down in the technical aspects of trade. A much better target is financial, not technical: the Chinese currency.
So far, the signs of early recovery in China, which is the world’s third-biggest economy, are of the same nature as the slightly optimistic indications in Europe and America: they are signs that the economic downturn is not proving to be as bad as was feared at the height of the post-Lehman Brothers shock. But it is quite plausible that, unlike in Europe, there will soon be more genuinely positive indicators of accelerating growth in China. For the Chinese downturn has been quite different from Europe’s. While Europe’s recession is the direct result of the financial crisis, China’s downturn is chiefly the result of China’s own measures to control inflation during 2008. The financial crisis itself has barely touched China.
When a downturn has been caused mainly by government policy, through the tightening of monetary controls and the raising of interest rates, it can come to an end quite quickly once those policy measures are reversed. That is what China has been doing since last November, with a big fiscal stimulus package and much looser monetary policy. Of course, China is suffering from the fall in demand in Europe and America for its exports. But for many of those exports, China is just the final assembly point for goods originally designed and manufactured elsewhere in Asia, so the pain in Korea, Japan, Taiwan and Singapore has been much sharper than in China.
The World Bank this week raised its forecast for China’s GDP growth in 2009 to 7.2%, up from its forecasts earlier this year of 5-6%. Many private economists expect Chinese growth to be a bit faster than that, both this year and in 2010, given the size of its fiscal stimulus and the ready availability of credit and capital inside China.
That Chinese recovery will boost exporters of oil and other commodities, but will not do much to boost growth elsewhere in the world as it does not look very likely that Chinese demand for imports is going to rise very rapidly. The case brought this week at the WTO by the EU and the US has focused on Chinese controls on exports of raw materials, which are designed, the EU says, to keep input prices low for Chinese producers. That is probably true, and Chinese producers are also becoming more competitive because wages are falling in China. But European countries are also guilty of trying to offer preferential terms for their own producers. To attack China on this basis is just to risk a retaliatory assault on Europe’s own protectionism.
The Chinese currency would be a much better target. China is the only major economy whose currency is not freely traded and convertible. The effort to keep the Chinese Renminbi cheap explains why China has built up the world’s largest stock of foreign-exchange reserves, with $2 trillion mainly invested in US dollar securities. If the world is to have fair, balanced trade, we need the Chinese currency to float freely and to be allowed to appreciate in value. China is opposed to that, but it too has a problem, given the risk that those $2 trillion in US securities could plummet in value. There is a deal waiting to be done: currency flotation in return for a solution for China’s foreign-exchange reserve problem. That would be a much better focus for European and American pressure.