William Pesek: Five reasons why China won't save the world

Opinion

The idea that China can grow strongly as the world unravels is a fantasy. Ditto for the view that China is going to save the global economy.

China is already slowing, of course. The third-biggest economy grew 6.8 per cent in the last quarter of 2008. Such growth sounds like heaven just about everywhere else. Yet for an economy at China's level of development, one that zoomed along at a 13 per cent pace in 2007, it's hell.

Premier Wen Jiabao was wrong to err on the side of caution last week when he delivered the Chinese equivalent of the US State of the Union address. He said the country's 8 per cent growth target was within reach, indicating an additional stimulus package wasn't needed. It's a bad call, and Wen is likely to regret it as 2009 unfolds.

Markets are sensing as much. On Thursday, stocks around the globe soared on hopes that at least one major economy would skirt disaster. Markets came back to earth after China quelled stimulus speculation. As the global meltdown deepens, it probably means the export demand that drives China won't return until well into 2010.

Here are five reasons a Chinese rebound in 2009 may not pan out:

1. World growth is collapsing.

This isn't hyperbole, but a sobering fact. The International Monetary Fund can't downgrade its global growth estimates fast enough as the credit crisis overwhelms economies as diverse as Ireland, Japan, the United Arab Emirates and the US.

Asian Governments are increasing spending to soften the blow from falling asset prices, consumer spending and manufacturing. The European Central Bank is struggling to keep up with the region's plunging economy. The trillions of dollars of wealth being lost as markets plummet are depleting public coffers and damaging consumer psychology. It's not a good environment for any Government hoping for a revival in global demand.

2. China's key customer is in hiding, indefinitely.

Just when you thought conditions in the US$14 trillion US economy couldn't get any worse, they "deteriorated further" in almost all corners of the country over the past two months, the Federal Reserve said in its regional business survey.

Wang Hanmin, a sales manager at Yixing Bochangyuan Garments in Jiangsu province, spoke for many when he said exporters faced a "life and death" crisis. Exporters are so worried that they are calling on the Government to weaken the yuan after the biggest slump in overseas sales in more than a decade. One thing is for sure: The US consumer isn't about to help China out of this dilemma.

3. A lack of tools.

It's important to remember that the 4 trillion yuan spending plan unveiled in November was more spin than reality. Much of it wasn't new, but a tally of existing spending efforts. They were never going to boost a US$3.3 trillion economy anyway.

China's almost US$2 trillion of currency reserves would seem to give the nation considerable policy latitude. Yet China's vast economy lacks the financial infrastructure to get the bang it needs from its stimulus in yuan. Would building more roads, bridges and dams do the trick?

The spending will help, but such projects didn't propel growth as hoped over the last 30 years. Exports did.

4. All those US Treasuries.

Financing loads of new projects could prove dicey, even for cash-rich China. Any move to draw down US$696 billion of US Government debt could leave China with major losses and prolong the US recession.

That leaves domestic lending institutions. If China wants to avoid a Japan-like bad-loan crisis, or something far worse, it has to be careful about massive public-works projects with questionable economic benefits.

Of course, there's the "official" gross-domestic-product figure, and then there's the real situation in the most populous nation. The double-digit drops in exports among China's biggest trading partners in Asia show how bad things are getting. Offsetting those trends won't be easy or cheap.

5. Rebalancing takes time.

Just as the US needs to become a nation of savers, China needs more consumers. That's a destabilising, decade-long process that requires the creation of national safety nets and more education and health-care spending.

Making that transition would be a big enough challenge with a healthy world economy. Doing it while Group of Seven members are in recession and developing Asia is slowing rapidly will prove extraordinarily difficult.

How much China's export collapse is hurting can been seen in the 20 million migrant workers who are suddenly unemployed. The risk of social unrest is higher than at any time since 1989, the year of the Tiananmen Square protests.

It's still a stretch to think the country can turn its economy upside down in this ever-worsening environment.

Wen says China needs to "reverse the economic slide as soon as possible". Too bad officials in Beijing think their work is largely done. It's not, no matter what the official spin is.

- BLOOMBERG