February 8, 2010


Why China is stoking war of words with US: Beijing’s belligerence is a diversionary tactic. There’s nothing like nationalist outrage to sweeten unpopular economic reform (Bill Emmott, 2/08/10, Times of London)

For the past two decades the country’s official policy has been to keep its head down in international affairs, in line with a dictum of Deng Xiaoping, its great leader of the 1980s: “keep a low profile and hide your claws”, he said, while focusing on building up your strength. That was a good description of Chinese policy in the 1990s and for much of this decade. But it now looks out of date.

One tempting explanation is Chinese confidence. China has been the big winner from the global economic crisis, runs this argument. Not only did it survive the crisis without suffering social unrest, it has seen its growth rebound strongly — indeed, back into double digits during the most recent quarter. Its huge fiscal stimulus package and expansion of lending by state-owned banks has been much lauded. It was popular in Davos last week to claim that China is in the vanguard of a revival of state-led capitalism, with the Beijing model being increasingly admired by other emerging economies.

This interpretation is tempting for any American or European who feels weak and self-critical about their region’s power and prospects. It is certainly true that China is increasingly viewed with awe by others, even if many countries (notably India) also fear or resent it. It is also true that many Chinese feel that their country is on a roll.

But there is another explanation. If you look more closely, China’s economy starts to look much less strong. The huge increase in money supply and bank lending that revived its GDP growth is bound to lead to inflation — and is already doing so. If its apparent strength is to be sustained, China needs to find a new model, a new source of growth, now that reliance on exports to the US and Europe looks like a thing of the past. For even a state-run banking system cannot continue to boost lending by 35 per cent a year indefinitely without causing problems.

That is why a popular debate in the markets concerns whether China is experiencing an asset bubble and whether there is a risk of its growth collapsing in the same way as Japan’s did in 1990.

Posted by Orrin Judd at February 8, 2010 7:34 AM
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