China Turns Inward For Economic Growth
Speaking at the Clinton Global Initiative conference in Hong Kong, the chairman of China’s sovereign wealth fund , Mr. Lou Jiwei, said on Wednesday that China had no plans for further investments in Western financial institutions. “Right now we do not have the courage to invest in financial institutions because we do not know what problems they may have,”
The sovereign wealth fund had invested heavily in Barclays and Morgan Stanley, only to see the value of its investments plummet as the American and UK financial sector crashed.
Mr. Lou also emphasized that China will be looking to shore up its own economy, targeting a $500+ billion spending program on new roads and other infrastructure projects that are badly needed there. He said that the best way China could help the world economy would be to keep its own economy healthy. This will counter any hope western banks and brokers had that China will use its almost $2 trillion in foreign currency reserves to help them raise badly needed capital.
China is also getting edgy about the slowing purchases from America. This has led to large-scale layoffs at export-oriented factories in China, particularly in the Pearl River delta region near Hong Kong. Mr. Lou blamed a shortage of letters of credit from American banks, which he described as making it hard for American importers to obtain the money they need to buy Chinese goods even when they have ready buyers.
The recession in the West and in other emerging markets, whether in Asia, Africa, Latin America or Eastern Europe, will bolster the importance of China in the world’s economies. All of Asia has been on the ascendency of late, and the current economic crisis will only speed up that process. India, too, for example, has been experiencing high growth, and it looks to continue growing its economy, although at a slower pace than the last decade.
Mr. Lou did not mention China’s role in supporting the IMF with some of its huge foreign currency reserves. At the next meeting of the G-20 in London, set for April, the issue will probably come up again, as many of the emerging market currencies need temporary support to prevent them from causing longer-term harm to the world economy. With unstable exchange rates, neither buyers nor sellers can accurately predict product prices. This disrupts the supply chain for everyone, and world trade volume is suffering. But, for China to lend a hand in the currency stabilization effort, they have a right to insist on a better representation in the IMF. For now, both China and India account for less than 5% of IMF voting. This issue will have to be addressed before any progress could be expected on the currency stabilization front.
China is looking after China, right now. And it probably is the best way for them to proceed. They must keep their economy growing if they want political stability, so they must substitute some domestic spending to replace the falling exports that are causing serious cutbacks in their export-oriented factories.
China is already the world’s fourth largest economy, just behind Germany. I look for it to pass Germany in 2009 or 2010. The German economy is predicted to shrink in 2009, while China looks for a 5-6% growth. It will be a major challenge for the new Obama administration to find the right tone for dealing with this emerging giant.
