What would we do without China?

I read an interesting article in Le Monde about China which claims that change is underway and that economic anti-Chinese hysteria is completely misplaced. Not sure I agree with everything he says, but here is a rough translation, apologies for errors.

China is a blessing. No, certainly not for human rights or for the environment - but for the world economy. Yet the exact opposite is the view in the west. In a TNS opinion poll for the German Marshall Fund, an American Foundation, 51% of Americans and 55% of Europeans said they view Chinese growth as a threat. These numbers rise to 57% for Germans, 60% for Italians, and 64% of French.

People in the developed world blame the Chinese for the flight of textile and toy factories out of their countries. Reluctant to begrudge the Chinese their paltry salaries, they have made the chinese yuan their bête noire. Thus 63% of Americans and 55% of Europeans believe a revaluation of the yuan would help protect employment in the West against competition from Asia.

This just shows that Western leaders, who flocked to Beijing in November and December 2007 to campaign for a stronger yuan, were acting on behalf of employees at home. Chancellor Merkel, President Sarkozy, governer of the ECB, Trichet, the European Commissioner Almunia and the American secratary of state, Paulson, raised the same issue with president Hu Jintao. "We can no longer tolerate such huge trade deficits: 158 billion euros for the US and 112 billion for Europe, and doubtless these figures will be higher in 2007" they lamented. "Our traditional industries have been badly hit by your fierce competition. You must stop exporting such enormous volumes. To that end, you need to raise your salaries, provide minimal social protection, and above all revalue your currency which is 20% to 30% below its real exchange value, which gives you an unfair advantage"

The leaders in Beijing responded "It is out of the question that we accelerate our reform program and risk the double digit growth which we need to drag our population of 1.3 billion out of poverty. We are already doing the best we can".

They are right. To achieve the goal of a "harmoneous society", advocated by president Hu Jintau, Beijing has in recent months been tighening the financial and monetary belt. On the 21st of December their central bank increase its rates for the sixth time in 2007, bringing rates to 7.47% for loans and 4.14% for deposits. The aim is to reduce the growth in bank loans to an annual rate of 12%, down from 22% for 2007. The yuan too has increased against the dollar by 7% over the last year, up from 3.3% growth in 2006. And the government is considering widening the band within which the yuan is pegged to the dollar.

Their efforts to stimulate demand are no less significant. In 2008, in three provinces, the government offered an experimental tax rebate of 13% to tens of millions of peanants on the purchase of TVs, mobile phones, fridges, and air con. The cut-off point for entering the tax net was also raised from 1600 yuan (150 euro) to 2000 yuan. This should make 70% of employees exempt from tax, up from 50% today.

Better still, a significant piece of legislation on working conditions came into effect on 1st January. The new law makes employment more secure, provides for redundancy compensation, and obliges employers to pay social indemnities on salaries (retirement, unemployment, health). The penalties for infringement suggest that these norms will eventually be adopted. The cost of labour and Chinese exports will be increased in consequence. This should be to everyone's satisfaction.

The anti-Chinese hysteria therefore, accentuated by the electoral race in the US, has no foundation. A biannual report on trade by the Tresory contradicts the complaints of the American Congress by its finding that Beijing is not manipulating its currency to benefit trade. The report welcomes the rise of the yuan and approves further progress which is under way or in the pipeline. It even goes so far as to acknowledge that the performance of the Chinese economy has been a wind in the sails of the global economy.

But such official recognition is no more than what is right from a country which, last Summer, might well have pushed the world economy into recession due to failures in its banking system which resulted from an inability to manage high risk loans. Who is preventing the world economic growth rate from falling below 4.5%? Not the US, which touches close to recession as this year begins; nor Europe, with its anemic 2% growth; but China which steams ahead at 11%.

Who prevents the dollar from collapsing dramatically, if not China, which holds 70% of its gigantic reserves of 1,400 billion dollars in US Tresury bonds? Who provided the cash injection to American banks Bear Stearns and Morgan Stanley to enable them to bridge enormous debts they incurred through bad management? Not the quoted pension funds in Wall street or London, but the sovereign funds of Beijing.

Low Chinese prices have helped control inflation in the west, thereby preserving the purchasing power of industrialised nations. The Chinese buy massive quantities of African primary resources thereby proping up the price of metals as well as agricultural produce. Not only do they provide valuble currency to weaker economies, but they also sell them manufactued goods which are cheaper and better adapted then those from the rich countries.

Finally, China provides loans and long awaited donations for construction projects for ports, schools, hospitals and electricity lines. Here again, China makes up the shortfall left by Western nations: she announced 5 billion dollars in aid between 2007 and 2009 which will surely be welcome since the G7 countries have renaged on the promise of 25 billion dollars in annual aid to Africa which they promised in 2005. Yes, all things considered, thank you China.