Shock absorber becoming a bit worn

WHEN in 2008 the global economic crisis was ushered in by the collapse of Lehman Brothers, fears that the resulting avalanche would lead to a collapse of the world economy were only partially realised.

All in all, most parts of the world came through the crisis relatively unscathed, exceptions notwithstanding. Several reasons may be advanced, one of the most important being China’s robust economy.

The Chinese economy seemed barely to be affected by the malaise.

It grew unabated, albeit a bit slower than at the climax of almost 15% in 2007. It took a brief nosedive to just over 5% at the beginning of 2008, after which it bounced back to more than 12% at the end of 2010, with a slow decline after that to the present annualised 7% in the first quarter of 2015.

China was thus acting as “the shock absorber of the world economy”, in the words of Stephen King, outgoing chief economist of the British bank HSBC.

With the Chinese economy’s continuing robust growth, that country soaked up a huge amount of imports – motor cars, aircraft, machinery, agricultural products, just about everything – from the West.

And this, in turn, played a large role in preventing especially the European economy from going belly-up. In fact, the world has much reason to be thankful to the Chinese.

Now that the West is crawling from under the crisis, albeit tentatively, this “shock absorber” is becoming a bit worn. The Chinese stock exchanges have crashed to the tune of a $4 trillion loss since June. And then came the recent two devaluations of the Chinese coin, which sent a shock wave through the markets world-wide.

The problem started, as in the United States, with an overheated property market, which inevitably came tumbling down. The contagion infected the stock market as well, and an unbelievable amount of money has since vanished into thin air.

This means that the Chinese capacity to pay for imports has now declined. And that will probably have a negative effect on the world, especially on Europe.

This is, firstly, the case for international stock markets. According to calculations by the German DZ Bank, about €56bn on the German stock market, DAX, went up in smoke in as little as three days.

Also, in the first quarter of this year, the German economy grew by 0.4%. Which, compared to Chinese figures, sounds like nothing, but everything is relative – in European terms it is seen as a definite sign of recovery.

This recovery, according to the German Federal Statistics Bureau, was driven mainly by strong exports and consumer spending. If the export to China is negatively affected by the crisis over there, as is expected, this may also smother the tentative European recovery.

China’s spectacular growth the last decade or two has probably masked many problems in that country, problems which have, therefore, not received the attention they deserve.

First and foremost it should be realised that the Chinese economy to a large extent is still in state hands. It is the private sector which was responsible for the impressive figures; the state-controlled sector remains inefficient, just like all communist economies have always been.

This state sector lies around the Chinese economy’s neck like an albatross. The powers that be do not want to privatise to a meaningful extent, probably as most of the corruption – which also lines the leader class’ pockets – is present in this sector. The state sector is also an important political power base for the leadership.

This, therefore, is the second problem: The half-hearted attempts to combat corruption. This fight is used more often than not to remove political enemies by accusing them of corruption, rather than a sincere desire to root out a paralysing problem.

A third problem is the continuing huge difference between the well-off coastal and southern areas, and the poor interior and north. When one sees the in itself pretty impressive rail network for fast trains built the last decade or so, it immediately strikes you that most of the network lies in the southern two thirds, especially in the coastal areas. Large parts of the interior and north lie undeveloped.

This has already resulted in a huge population movement to the coastal cities. When walking in cities like Beijing and Shanghai, one sees people who by their appearance look markedly different from the “normal” Chinese. When you ask where they come from, the answer is typically “from the interior”.

The big cities are poorly prepared for this influx. The government has tried for years to prevent it with a system reminiscent of influx control in South Africa during apartheid times, but it has failed as miserably.

Finally, China has run up a huge debt. According to a report by the International Monetary Fund just released, the Chinese state is expected to have an augmented fiscal deficit of around 10% this year. It is set to decline to 8% by 2020.

This means that China is running into the same kind of problems that weighs down the American recovery. When these words were written, the US state debt stood at approximately $18.4trn (add 11 zeros) and growing every second.

No state can go on indefinitely like this. And, therefore, the world should perhaps depend less on a robust Chinese economy and do more to pull itself out of trouble.

*Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.