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China's Economy 'Losing Steam Very Quickly'

Interviewee: Elizabeth C. Economy, C.V. Starr Senior Fellow and Director for Asia Studies
Interviewer: Bernard Gwertzman, Consulting Editor
December 12, 2008

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Elizabeth Economy, CFR's director of Asian Studies, says that although China had, just a few months ago, thought it could escape the worst of the global recession, China is now being "hit hard." She says that China's economy is now "losing steam very quickly," and that "this global economic crisis is going to make it much harder for China to address its own domestic economic problems." Economy notes that even though over the past thirty years, there has been a great improvement in the ability of Chinese people "to say what they think," in more recent years, the Chinese leadership has retrenched on this. She says there has been "a contraction of some significance in terms of the ability of people to talk openly about political change."

It's been thirty years since Deng Xiaoping launched the economic reforms after the Communist Party Congress in 1978 and China's been on an economic roll ever since with incredible growth rates in gross national product, as well as in its exports and imports. But is the global recession beginning to catch up with China now?

You're right that China has had extraordinary growth over the past three decades of economic reform, with the average somewhere between 9 and 10 percent for almost twenty of those thirty years. And I think there was a sense in China about four months ago that the country would be able to escape the worst of the global economic recession. And, this feeling was not unique to China. I think a number of other countries didn't quite understand just how interconnected our world has become, despite the fact that we talk about our "globalized world" all the time. But China's clearly being hit, and being hit hard. Exports are down more than 2 percent from this same time last year. And everyone's predicting a steep downturn in the growth rate for next year-in the neighborhood of 5 and 7 percent rather than the traditional 9-to-10 percent. There are even forecasters that are predicting zero percent growth in China for next year. I do think it's important to note that even before the United States' financial crisis precipitated this global crisis, the Chinese economy had been having some problems. The stock market had lost about two thirds of its value over the first nine months of the year, and the real estate market was in trouble. No doubt, however, this global economic crisis is going to make it much harder for China to address its own domestic economic problems.

Is China facing an unemployment problem now? They don't publish statistics, do they?

"There are small signs that there is going to be some kind of greater control exerted over the economy, which suggests that greater openness is not in the cards for the time being."

They do publish unemployment statistics, but it's hard to know what's real and what's not. Officially, the Chinese government says unemployment stands at about 4 percent. Unofficially, unemployment reports are as high as 10 to 12 percent. Of course, over the past few months, the media have been filled with reports of thousands of factories closing and tens of thousands of workers being laid off. By now, some provinces such as Jiangxi and Hubei, are reporting that hundreds of thousands of migrant workers have returned to their provinces jobless. This is probably true for a number of other provinces as well. In a few provinces, they are passing regulations that require factory managers to get the approval of the government if they want to lay off a certain number of workers. The government is extremely concerned about unemployment and unrest, so it is trying to take preemptive action by insisting that factories not lay off workers. In response, the owners say "well we can either lay off some workers or we're going to have to close down because we can't compete." So there is a clear tension here, and I don't know how the government is going to resolve it.

The government owns about what percentage of the industry?

It's difficult to know. One statistic that is out there is that 70 percent of the top 500 companies in China, which account for about 83 percent of the country's GDP [gross domestic product], are state-owned or state-controlled.

It was Human Rights Day the other day, and again there were, as you might expect, articles here about some of the leading Chinese dissidents still under detention. Have political liberties at all increased with the economic boom? How would you describe the situation?

As many people have noted, over the past thirty years there's been an enormous expansion in the ability of the Chinese people to say what they think, and think what they say. And there's been the development of civil society-non-governmental organizations, that take on all sorts of social challenges, and can move about with a much greater degree of freedom than ever before. Nonetheless, I think in the past several years, during the tenure of President Hu Jintao, there has been a contraction of some significance in terms of the ability of people to talk openly about political change. What we saw on Human Rights Day was a group of one hundred prominent activists, setting forth a human rights charter that called very explicitly for political change-calling on Beijing to hold direct elections, and to remove the Communist party from the court system, and from managing virtually every aspect of political life. Now this list of signatories has expanded to as many as 400 people from all across the country and from all walks of life-farmers, workers, professors, and others. Four hundred out of 1.3 billion, of course, doesn't sound that significant. Nonetheless, it was a bold move with a well-articulated set of demands. Of course, several of the people that signed on to the charter were arrested or brought in for questioning. This is likely to be a very interesting year coming up for China. It's not only the thirtieth anniversary of the normalization of relations with the United States but also the twentieth anniversary of the Tiananmen Square democracy demonstrations.

Is there any possibility of having token opposition parties running for government office? Or are there now only Communist Party people running?

In village elections and local district elections, independents do run. There are no organized political parties that are permitted to challenge the Communist Party, although technically speaking there are other political parties in the Chinese People's Political Consultative Conference, but they don't mean anything in any real sense of political organization or power. I think the big disappointment for many people in and outside China is that after twenty years of such grassroots elections, there hasn't been any progress in direct elections up the political hierarchy. We haven't seen any real advance or expansion in direct elections in China since 1989. There have been a few rogue experiments, but the government has not recognized the legitimacy of these elections.

Is the economy tanking?

I'd say it's losing steam very quickly.

Could the Chinese leaders pull back on any reforms they had in mind? Does this concern you at all? Is there a possibility of a real setback?

It depends on what kind of reforms you're talking about. The overall approach of the Chinese government, at least initially, is to evaluate everything in terms of how to stabilize the economy, and prevent greater job loss and more social unrest. For example, I mentioned the new labor regulations in a few provinces. There was also an announcement that the Chinese government has been telling the Chinese aviation industry not to purchase any more planes. They appear now to be devaluing the renminbi in order to boost exports. From the U.S. perspective, of course, that is a move in the wrong direction. So I think that there are small signs that there is going to be some kind of greater control exerted over the economy, which suggests that greater openness is not in the cards for the time being. Still, the Chinese leadership keeps saying the right things about not moving into a protectionist mode. In terms of policy reform, my guess is that everything is going to come up for a second look. If it seems to serve the immediate economic and political Chinese interests, then yes. And if it doesn't, if there is going to be political opposition, then it's not going to move forward. It doesn't seem to be a time for advancing bold new economic reform initiatives.

China's been criticized, along with India, for blocking process at the Doha round on world trade. Are they not going to change?

They're not going to change their position. China is worried about protecting its agricultural base and wants to maintain a strong safeguard to protect itself from agricultural import surges. Nonetheless, it was apparently quite a surprise when China reversed its decision to support a compromise on the issue.

Any inklings from the Obama administration, how it wants to view China?

"Everyone's predicting a steep downturn in the growth rate for next year—in the neighborhood of 5 and 7 percent rather than the traditional 9-to-10 percent. There are even forecasters that are predicting 0 percent growth in China for next year."

China was not a major issue in the campaign. From the perspective of China watchers, that's a good thing, because it means that the issue doesn't become politicized, and people aren't trying to lay claims or put stakes in the ground that will be difficult to back away from further down the line. I think that we've had a good run for the past thirty years in terms of maintaining stability in the relationship and not allowing our many differences both in policy substance and in values derail the relationship. Nonetheless, given the sharp economic downturn here in the United States, I think that the relationship will be tested in ways that it hasn't been previously. China's imports, for example, dropped by 17 percent in October. This will do nothing to help out the U.S. economy; and if the Chinese government is, in fact, telling Chinese companies not to buy products, like airplanes, which are a big ticket item in our trade relationship, that will be a problem. Negotiating a deal on climate change will also become more difficult--not that it has been easy--unless both sides decide independently that really pushing forward on a green economy is an essential component of their respective economic recoveries. Overall, I don't think anyone on either side is going to be looking for a fight, but it will be difficult to avoid a blame game unless each side considers the global ramifications of its policies.

I guess on the issue of North Korea's nuclear program, which is now back to square one again, the Obama administration can pick it up again with the Chinese and the others.

The North Koreans have been pulling back and making things more difficult, but the rest of the players are largely going to be the same. Obviously we'll have new people in the key positions here in the United States, but I haven't seen much from the Obama team that suggests that their policy is going to be strikingly different from that of the Bush administration.

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