China in the days of Meltdown

John Samuel


Taxi drivers are often the best barometers of a society. They are a part of the common people. They know the city- its glow and underbelly. So I began my discussion with my Taxi driver in Beijing. He told me that he got less business and there were not many foreign tourists. He was worried about financial crisis- though he hoped that government would do something about it.


It seems China has anticipated the Finance Crisis and also adopted a comprehensive strategy to address the situation. In spite of such preparedness, there is a shared sense of nervousness among people. People spend less and save more. There is an unarticulated sense of impending trouble. But there is also a sense of confidence- that the government would be able to manage the trouble.

There are around 200 million migrant labors who moved from villages and agricultural sector to the booming real estate and manufacturing sector, in the last ten to fifteen years. They are the people who are hit by the present crisis. Hundreds of factories in export zones (such as Guangdong) are shut. Maximum number of lay off are among the direct subsidiaries of Multi National Corporations or the direct suppliers of such big companies. So now there is a reverse migration from Cities to villages.

While government has announced a package of US$ 586 billion for stimulating domestic demands and building rural infrastructure, they announced 9 point economic and fiscal management programme to stabilize and manage the economy. These include a) Reducing the interest rates b) A massive programme for rural credit for new ventures- where local government will offer guarantee c) A programme to provide loans to start new enterprises d) Stock market stabilization strategy and e) Weekly risk monitoring and management .

Anticipating an urban-rural migration, there is a coordinated effort between the federal government and the provincial government, along with county administration, to initiate a whole range of projects on high quality rural infrastructure. This will include rebuilding schools, improving hospitals, constructing new roads, bridges etc. Apart from this, 140 new airports are planned across the country.

Though there is a slow down of the construction activity in Beijing and other big cities, the real estate is yet to show a serious crisis here. The demand has decreased (though loans are still available). But the price has only come down to 10% to 15% in the housing sector in Beijing

There is a conscious strategy to encourage internal tourism and the number of people traveling within China is increasing. There is also a new effort to encourage tourism to Taiwan- in the context of the new equation with the government of Taiwan. However, there are clear evidences of decreasing number of foreign tourists. This may have a direct impact on hotel and airline industry.


It seems China has a comprehensive security policy in the context of the finance crisis. There is restriction on visas. All international organizations are under new surveillance. They are now very careful about each and every business proposal or financial deal. It seems China is far ahead of India in terms of planning, risk analysis and preparedness.


There are very interesting debates about the Financial Crisis in China. The key debate is whether the first priority should be to strengthen Chinese economy or to help to stabilize the global economy by pumping in more money to the US. There seems to be fierce debate on this in the Chinese media and less debate in English- as government imposes more restriction on English media.

Unlike many other countries, China is unique in terms of the scale of operations and also the fast pace of implementing policy recommendation. China has highly centralized form implementation and a much better orchestrated coordination between the federal and provincial governments. So there is a much better chance to implement a demand stimulation programme- which will have multiple layers and dimensions- at a much faster pace than many other countries.

China seems to have a three prong strategy a) A Huge programme focusing on rural and small town infrastructure development (in the last fifteen years- it was more urban focused development) b) A growth stimulating programme by providing generous loans for small and medium level enterprises in the third and forth tier towns/cities- closer to the rural area c) A fiscal management strategy.

Last week, they finished the fifth round Strategic Economic Policy Dialog with the US. The discussions were led by Hank Paulson and the Chinese vice-premier. This is a part of the external strategy of building bridges and strategically positioning in the context of the financial crisis. Chinese leadership very well knows the USA will be more dependent on China much more than before. At the same time, it is in the interest of China to make sure that the economy of USA rebounds to its earlier vibrancy. China needs an economically vibrant USA to export its goods and services. And the USA needs the Chinese foreign exchange reserves to stabilize its finance system. CCTV 9 (English Channel) did a special programme focusing on European businessmen in various cities and how they felt about the pinch of Finance crisis. Of course, they gave the general narrative "it will be difficult- but China will come out in flying coloures".




In many ways, the situation of China is exactly opposite to the USA. In the USA, everything is driven by credit- personal spending to the consumer market to new investments. In China, it is still driven by the saving. In spite of everything, people spent only a percentage of their earning, most of the people who buy houses would prefer to take only 30 to 50% as loan- instead of hundred or eighty percent mortgage in many other countries. China got one of the best saving ratios in the world. Public debt ratio too is good in China. So the saving driven economic model may actually help China in the difficult days ahead.

There has been a cottage industry predicting the fall and doom of China. But don't underestimate the quality and caliber of the leadership in China .There seems to be a difference between the external perceptions- and the multiple layers at work in China. There is a sort of inbuilt resilience within the system of governance. Though the economy and financial sectors have opened up, there is still a strong regulation and control management system at work in China. Most of the big Chinese corporations are owned or controlled by the government. This is quite different from the free market of the USA or Europe.

Having said this, China has a huge export market- and the financial melt down may severely affect the export market, particularly if many people in the US and Europe lose jobs. Though China is confident to keep the growth rate at the level of nine percent, it may actually come down in the next one year. It may have some difficult effect in some provinces and in the short run many millions of migrant workers may move back to their villages and countries.

China, with its centralized economic management, a strong sense of nationalism (this has a psychological impact), and the possible simulation of demands may be able to cope up with the finance crisis better than many other countries.