America’s dangerous dance with China


Washington — The international financial crisis marks a turning point in China’s relationship with the rest of the world, especially the United States, said Mr. Pieter Bottelier, China expert, in an exclusive interview with recently.

Mr. Bottelier is a senior adjunct professor of China studies at the Paul H. Nitze School of Advanced International Studies and considered a leading expert on the Chinese Economy. In addition to holding a number of World Bank positions in both Africa and China, Mr. Bottelier also teaches at John Hopkins University.

Mr. Bottelier outlined a new self-confident China emerging largely intact from the financial crisis sooner than anyone anticipated, wielding an aggressive stimulus package that includes an affordable housing program directly supported by the central government.

The Chinese government regulates the mortgage market much more directly and aggressively than the U.S. government does. It requires first-time homebuyers to put down at least 30% of the purchase price (which for a 1000 square foot apartment in Beijing is typically around $400,000 in today’s market).

To curb property speculation, those seeking a second home are required to put down 50% and mortgage loans for additional residential properties are almost impossible to get in tier one cities.

“So this housing program is quite new, it’s massive in scale and I don’t know the details, but I am very curious to understand exactly what mechanics they will use to avoid messing up the commercial part of the housing market,” said Mr. Bottelier.

“If you want to accommodate the rapidly expanding urban population, especially migrants, and don’t want massive slums as are common in many other developing economies, like India, Bangladesh, Pakistan, Indonesia, even in Mexico, then you will have to provide affordable housing that is government subsidized in one way or another.”

“I believe that they are very heavily interested in the experience of Singapore with their public housing program, one of the most successful housing programs in the world and has been going on for decades.“

While this process is far from over, one of the most visible results of the broad stimulus package are rising wages for both skilled and unskilled workers, reaching 20% in some cases.

The other side-affect of the financial recession and China’s ongoing recovery is a reevaluation of its relationship with the United States.

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“I think the United States was always a model for China’s reforms, at least in many respects, although it was never formally acknowledged,” said Mr. Bottelier.

“The U.S. was always the shining example of a prosperous, stable and powerful nation that China aspired to become.”

“The fact that the U.S. crisis occurred at all, and the U.S. was much less able to cope with the immediate consequences than China was, has caused many Chinese to rethink the relations with the country; they have less admiration for the U.S. now than before the crisis.”

The financial implosion on Wall Street triggered a collapse in Chinese exports forcing manufacturing lay offs in the region of 20 million people in the coastal provinces. (These figures are quoted cautiously, since they are not as reliable as the trade statistics supplied by the Chinese government.)

This was exacerbated by job losses in the construction sector earlier that year.

Thus, the by the end of 2008, China was in deep trouble facing a massive unemployment problem and nobody, including the U.S., expected them to crawl out of the recessionary hole as quickly as they did.

China pounced with lightening speed to deal with the looming financial meltdown, introducing a stimulus package in early November 2008, only about 7 weeks after the collapse of Lehman Brothers.

Mr. Bottelier partly attributes this transformation, which is still underway, to the massive investment in construction activities, including housing and subways.

This created huge amounts of jobs that absorbed out-of-work migrant laborers laid off earlier in the year.

Other factors also played a role in the unexpected tightening of the domestic labor market in 2009, less than a year after the crisis hit, including a shift in demographics, which slowed the migration of rural residents to the cities.

While urbanization is still climbing, the pace is not as frenetic as it once was. China’s cities are expected to absorb over 250 million rural residents in the next 30 years.

“The population of the age group between 15 and 36 has already peaked, although the total population has yet to peak,” said Mr. Bottelier.

Another factor is that rural residents are less eager now to move way from their home villages than they once were because living conditions in rural China have improved considerably and non-farm jobs are more easily available than in the past.

According to Mr. Bottelier, electricity, cell phone service and even broadband are now provided all over China, even in remote areas. The stimulus program has contributed to the development of infrastructure and telecommunication services in rural China.

The end result is that the traditionally poorer interior regions of China now have greater job prospects as the Communist government continues its “Go West” policy.

“They don’t want the differences between the east and west to become too large and the government has been investing an awful lot in accelerating the infrastructure improvement in interior western provinces. It’s a complicated story.”

It gets more complicated. While many U.S. consumers see China as the evil empire, stealing jobs and flooding the market with cheap goods, this may not actually be the case.

Instead, Mr. Bottelier paints a picture of a more pragmatic China, intent on pursuing economy prosperity and gaining international respect.

While U.S. consumers complain about lost jobs and lower quality goods, Mr. Bottelier points out that the U.S consumers have actually benefited from high quality consumables at lower Chinese prices.

China, he says, has for the last 30 years been an economic boon to America and the world.

He recently told C-Span that “if you want to blame China for the job losses in the U.S., you are essentially criticizing the policies that encourage or permit the outsourcing of manufacturing activities by U.S. enterprises.”

Adopting an adversarial dance with China, including instituting tariffs on Chinese imports, would raise prices for U.S. consumers or force importers to switch to alternative, often lower quality suppliers in other developing countries.

Neither option, Mr. Bottelier argues, would create more jobs in the United States.

Further, by punishing China, the U.S. is effectively punishing itself, since U.S.-invested companies operating in China sell many exports from China to the U.S.

Another point that few people in the U.S. seem to realize is that China has become America’s third largest and most rapidly growing overseas market for American exports, including Boeing aircraft, automobiles and soybeans.

The two countries are intertwined in a complex trade dance that cannot be reduced to simplistic fears over currency devaluation, cheap goods or job outsourcing.

“We also recycle a lot of waste to China. It’s amazing that many cargo ships that bring the computers and consumer goods from China to the U.S., go back full of scrap metal and waste paper. The reason why these recycling jobs do not stay in the U.S. is that it is too expensive to do that work here,” said Mr. Bottelier.

He also noted that General Motors’ revival is not unrelated to the huge and rapidly growing demand in China for GM-made cars, manufactured in the U.S. or in China.

China is now the world’s largest market for automobiles, he said.

Mr. Bottelier also stresses that in his opinion the collapse of U.S. financial institutions in 2008 was brought about by the subprime crisis and had little or nothing to do with China.

New dance partners

Intriguingly, China may no longer offer the cheapest labor in Asia. Wages in China are already much higher than in most neighboring countries in Asia. For example, wages in China are on average 4 times as high as in Vietnam.

This is partly why China is not only shifting its manufacturing bases to cheaper inland areas, but also to nearby countries such as Vietnam, India and Bangladesh.

Africa is also not being ignored by China. The Asian giant is now present on just about every corner of the African map including the oil-rich Sudan.

Relations with South Africa continue to be important to China offering it a springboard with which to launch other economic ventures on the continent.

“The big difference between China’s approach to Africa and the traditional western approach to Africa is that is primarily commercial,” said Mr. Bottelier.

“They do not come like gods out of heaven to provide aid out of the goodness of their hearts; they want both sides to benefit from the relationship. That is a big change between how the Chinese operate in Africa and the way the traditional colonial powers used to operate.”

Most importantly, this global economic rebalancing exercise by China includes a shift in policy towards Taiwan, a perennial flashpoint on the Asian peninsula. From Taiwan’s side, improved relations with the People’s Republic of China (PRC) also became a priority under the government of Ma Jingjou who was elected Prime Minister a few years ago.

“The trading relationship between Taiwan and China is now much more important for Taiwan than the trading relationship with United States,” said Mr. Bottelier.

“If you add Taiwan trade with Hong Kong and Mainland China, the volume of trade is at least double the volume of trade with the United States.”

“So Taiwan, like almost all other countries in the neighborhood, is getting more and more tied to the Chinese economy. In Taiwan’s case, this is politically very important.”

There are also all sorts of collaboration projects between China and independent Mongolia including a request by Mongolia to build a railway from interior mineral producing areas to the Chinese mainland.

Mongolia, sitting on huge deposits of minerals, is set to become one of China’s important mineral trading partners over the next decade.

The Final Tango

Ironically, while certain corners of the United States may wish to distance themselves from China as a trading partner, China itself may already have begun that process by trying to reduce its dependence on export demand and domestic capital formation.

According to Bottelier, China’s exports are 60% accounted for by foreign-invested enterprises including American enterprises. Essentially, in a globalized world economy, many rich countries, including the U.S. are using China as a platform from which to export. To complain about China’s exports is to complain about globalization.

“I think China now feels that its model of economic management may not be not so bad after all. They don’t feel pressure any more to replicate western models of financial system organization,” said Mr. Bottelier.

“They will still try to modernize their economy, including their financial system but are now less inclined to follow western advice and listen more to the advice of their own specialists.”

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