January 05, 2009


A theme is emerging among US journalists prone to project America's problems elsewhere that the big story of 2009 will be massive "social unrest" or "instability" in China that will lead to a Tiananmen Square type crackdown.

The meme ranges from trite to thoughtful and will most likely be a common refrain in the first part of the year. But Sinomania! can predict confidently that China will not fall and there will be no cataclysmic showdown between Beijing and the Chinese allegedly (so the MSM tells us each day) "yearning" for American style democracy.

Yes, China's economic slowdown is scary. But consider the contrast from conditions in 1989:

Inflation is the big bugaboo in Chinese politics as in any political system. Remember it was rampant hyperinflation that ended the Chiang Kai-Shek regime on the mainland. In 1989 the inflation rate was running at double digits (21% at the end of 1988) and rationing of some consumer staples had just ended in big Chinese cities. The 2009 CPI forecast is -0.8%. That's right, DEflation is the issue although most analysts believe that it is deflation due to supply shock not a collapse of the monetary system. And deflation is expected to persist perhaps all the way to 2010.

But what about GDP growth slowing all the way (!) to below the magic number of 8% - surely once that happens all hell will break loose since Beijing has no experience dealing with a major recession? Actually, the impression is wrong. It is not true that Beijing has never dealt with a major recession. On the contrary, the recession of 1960-61 was marked by a drop in GDP of -27.3% equivalent to the worst years (1931-32) of the Great Depression in the USA and recession occurred again in 1962 (-5.7%), during the Cultural Revolution (1967-68 -4.1%) and the year Mao died (1976 -1.6%). In 1989 GDP growth was just over 4% and fell to 3.8% in 1990. And during the so-called Asian flu in the late 90's China GDP growth fell below 8% (7.8% in 1997, 7.1% in '99).

Consider the differences in Beijing's financial position today:

Chinese banks have $6.85 trillion in deposits including around $2 trillion in foreign exchange reserves held chiefly in US dollar bills. By contrast in 1989 Chinese households had only 515 billion yuan deposited at the bank (approximately $138 billion US at the time) and a mere $5.5 billion in forex reserves.

Every economic indicator fell dramatically in 1989 including capital investment which is set to rise significantly in 2009 when Beijing's giant infrastucture stimulus programs are underway.

And signs are that China's economy may already be rounding the bend.

The pace of decline in industrial output slowed in December - that is output and new orders improved last month. The WSJ is reporting that China’s bond market is recovering and up to $235 billion in Chinese bonds are expected this year even though 1 year yields may dip below 1%.

The economy will be a big story all over the world this year but journalists and publishers hoping to focus instead on sexier and easier lines about an [insert color here] revolution in China will be disappointed.

(c) 2009 Ben Calmes, Sinomania!

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