Remember the Other Eleventh

Written By Brian Hicks

Posted September 12, 2006

The news crawler on the morning of December 11, 2001 scooted across the bottom of the TV screen at its normal pace. The previous night’s sports scores, some stock quotes…Oh, and China was admitted to the World Trade Organization!

When I traveled to China last year, I was told during one dinner how many Chinese diners refused to eat staple grains like rice until the end of the meal. The reason is that during the times of famine brought on by forced collectivization and unsustainable agriculture, rice and millet were all most people had to eat.

Today, Chinese meals consist of plentiful meat and vegetables. Those whose pride, hard work, and endurance have brought them this far demonstrate their new lives by shunning what kept them from death.

Today’s China is not scraping by. Though per capita income distribution needs to be improved, the national economy is prosperous and ever-present in retail stores worldwide. China’s national economy has recently been growing at a steady double-digit clip (11.3% in the second quarter of this year), and the government plans a 45% increase in GDP by 2010.

President Hu Jintao needs to cultivate his country’s "harmonious society" every bit as much as his forebears needed to grow grain, and so the Chinese Communist Party and its planners also want per capita GDP to double, with wealth not only existing but distributed as well.

When you plant bamboo…

China’s entry into the World Trade Organization followed the longest accession process in the history of the Bretton Woods institutions (for more on those, click here). But like that lively Asian plant bamboo, China’s growth has been swift once it took root.

In 1984, Chinese leader Deng Xiaoping said, "One of our shortcomings after the founding of the People’s Republic was that we didn’t pay enough attention to developing the productive forces. Socialism means eliminating poverty. Pauperism is not socialism, still less communism."

Following this logic, China began to take a turn for reality some two decades ago. Membership in the WTO changed its path from that of a lone ranger to part of a motivated posse driving world economic growth. China now finds itself among the world’s top economies, at #2 in GDP by purchasing power parity. The country is even finding new ways of finding what it already had.

This past winter, the National Bureau of Statistics re-evaluated the entire Chinese economy on the basis of the back-alley transactions and service sector. The result was a new figure which allowed the Middle Kingdom to leapfrog European powers like Italy and the United Kingdom, and even Japan.

So the danger facing China in 2006 is not whether this bamboo shoot will take root. As bamboo scaffolds encase rising skyscrapers throughout Chinese cities (even in western China’s Xining, where I was), the government is now worried about runaway growth.

Foreign reserve holdings are pushing the trillion dollar mark due to massive real estate investment in cities like Shanghai and Beijing, where prices are now so overinflated that real estate offices are shutting down by the thousands.

An increasingly well-educated and spoiled bourgeois generation of only children (due to government policy) is being raised by financiers and businessmen, then being sent to universities and business schools where they will advance China’s intellectual capital further into the 21st century.

This means a shortage of unskilled labor, the demand for which is now flowing to Bangladesh and Vietnam where wages are lower and the workforce largely untapped.

Bilateral deals are being brokered all over the world, from Burma to Benin, and many of them have to do with China’s quest for energy supplies (energy consumption actually outstrips every percentage point of GDP growth).

The People’s Bank of China, the central bank, has increased the amount that lending institutions must hold in reserve, and tighter policies on new construction are being imposed throughout the country.

These measures and interest rate hikes seem to finally be working, as the deputy central bank governor said this week that the country’s money supply is slowing "dramatically."

But it’s not just about revving up for speed then hitting the brakes. The quality of China’s growth is key, and it needs to adhere not only to WTO standards but logical financial principles.

The World Bank’s "Doing Business in 2007" survey, released this month, lists China as one of the world’s top ten reformers, chalking up its process to improved consumer protection and the establishment of credit histories for over 340 million Chinese borrowers. Business start-up time has also been expedited, which will help to balance the scale away from the "world’s workbench" mentality that many still hold when viewing China.

From the official US point of view, there is a cacophony of voices. Frankly, American consumerism and the desire for cheap goods have painted US policy into a corner. Some call for a 27.5% tariff on imported Chinese goods to balance what they say is an undervalued yuan (Chinese currency unit). But the yuan is floating more freely, and a hike in cheapo wares would hit Wal-Mart and many others hard.

Politics aside, US moneymen should take heart from their cue-giver. Fed Chairman Ben Bernanke, in a late-August letter to Senate Banking Committee Chairman Richard Shelby, said that China’s chance for economic crisis is "very low for the foreseeable future."

"Hard landing" is a term hot on the lips of American market watchers for domestic observations and stakes being laid abroad as well. As the world market becomes more integrated in a post-2001 world, we deal in the same terms with many diverse economies. China is now part of this scheme, after the 11th changed their country forever.

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