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China's historic shift from centrally planned to market economy has made it the manufacturing centre of the world. This has however come at the cost of a widening development gap between urban and rural areas and between coastal regions and inland/frontier areas. Many people in China have also lost the assurance of a lifetime job and the social safety-nets that they enjoyed a generation ago. Opening the economy, creating new labour-market mechanisms, and encouraging internal-migration flows have also impacted on China’s peripheral regions such as Xinjiang, TAR and elsewhere.
Impact of Global Recession
As the Chinese economy is closely integrated with the global economy, it cannot be insulated from global recessionary trends. Today, close to 40 per cent of Chinese GDP comes from exports and it is this segment which has been hit hardest by global recession. Lack of domestic demand for goods being exported has perforce led to a cutback in production which has further translated into job losses. China already had a huge unemployment problem with 120 million unemployed on a continuous basis. To this has now been added an additional 20 million newly unemployed due to the global financial crisis and its resulting closed factories. Add another 6 million new graduates into the work force (2008-2009) and we get a sense of the magnitude of the problem China is faced with.
To combat recession, China has relied mainly on the Monetary Expansion route to tackle the economic crisis. Two major measures undertaken in this regard are: -
• RMB 4 trillion (USD 585 billion) has been pumped into the economy in a stimulus package, to be deployed over two years in a bid to stimulate demand within the Chinese economy.
• RMB 5 trillion (USD 731 billion) worth of loans given by Chinese state owned banks to people and to businesses both large and small.
Impact of Chinese Monetary Policy
The stimulus package makes the Chinese economy look bullish as so much money has been spent in just 6 months. All analysts are therefore saying that China is booming again. This however may not be true as the effects of the stimulus package are at best temporary. Sooner or later market fundamentals will come into play and then we will see a different picture emerge. Some facts which need to be considered are: -
• Loans given by state owned banks have been utilised by many borrowers in stock trading investment. An amount in excess of $170 billion has gone into the stock market with a staggering 480,000 share trading accounts being opened by the week ending 20 February.
• In addition, the Chinese government is giving a 5 per cent grant to every person buying a car and a 20 per cent grant to anyone buying an electronic product; such subsidies are not sustainable.
• China saw a Net Capital flight of $240 billion in Q4 2008. This, in conjunction with the data on bank lending indicates that the communist regime in Beijing is having major problems in handling China's economy. What explains the positive numbers presently coming out of China is only the impact of the stimulus package. While this will cause a temporary rise in the rate of GDP growth for the current quarter, it would be wrong to annualise it. Perhaps the quarter ending June 2009 was the last good quarter and the downslide may very well start now.
There is so much money floating around (Close to $800 billion with ordinary people, with an additional over $170 billion having gone into the stock market), that China will soon have a huge inflation problem unless they tighten up their monetary policy and suck the liquidity out of the system before they lose all control over prices. If they lose control over prices and if they have runaway inflation in the middle of the winter (October 2009 - March 2010) then it could create huge law and order problems all over China.
The Oil Factor
Oil data coming out of China looks bullish. Demand has increased from a low of 6.07 mbpd in January 2009 to 7.7 mbpd in May 09. This huge increase of 1.6 Mbpd has not been used for Chinese Phase I strategic storage, which at 102 million bbls was declared totally full in Q4 2008. Also, Phase II of Chinese strategic storage at 170 million bbls has not yet been built. This indicates that the oil has actually been run in the two new Chinese refineries. Further, if stock building has taken place, it has been on the products side in commercial and other storage downstream of the refineries.
The question to be asked now is this: Why has Chinese oil demand increased from a low of 6.07 Mbpd in Jan 09 to 7.7 Mbpd in May 2009? The world oil prices by current indicators are not going to witness an upward spiral in the short term so obviously this increase in demand has not been generated due to an anticipated surge in world oil prices. So, if rising refinery runs in China in the midst of growing financial chaos are not indicative of the Chinese economy bottoming out, what is the diesel, gasoline and jet fuel produced in the refineries being used for? Is stocking taking place for an anticipated military operation?
Prognosis
The Chinese export-led market economy has taken a hit due to worldwide recession. As world markets are unlikely to stabilise in the short term, the spectre of massive unemployment due to loss of exports will only tend to further exacerbate the situation. Bank investments going into the stock market and large cash outflows will lead to inflationary pressures which are likely to come to the fore before the end of the year. Massive unemployment coupled with rising inflation is likely to cause serious disturbances initially in the coastal region and subsequently in other parts of the country. We can hence summarise the current internal situation in China as one being fraught with grave risks. We may yet see a repeat of Tiananmen Square protests of 1989 with the difference that the fires may not be so easy to quench this time. And this is likely to further inflame the fires of Lhasa and Urumqi. What may happen there is still an open question, but would need a careful watch.
We also need to keep a very close watch on the oil consumption pattern in China. The reason for rising oil refinery runs in the midst of global recession need to be determined as the possibility that the oil in question is being used to build up resources for a military conflict cannot be ruled out. China’s communist regime, anticipating worsening of the economic crisis leading to widespread riots in the coastal region may spark off a military adventure somewhere to retain its hold on the levers of power and deflect attention from its internal crises. While a major military conflict over the Himalayas is not something which will benefit China, a limited incursion in its contested areas may well be on the cards. Or is the contest likely to take place on the high seas? Time will tell, but it would be wise to be prepared.
(Disclaimer: The views expressed in this article are those of the author and do not represent the views either of the Editorial Committee or the Centre for Land Warfare Studies).
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