Promising Future

China brings a sense of economic stability to nervous Davos By Hu Yue

Promising Future

China brings a sense of economic stability to nervous Davos By Hu Yue

OPENING REMARKS:German Chancellor Angela Merkel (right)speaks next to World Economic Forum (WEF)founder and Executive Chairman Klaus Schwab during the WEF opening session in Davos on January 25

W hile Europe buckles under a mountain of debt, the U.S.economy has been struggling with a sluggish recovery, and Japan is still reeling from the impact of the devastating earthquake and tsunami, many attendees at the annual World Economic Forum held in Davos, Switzerland on January 25-29 looked to China to prop up the global economy.

Despite a modest slowdown in growth,the Chinese economy remains a calm port amid the world fi nancial storm.

Speaking at a public session, Singaporean Prime Minister Lee Hsien Loong said he was fundamentally optimistic about the Chinese economy.

Lee pointed out China was making rapid economic progress and undergoing quick urbanization, which created enormous demand for facilities such as roads, hospitals, schools and houses.

Li Daokui, adviser to the Monetary Policy Committee of the People’s Bank of China and Director of the Center for China in the World Economy at Tsinghua University, expects the Chinese economy to grow around 8.5 percent this year, down from 9.2 percent in 2011.

“Anyone who has any understanding of China will agree that we will be able to achieve a soft landing, supported by buoyant domestic demand,” said Li, on the sidelines of the forum.

In fl ation, which has nagged China for much of the past year, is also likely to ease to about 3 percent from 5.4 percent in 2011, he said.

Zhu Min, Deputy Managing Director at the IMF, agreed. “The growth moderation is acceptable and it is actually good news for China as the country tries to rebalance its economy away from over-dependence on exports,” he said.

But the economy is not without risks.China is still far too export-dependent and that makes it very vulnerable, said Nariman Behravesh, chief economist of IHS Global Insight. The second worry is the housing situation. It is tricky because there are very few countries that were able to de fl ate a housing bubble without creating some other damage.

Zhang Weiying, an economics professor with Peking University, said two major factors may drag down China’s growth over the long term.

“Due to an aging population, gains from demographic dividends are shrinking, and the side effects include labor shortages and stubborn labor cost in fl ation,” he said. “Moreover,policymakers still have a lot to do to foster the private economy and encourage innovation and entrepreneurship.”

Lee suggested that China should continue its efforts to improve the social safety net,properly distribute and utilize profits generated by state-owned enterprises, as well as balance investment and consumption in order to ensure future growth.

Rescuing Europe

As Europe sunk into an intractable debt quagmire, many also expected China to come to its aid.

Li said China has never changed its policy to participate in the financial rescue through the IMF, but insisted that there need to be conditions. “The fi rst is that the EU must devise its own effective rescue package, and the second is that the efforts are multilateral, not just bilateral,” he said.

“Both sides are in the same boat,”said Finnish Prime Minister Jyrki Tapani Katainen. “China will suffer from the worsening economic situation in Europe, and vice versa, so it would be good for China to use part of its foreign reserves surplus through the IMF to fi nance countries in trouble.”

Going global

Cash-rich Chinese fi rms are accelerating their pace of going out, but their outbound forays are usually hindered with pitfalls, such as stringent political scrutiny. Some Western critics have even raised suspicions that China may be seeking to exploit the economic weakness of advanced economies to grab valuable natural and technological resources.

Richard Levin, President of Yale University, said the rest of the world could be grateful for China’s current investment interest, as eventually the country of more than 1 billion people will have to start spending more of its cash on problems at home, including the lack of proper social security for an aging population.

Pascal Lamy, Director General of the World Trade Organization, said the prejudice problems would get worse as China’s overseas investments shoot up. China’s outbound direct investments in non-financial sectors grew 1.8 percent year on year to reach $60.07 billion in 2011, said the Ministry of Commerce. By the end of 2011,Chinese companies had established more than 18,000 overseas fi rms in 178 countries and regions.

One way for China to ease the rest of the world’s fears about its extravagant corporate shopping sprees is to be more open about its vast poverty problem at home, said Lamy.

John Zhao, CEO of Hony Capital, a China-focused private equity investment firm, admitted there is some bad behavior by Chinese companies abroad. “But the vast majority of Chinese companies are trying to learn and follow the rules as they understand them,” he said.

Zhao said he had lost out on investment opportunities because of the image problem,citing the example of a German company selling out to a French rival, even though he had offered a higher price.

Nasdaq CEO Robert Greifeld noted that Chinese companies aren’t the only ones with a reputation problem.

“We in the Western world have had a long tradition of corporate misdeeds,” he said,citing Enron of the United States and Parmalat of Italy, both of which collapsed after years of hiding massive holes in their accounts.

He Yafei, Chinese Ambassador to the UN Of fi ce in Geneva, said overseas Chinese firms should honor their corporate responsibilities, fully respect the cultural and religious traditions of local markets, and make greater contributions to local economic prosperity.

“The international community is also supposed to coordinate efforts to fi ght protectionism and create a fair and open investment environment,” added He.

A stronger yuan

In Davos, the U.S. Treasury Secretary Timothy Geithner said China’s currency exchange policies were damaging to not just their commercial economic trading partners but also the sustainable world trading system.

In response, Li Daokui said the attack is totally unfair as the yuan has been continuously appreciating.

“Perceptions about the yuan exchange rate in the international community are absolutely groundless, as the yuan is probably the only emerging economy currency that has been rising against the U.S. dollar since August last year,” said Li. “Take India’s rupee for example. The currency has declined about 20 percent against the U.S. dollar, while the yuan has been rising continuously,” he added.

Since June 2010 when China restarted reform to the exchange rate regime of the yuan,the currency has appreciated by more than 7.5 percent against the U.S. dollar.

Taking into account the higher rate of domestic in fl ation in China than in the United States, the yuan has appreciated even faster against the U.S. dollar, added Li.

Especially during October and November last year, many Chinese private investors started using the yuan to buy U.S. dollars,which is an indication that the Chinese currency is near an equilibrium level,” said Li.

Because of a stronger yuan, China’s trade surplus has shrunk to around 2.3 percent of the GDP in 2011, down from 8 percent in 2008, according to of fi cial statistics.

“Perceptions about the yuan exchange rate in the international community are absolutely groundless, as the yuan is probably the only emerging economy currency that has been rising against the U.S. dollar since August last year.”

—Li Daokui, adviser to the Monetary Policy Committee of the People’s Bank of China and Director of the Center for China in the World Economy at Tsinghua University