By Wieland Wagner
Symbols of confidence are in demand. Local officials in Shanghai unveiled plans for a new skyscraper last week. The bold design is modeled on the image of a dragon, and at 632 meters (2,073 feet) it will be China's tallest building. It will tower over the World Financial Center, which recently opened in Shanghai and, as a result of the crisis, remains half-empty.
Things could get a lot worse, economists at the People's University in Beijing warned in a recent report. The Chinese economy, they wrote, will adjust to the new environment by progressing as unevenly as the letter "W," with growth declining next year to a greater extent than feared, a slight recovery in 2010 and another sharp decline after that.
Beijing, anxious to avert this horrific scenario, announces new economic stimulus measures almost daily. Last Wednesday, the central bank reduced interest rates by more than one percentage point for the fourth time in a row. China has not taken such radical action since the 1997 Asian financial crisis.
China's current economic policy is looking like a roller-coaster ride. Beijing raised interest rates several times until this spring, hoping to curb inflation. Prices were stimulated by raising the exchange rate of the yuan to the dollar, as well as by rising costs of raw materials and food. But no one mentions inflation these days. In fact, the world's factory is now trembling at the prospect of deflation, or a consistent decline in prices.
An employee works on a Santa Claus toy inside a factory producing Christmas decorations on the outskirts of Guangzhou. Demand for cheaply made Chinese goods has shrivelled with the global financial crisis.
Premier Wen's crisis managers are fighting on several fronts. Even before the global financial crisis, they did their best to prevent a loud popping of the country's overinflated economic bubble.
This led to a decline in prices on the Shanghai Stock Exchange by more than half, and a sharp drop in the real estate market.
Wen and his team are also faced with an enormous structural challenge. Three decades after the legendary reformer Deng Xiaoping opened up the People's Republic to capitalism with his reform policies, the Chinese low-cost factory appears to have reached the end of its useful life. The strategists in Beijing sense that a system in which China produces obsessively and the rest of the world does little more than consume cannot function in the long term.
To address this new reality, planners in Beijing have cautiously begun to lift their country to the level of a high-tech nation. With a more stringent labor law, and by temporarily repealing export tax rebates and imposing stricter environmental protection requirements, the government was partly responsible for the shuttering of about 67,000 low-cost factories in the Pearl River Delta, including shoe and textile plants. Some operations moved to countries where costs are even lower, like Vietnam and Bangladesh.
But then change came far more rapidly than planned. First, a devastating snowstorm wreaked havoc on the government's industrial policy plans, and then there was the earthquake in Sichuan Province. Finally, there were the Olympic Games.
The Olympics were suppoed to give a powerful boost to China's continued industrial ascent. Japan and South Korea had seen booms after their respective Olympics, in 1964 and 1988. But in China the Games actually curbed growth. To keep the skies blue over Beijing, authorities ordered countless factories in northern China to be closed weeks before the Games began. And, fearing terrorist attacks, they banned the transport of chemicals and other hazardous goods. Many companies still have not recovered from the temporary shutdown.
The world financial crisis, which now threatens to expand into a global recession, is taking care of the rest.
China is far from being in an actual recession -- that is, a shrinking economy. Nevertheless, the country must provide new jobs for an additional 10 million migrant workers flooding into the major cities each year.
To offset declining demand from abroad, Beijing is now trying to stimulate domestic consumption, as the Communist Party eyes the country's 800 million farmers as potential new consumers. It plans to allow farmers greater control over the government-owned land they farm. But private consumption, which now contributes to only 40 percent of China's gross domestic product, cannotbe created by fiat. Beijing will have to improve the social welfare system to encourage the Chinese to spend more and save less. Most rural residents have neither health insurance nor retirement pensions.
The current crisis is also likely to intensify trade tensions between the world's factory and its biggest customers, the European Union and the United States. In October, China's trade surplus climbed to a record $35 billion, mostly because China, as a result of the crisis, imported drastically fewer goods than in the previous month. There is plenty of material for bilateral talks, and yet Beijing, angry over French President Nicolas Sarkozy's plans to meet with the Dalai Lama, called off its summit with the EU in Lyon that had been planned for this Monday.
Despite the crisis, China remains undeterred in pursuing its global ambitions. In the presence of President Hu, the heads of the state-owned Chinese shipping company, Cosco, signed an agreement with Greece last week. Cosco plans to build its own container terminal at the Athens port of Piraeus -- as a strategic launching pad for Chinese trade with Eastern Europe.
Translated from the German by Christopher Sultan.
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