Carry On China

The scores are in, and China has proved ‘decoupling theory’ right. As far as hosting the Olympics is concerned, China is in a league of its own. China has produced a ravishing spectacle by going its own authoritarian way. It has spent a record $43 billion (Rs 1.85 lakh crore) to construct stunning stadia, concert halls, airports and subways. It has ordered two million cars off its roads, and shut down thousands of smoke-stack factories to bring Mediterranean blue skies over the capital. It has sequestered water from farmers in neighbouring provinces to nourish 40 million flower pots. It has banished tens of thousands of migrant workers, who built the dazzling edifices, from Beijing. And Chinese athletes have crowned the success story with a record 51 gold medals. As China’s official news agency coyly claimed, the Games “witnessed the rise of Asia”.

In the aftermath of this spectacular decoupling of China from the past practices in organising the Olympics, one can ask if it can do the same with the economy. Can China ignore what has been happening to the world economy — as the decoupling theory suggests — and move on with its blazing speed of growth? The answer so far is mixed. China’s exports have slowed, but even its lowered growth still packs a punch against the lacklustre performance of the industrialised nations. With over 20 per cent of its exports going to the US, and 54 per cent to high-income economies where joblessness is rising and consumer confidence falling, can China keep its growth engine humming along? Beijing will find the monopoly of political power which enabled hosting a spectacular Olympics will be far more constrained when the issue is running the economy.

The Chinese government can allocate resources from its bulging coffers to build whatever structure it wants, but it cannot control foreign demand for its goods. With the euphoria of a successful Olympics behind them, as one foreign economist in Beijing in close touch with officials says, they are increasingly anxious that a fall-off in US demand will badly damage China’s vast export machine of textile, footwear and electronics.

Take footwear, for instance. Nine out of 10 pairs of shoes sold in the US come from China. That may now be changing — not only because Americans are buying fewer shoes, but also because wage pressures in China are leading to rising prices for consumers. More than 1,000 shoe factories in Guangdong province were shut down in 2007, with production moving to lower- wage countries. Similar pressures are building on its high-flying textile sector, where the government recently tried to sustain some momentum by increasing export rebates. In the first few months after the subprime crisis hit the US, there was not much impact on China’s exports. But all of that is changing.

To be sure, Chinese exports to the US are still growing, but at a much slower pace. Economists now estimate China’s annualised export growth in 2008 will slip to 7 per cent, down from 21 per cent last year. From the double-digit growth of the past five years, China is expected to settle down to a lower — though still respectable — 8 per cent. In view of the anaemic growth prospects in the

industrialised world, China’s sustained contributions to global growth will be welcome. The fact that, despite falling exports, Chinese imports have continued to grow at a healthy clip adds some weight to the decoupling theory that sees the rise of an economy independent of the US and the industrial West.

But in this increasingly interdependent world, can China, or any country, for that matter, be totally decoupled from the rest? Given the size of its economy and population, China is certainly in a position to hew its own course and, in the process, pull the rest of the world along. To do so, China’s leaders have to be ready to loosen their grip on the economy, and allow its private companies and citizens greater breathing room. In addition to obvious recourses such as cutting interest rates, encouraging bank lending and promoting consumer spending, Beijing could loosen its control over the commanding heights of economy through state-owned enterprises (often a sinecure for children of senior party officials) and open up the banking, telecom and energy sectors. If China were to take up this path of domestic expansion and boosted global growth, the world would cheer as the Chinese did at the Olympics: Jia you, China. Go China, Go!