Column

By ‘bailing out’ the West now, China will only help itself. But that’s a tough sell in Beijing

As financial panic gripped the world’s markets and economies over the past month, and Western leaders ran around like headless chicken trying to inject liquidity into the global financial system, their eyes turned forlornly to China, which is sitting on nearly $2 trillion in foreign exchange reserves. Yet, despite pitiful entreaties from Wall Street bankers to Chinese state investment agencies for cash infusions to save their collapsing institutions, Chinese leaders sat idly by, like appreciative audiences at a grand theatre.

For Chinese leaders, who have long suffered lectures from uppity Western free-market standard-bearers on the need to open up the Chinese financial markets, the cataclysmic events of the past month have provided fodder for unmixed gloating. At a meeting of the International Monetary Fund last week, the deputy governor of China’s central bank called pointedly for the IMF to increase its surveillance of developed nations, which suffered from “weak financial-policy discipline”. The boot is decidedly on the other foot this time around.

China’s reluctance to step up and help Western economies at their weakest moment in recent decades is motivated by several considerations. For one, China’s recent experience of making investments in Western financial institutions has recoiled on it. Last year, the country’s sovereign wealth fund, China Investment Corporation (CIC), invested $5 billion inMorgan Stanley and $3 billion in the New York-based buyout fund firm Blackstone. Those investments, small though they may be, have depreciated in value by over 75 per cent, a slide that began even before the recent market crash.

China’s investment managers have been shown up to be babes in the woods of international finance, and have come in for trenchant criticism at home, including from a resurgent ‘New Left’ faction within the Communist Party of China.

More recently, it’s been revealed that CIC has an additional $5.4 billion frozen in a US money-market fund that suspended withdrawals last month after huge losses on its portfolio. That will only turn up the heat on reformist-minded leaders in the Communist Party and inhibit them from rushing to “rescue” down-and-out Western financial institutions when their valuations are dropping by the hour.

More critically, the West is approaching China, hat in hand, at a time in China’s history when it is maximally inclined to batten down the hatches in preparation for the coming global economic storm. The US recession is spreading rapidly to Europe and even to the Asia-Pacific, where Singapore and New Zealand have hoisted the red flag.The effect of this ‘creeping recession’ will be felt most acutely in China, which powered its giant economy through its export zones.

In response to this collapse of its export markets in the US and Europe, China is contemplating one of its most ambitious economic realignments: it is looking to shift the focus of its growth from exports to domestic consumption, and from its coastal cities to the rural hinterland. Just this week, Chinese leaders endorsed a plan that seeks to double rural incomes by 2020.

But this transition will not be without its problems. For one thing, the pain of a global recession is already being felt, with the closure of thousands of factories in China’s export zones. In that respect, China is rather more joined at the hip with the Western economies for it to now insulate itself from the effects of a global downturn. Also, its domestic consumption, which accounts for less than 40 per cent of GDP, is nowhere near being as powerful a driver of growth as exports.

Economic pragmatism dictates that China should ‘bail out’ the West, inject liquidity into the global financial system and revive consumer confidence in the US and Europe, which in turn would drive China’s export-driven economy for a while longer. But the ideological mood in China disfavours any bailout of the West, even if, given the yin-yang balance of economic forces, China will only be helping itself.

Email: venky@dnaindia.net