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China to the rescue?

October 6th, 2008 · No Comments

The role of China in the international economy is very interesting. It’s economy is way more open than would be considered normal for the size of its economy, so the economic interwovenness with the rest of the world is high. And its role, despite all the retoric, has been quite pro-capitalist..

We have earlier reported on the remarkable role of ‘communist’ China coming to the aid of capitalist bosses in America. By integrating hundreds of millions of cheap labour into the world economy and flodding markets with cheap industrial exports, China has had a deflationary effect on the world economy and shifted the power balance between labour and capital in the latter’s favour, increasing the return on capital.

The deflationary effect (and the large US Treasury purchases) enabled much lower interest rates in America, and that has been a conducing element in the housing bubble that led to the present malaise.

So, until a few years ago, one could say that communist China has aided the capitalist in the US, and now, they have to do it all over again.

The deflationary impact of China has been quite moderated in the last couple of years, as currency revaluation and large wage increases have made Chinese exports more expensive. These were slowing down pretty significantly even before demand began to falter in earnest in the developed economies, but now that has accelerated.

In a reverse that seems too quick, China is now looked upon as to save the world economy by stimulating domestic demand. Chinese authorities are already doing that (especially now that the inflation threat seems to be slayed), but whether China can shoulder the weight of the world economy by serving as the market of last resort seems doubtful, to say the least.

It is true though that the financial position of China is quite sound, and they are, for instance, embarking on huge ($400B) infrastructural program to modernize their economy and stimulate domestic demand. But it’s purpose is not to save the world economy (although they are likely to continue buying up US Treasuries, financing a large chunk of the Paulson plan), as the slowdown in China itself is creating a headache for authorities.

Growth below 8% might be seen as the ultimate dream in the developed economies, it is seen in China as destabilizing, as China needs to create millions of jobs for poor people who come from the countryside in search of a better future. And that could potentially threaten the legitimacy of the communist regime. And, politicians will be politicians, this is a prime motivator for action..

Tags: The Markets