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Take heart, China is no big deal

M Ramesh

THE more you learn about China, the stronger is the impression that fears about long-drawn-out, intense competition from the Dragon are misplaced. China, the world's biggest enigma, may after all be no big deal.

Dr Gerard Lyons, Chief Economist, Standard Chartered Bank, who was in Chennai recently, provided some revealing insights into what is happening in China. He did not exactly say that China is a bursting bubble, but it is possible to draw such an inference.

Consider this: 85 per cent of bank credit in China is not commercially driven. Over half the loans are not repaid at all. Non-performing loans equal 15 per cent of GDP, compared to about 5 per cent in India. This has got to change — Dr Lyons reckons that international pressure will make China change this sooner than later. When that happens, the Dragon's competitive edge is bound to get a little blunted.

Last year, Standard & Poor's calculated that if bad debt in the banking system is included in government debt (since eventually the government may need to bail out the banks), it would amount to 70 per cent or more of GDP. Include unfunded pension liabilities, and the ratio rises to 100 per cent.

The Chinese authorities "raised" banks' reserve requirements to — guess what — 6 per cent! Here we have 25 per cent. Over time, banks' reserve requirements in China will have to rise further.

Second, China is under pressure to up-value its currency. The US believes that the Chinese currency is undervalued, which gives China an unfair advantage in trade. Experts such as Mr David Eldon, Chairman, HSBC, and Dr Joseph Stiglitz, former World Bank Chief Economist, are, however, of the view that China should not revalue its currency, as the growth of Chinese exports and, hence, its industry has a positive spillover on economies such as Japan.

Japan is, for the first time since 1990, coming out of a stagnation, and Dr Lyons believes its growth is led by China. However, it is a moot point whether the Chinese authorities will be able to hold out against the mounting international pressure to up-value the yuan. When that happens, the country's competitive edge will get even blunter.

Third, China has committed to reducing its import tariff and phasing out its export subsidies. According to India Trade Outlook, a publication of DHL: "China is expected to reduce its weighted average tariff from the present level of about 20 per cent to 8 per cent over the next two to six years. India will benefit from this, as most of the top commodities imported by China are the principal commodities in India's export basket".

Fourth, China will have to address the issue of income imbalance between its urban and rural centres. Dr Lyons believes the issue of rural poverty in China is "very severe". Addressing that issue will affect the country's ability to subsidise its exports.

Today, the world over, China is more in focus than India is. Why? According to Dr Lyons, the answer is that while India is a known commodity, China is not. Novelty attracts, and everybody wants to get his foot in. However, while India is getting better, China is looking wobbly.

Also, the supply chain disruptions that happened during SARS caused countries such as the US to look to alternative production sources, such as Latin America. China may look less attractive. And China has to do a lot of catching up with the world in terms of drafting new legislation that is contemporary and putting in place an independent judicial system.

Yet another reason why China will look less formidable: China's biggest market — the US — is growing today, but this growth is not expected to last long.

The reasons for this range from peacekeeping in Iraq to the $500-billion current account deficit. While this will affect all countries, China will be worse hit than others.

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