As the United States and Europe continue to reel from the financial fallout, Asia is heaving a collective sigh of relief that this time, it is at least not their fault. Iceland’s biggest banking crisis ever has forced its almost bankrupt government to turn to Russia for a US$4 billion loan, raising eyebrows everywhere as to what this means for geopolitics in Europe.
IMF’s $200 billion war chest is dwarfed by reserves held by China, Russia and other emerging markets which are expected to surge to $6.5 trillion by the end of 2009, and so it is by no surprise that going forward, battered economies will increasingly turn to these places for help. No way, Jose, at least not for China, says Paul Denlinger of China Vortex who explains why he thinks China won’t consider throwing out a lifeline to the West:
- Successive Chinese regimes have always lost power when they coddled the urban elite and ignored the needs of the countryside. This was how Mao rallied the Communists, surrounded the cities (the strategy was called “using the villages to surround the cities” or “乡村包围城市”), then threw out Chiang Kai-shek in 1949. Hu Jintao and Wen Jiabao know this, and know that they need to swivel around and develop the countryside so that the wealth gap can be narrowed.
- The Chinese government will focus on developing a new size of town, which in Chinese is called the 城镇 or village town. This will be mainly a distribution, education and trading center for farmers and their families in the immediate vicinity. Population will be 250-500K.
- For the next 15-30 years, the cities will stagnate in growth. People will not lose their homes the way they do in the US since China does not have foreclosure laws, but their salaries will not go up. Many of the wishes new university grads entering the workforce hoped they had will just become dreams. Somehow they will have to learn to live in this new drastically changed environment.
- The Chinese government is already talking about the development of rural infrastructure including rural insurance, microlending, etc.
- Many young Chinese who would have scoffed at the idea of working in the countryside will now go there, simply because job opportunities in the east coast cities will be limited. This, in turn, will help to clean out the party apparatus in the countryside, which has been seen as generally corrupt.
- Western companies will not benefit too much from this next stage of development because they do not, for the most part, understand how to sell to the bottom 2/3 of the Chinese pyramid. Most only know how to sell to the top 1/3 in the cities. Companies which will prosper are those who sell to the “local local economy”, or bottom 2/3, as Jack Perkowski calls it, as opposed to the “local foreign economy”. The local foreign economy is city-based on China’s east coast; the local local economy is mainly rural and inland.
- The companies which will survive and prosper are the swift pivoters who can quickly learn how to sell to the “local local economy”. This means that they made some money in export manufacturing, but now switch to sell domestically to Chinese consumers in the new inland towns and cities. Not many companies can do this, but those that do will do well. Most will be entirely new businesses, and local Chinese brands will have an advantage.
- This next stage of development will require a lot of money. Those foreign exchange reserves of US2T will be needed by China. Now, if you ruled China and you had the choice of 1) lending the money to the west, which has just acted about as irresponsibly as anyone can imagine or 2) investing the money in China to narrow the wealth gap between rich and poor, city and countryside and keeping your regime in power for more than a half century, what would you do? I think that it’s a pretty easy choice.
In the region, Pakistan, fresh from the shocking bomb blast at the Marriott hotel in Islamabad, is also starting to feel the heat from the global financial turmoil, sending the newly appointed President Asif Ali Zardari (widower of the late Benazir Bhutto) scrambling to look for help. And who does he turn to? Saudi Arabia and China. Zardari has arrived in Beijing on his first visit as head of state with cap in hand to ask for a soft loan of US$500-US$1.5 billion to stave off the crisis. The Financial Times adds:
When he arrives in Beijing on Tuesday, however, Mr Zardari is assured of a warm welcome. Similar sentiments are echoed on the streets of Pakistan.
His belated arrival has not been seen as a snub by Beijing. Sun Shihai, director of the south Asia research centre at the Chinese Academy of Social Sciences, says China is deeply committed to supporting its neighbour and notes the relationship has already survived Beijing’s drive to improve ties with India, a once mutual enemy.
The US too has been rapidly improving ties with Delhi, and Pakistan has looked on enviously at the international sanction given the US-India nuclear co-operation pact. Still, Pakistan may see slow progress on its push to get more nuclear power plants from China.
Pakistan already has one China-supplied reactor in operation in Punjab province and another under construction. It is looking to Beijing to help it build the bulk of more than 8,000 megawatts of planned nuclear electricity generating capacity.
Chinese analysts wave aside concerns that civilian nuclear co-operation has been complicated by revelations that Abdul Qadeer Khan, the founder of Pakistan’s nuclear weapons programme, passed technology to Iran, Libya and North Korea. But Mr Sun says Beijing will want to take things step-by-step. “I think [it will] be hard to start a new project before the old one is finished,” he says.
Chinese analysts are also cautious on how much Mr Zardari can expect in financial support. Chen Jidong of the Institute of South Asian Studies at Sichuan University says Beijing will certainly do something for its “friend in need”. “[Mr Zardari] will not be sent home empty-handed,” he said.