Worker pulls down Olympic banners in the centre of Beijing after the Games

China’s “miracle” economic growth rate, so impressive in recent years, began to falter in the middle of 2008. The global financial crisis, which affected China’s most important export markets, took its toll, although expansion at the over 10 percent level continued. That was considered in China now as rather slow progress.

What the government in Beijing had to do was attempt to cool the economy threatened by a high rate of inflation, but without leading to stiff reductions in production and jobs.

Inflation eased from 8.7 percent in February to 4.9 percent in August. Interest rate cuts were made in September. Capital controls were introduced later. Foreign exchange reserves rose by US$96.8 billion in the third quarter of 2008. But commentators were saying that it looked as if the tide of speculative capital that had been rushing in to the country had finally turned.

The reserves increased in September, but were well short of the foreign exchange generated by the record US$29 billion trade surplus and US$9.9 billion of foreign direct investment.

The sensation of the share market was the sharp decline of almost 70 percent in the Shanghai Composite Shares Index. China used to be the worst performing stock market in the world. At the beginning of 2008, that was still the position because corporate earnings were so far below expectations.

Figures up to the third quarter of 2008 suggested that companies quoted on the exchange might not only expect slower growth, but even as 2009 unrolled, a modest decline. Analysts put a figure to the meltdown for quoted companies making a combined six-month loss equivalent to the gains they had made in the same first half period of 2007.

It was in June that the international financial and trade crisis had its first damaging impact on China’s exports. The trade surplus fell by 20 percent in October compared with same month in 2007.

A lobby had been arguing for the up-valuing of the Renminbi to be slowed down to protect Chinese traders. It appreciated by 7 percent against the dollar in 2008. It got to the point where the Chinese actually complained about the weakness of the dollar! In a rare admission that some of the South-East Asian countries were more advanced than China, it was said: “We are not the Asian tigers. We need time to upgrade the structure and to handle the pressure.” Those were the words of Zheng Xinli, Deputy Head of the Communist Party’s research office.

Actually, exports from China were maintained better than observers had expected. Retail sales in real terms rose by 15.4 percent in July over the same period in 2007.

The Government tried to engineer a gradual slowdown of the economy, while still addressing the risks of inflation. In fact, exports grew in August, year-on-year, by 26.9 percent.

A direct attack on the undue reliance of Western governments on the market mechanism came in May from Liao Min, Director-General of the China Banking Regulatory Commission. In practice, he claimed, they tended to overestimate the power of the market while overlooking the regulatory role of the government, and this “warped conception” was at the root of the sub-prime crisis.

The cautious regulatory policy of the Chinese banks enabled them to come out of the credit crisis hardly affected, apart from the Bank of China. One bank even expanded, in the first big takeover by a PRC bank outside China. In June, China Merchants Bank said it would buy Hong Kong’s Wing Lung Bank for US$4.7 billion.

Western countries complained in the latter part of 2008 that China’s imposition of export taxes on key raw materials needed in the steel industry were unacceptable under WTO rules.  

They gave advantage to domestic producers.

This kind of pressure from foreign trade partners escalated during the year. It came home to Beijing when the WTO ruled against China’s argument that the position that a surcharge on car parts imports was needed to prevent the circumvention of the car duty – by simply importing large chunks of vehicles for assembly in China. The US, EU and Canada took issue with this in the WTO.

A topic that was also bitterly argued in the WTO was the ability of China’s exports partners to bring in anti-dumping measures, where they could prove that exports were being made by China at prices below those in the Mainland market itself. The WTO reported that in the first half of 2008, there was a 78 percent increase in new measures by India alone. But it was products exported from China that came to be the most frequently subject to new anti-dumping measures during the same half-year. Sectors affected in particular were chemicals, both metals and plastics.

There were two unusual events that must be counted as triumphs for China. One of these was the Olympic Games in August, hailed by the Chinese as the “millennium games” heralding the dawn of the “Asian century”.

With a billion people estimated to have watched the opening ceremony, the Games were a public relations success, capped off by China winning the largest number of gold medals (51) in the history of its participation of the Olympics. The US came in second with 36 gold medals.  

The other triumph was the orbiting of the Earth by Commander Zhai Zhigang in China’s first spaceship. Again, rivalry with the United States was at the top of Chinese minds and for a still developing “emerging” nation, the space achievement was remarkable.

Equally significant was the talk at last of land reform coming to China. Some means by which farmers could sell their farms privately was necessary, it was felt, for the benefit of agriculture. A privatisation of land could be on the cards, although it might take several years to realise.

When the real crises broke, and not only over the Mainland, in 2008, China joined the rest of the world in taking fundamental measures to protect the population from its impact. The result was what The Economist called an “eye-popping package” of economic stimulus. It would take some time to permeate down through Chinese society, but it was a deadly serious attempt at reform.

The few hints that had been dropped earlier about a change of attitude towards Taiwan were hardened by a more accommodating policy on the part of the new President of Taiwan. His parliament, for example, legalised the conversion of Renminbi, and there were substantial moves in the areas of aviation agreement and trade. There was a cross-strait liberalisation movement, which gelled with apparent new trends in Beijing.

The same cautious welcome could be given to the gradual acceptance by China of the call for rational and scientific policies in matters affecting the environment.

The landmark interview of Zhou Tianyong in London’ Daily Telegraph was remarkable not so much for what it said, but for the fact he felt free enough to say it.

He was not the only one. There were other outspoken liberals who found it possible to state unpopular views without being picked on by the communist rulers. It was not so much the conversion of the politburo as recognition, for the first time, that “the backwardness of the political system is affecting economic development”.

So what may we envisage for 2009? It would be rash for any commentator to be specific about a period where policy will be subject to a much wider range of influence. It does seem clear that the authoritarian state system will continue, but “it may go liberal” at the edges. Foreign analysts do not harp so much on the Marxist – Leninist origins of the Chinese Communist Party, but rather explain with some subtlety why China finds it so difficult to swallow democracy. It seems not enough to say that China ought to go democratic, and the more telling headline in the Financial Times recently was that “China needs proof of democracy”.

Chinese readers find it relatively uninteresting to be told of rival ideologies, but when a Deutsche Bank researcher concluded that China would account for more than 40 percent of global demand growth for oil, copper, nickel, steel, iron ore and aluminium during 2009, there was appreciative interest.

The environmental challenge is a very large one, and it is only recently that political speeches at a high level have warned earnestly of the danger that the Chinese economy may lose from neglect of the environment what it gains through industrialisation.

The Financial Times argued in an editorial in August that in purchasing so many products from China, Western partners “have moved greenhouse gas emissions to a place where they will not be curbed by the schemes of Western regulators… here they make a wonderful excuse for Western inaction”.

Another sign of more careful balancing of conflicting national interests can be seen in the unexpected warming up of the relationship with Taiwan. It was agreed during the year that reciprocal offices be established on either side of the Taiwan Strait, and there were also welcome changes in Beijing’s handling of economic links with Taiwan.

This followed the new President Ma Ying-Jeou, who presided over the setting up of direct flights over the straits and was given two pandas to show diplomatic goodwill. Direct shipping and daily flights would begin by the end of 2008. President Ma conceded that the Chinese leaders looked at Taiwan with uncertainty. Would Taiwan democracy throw up another president in four years’ time, who would discontinue the new concessions? And there are still, after all, more than 1,000 missiles aimed at Taiwan.

The historic talks that set all this in motion in Beijing were opened by Chen Yunlin, heading the Mainland delegation. The Taiwan delegate responded in kind, observing that the meeting “lay the foundations for long-term peace and stability”.

This, after all, was the sensible basis on which Deng Xiaoping had turned economic policy around to better suit Chinese conditions and to emulate the best experience of Western capitalism. That trend came to fulfillment when the fiscal package, so Keynesian in concept, came to a head.

As a senior Standard Chartered economist based in Shanghai judged: “We do not think recent comments signal an imminent change in either monetary or foreign exchange policy… but the tide does seem to be turning.”

They were brave decisions to take, with ministers disclosing that the rate of increase of industrial production had fallen to its lowest level in seven years.

Fiscal revenues rose by 33 percent in the first half of 2008, but fell by 0.3 percent in October. Besides, Ha Jiming of China International Capital Corporation explained that China had focused its economic development on heavy industry, creating severe overcapacity.

To cap it all, an optimistic prediction for the next 10 years that China would become a working democracy, basically finishing its political and institutional reforms by 2020. Zhou Tianyong, an influential adviser to the Communist Party’s Central Committee indicated that “religion should… be given a wider platform to play a positive role. We should protect religious freedom. We should recognise that the Government should serve the people and society.”

China is thus struck with cruel blows from the external economic sector, just as it was girding itself for a decisive advance in political liberalisation.

Actually, the Chinese Communist Party system already protects state and people from the turmoil of earlier revolutions, including Mao Zedong’s Cultural Revolution in the 1960s. Today’s President Hu Jintao took over from Jiang Zemin six years ago – there was no shooting, no bombing, no serious interruptions of the economic development programme.

That peaceful transfer of power was emulated when Hu Jintao succeeded as President in 2002. Most Asian countries suffer from the power claims based on family or military force. All that was achieved with economic growth of more than 10 percent a year. The fruits of those Dengist policies were to be enjoyed by one of the most oppressed populations in Asia. It is a tragedy that these gains will be severely threatened by the international financial chaos.