China’s big challenge in 2009: a better path

Eight is an important number in China.

Its association with good fortune makes it a big hit for licence plates and mobile phone numbers. It’s no accident that the Beijing Olympic Games opened on the eighth of the eighth, 2008.

But the number has another significance. If GDP growth falls below 8%, according to popular wisdom, China’s masses will turn the country into a simmering cauldron of unrest.

That thesis has been bandied about by politicians and economists for years. But it could soon be put to the test.

In 2009, China’s growth is expected to fall to 7.8% according to HSBC economists, from almost 12% in 2007, driven down by the collapse in China’s exports to the crisis-wracked developed world.

Social unrest is a rising threat in China. Recorded incidents increased almost eight-fold between 1994 and 2005—after which the government stopped giving comparable data.

When growth fell from 11% to 4% in 1989, ugly protests erupted. While the state apparatus has been tolerant of recent peaceful sit-ins by factory workers, co-ordinated action might leave only two options: Impose order the hard way, or renegotiate the terms of government.

Fortunately, the “theory of eight” is probably wrong. What really matters isn’t how much China’s growth falls, but what happens to unemployment.

The two aren’t perfectly linked. A collapse in capital-intensive industries, for example, would have less of an effect on jobs than a more modest decline in lower-value, labour-intensive work. Besides, unemployment isn’t the only reason the masses complain. As they become more prosperous, they are more likely to protest about non-economic issues such as pollution and corruption.

What’s certain is that unemployment is rising. Urban joblessness is already at 9.4%, according to the Chinese Academy of Social Sciences. The real figure may be higher, and the official national unemployment figure of 4% is almost certainly too low. Export sectors alone account for around 50 million employees, according to HSBC estimates—and around four million have been laid off this year.

Meanwhile, economic volatility, which may have more impact on the lives of China’s masses than any single number, is rising.

A stable economy rests on two pillars: consumer and government spending, which tend to move slowly—say, 1% or 2% a year. But 51% of China’s growth comes from investment and exports, which can fluctuate by tens of percent a year. Huge falls in the equity and housing markets add to a sense of rapid, uncomfortable change—especially in a country only three decades into its modern economic history.

Can China manage this tricky period?

Its almost miraculous economic achievement until now suggests it can. Government plans to spend Rmb4 trillion ($584bn) will help. If just 40% of that is new money, it should lift GDP growth by around 3 percentage points in 2008 and 2009—though that’s already factored into the 7.8% growth estimate. If implemented fast enough, it will absorb masses of workers into meaningful employment, in coastal cities and in the rural interior.

The question is what happens after the stimulus.

At best, China will use the giant spending spree as a prophylactic against discontent while managing the transition to a broader consumption-led economy—where widespread, stable employment means the risk of unrest is systemically reduced. At worst, it will be no more than a stopgap, until the US demand picks up again.

Finding the better path will be China’s big challenge in 2009—and it has nothing to do with luck.-livemint