Unrest in China

by Ryan Avent

Most stories on economic conditions in China will note, at some point or another, that a growth rate between 6% and 8% annually is necessary to provide enough employment growth to prevent civil unrest. It’s never clear just where this figure has came from, but there’s certainly truth to it. The IMF has reduced its forecast for Chinese growth this year to between 6% and 7% (and further downward revisions are likely), putting China well within the zone in which government officials begin to get nervous.

Yves Smith, in considering the latest dust-up over China’s currency policy, writes:

Japan has played up its basket case status, when it has in fact (until recently) had a robust export sector. Why? If the rest of the world thinks Japan is in terrible shape, no one will bust their chops for keeping the yen weak, which worked until carry trade unwinding drove it from the 115-125 level versus the greenback to its recent high of 86 and change. [Premier Wen Jiabao] should instead be stressing how bad things are.

He should, except that unlike Japan, which is a mature Democracy, China has to rely on the confidence of its people to prevent a state crisis. China wants to preserve its trade advantages, but it can’t afford to play poker with the west by underselling the strength of its economy, because there are hundreds of millions of Chinese workers counting on strong employment growth.

And Ms Smith links to a piece noting that confidence is waning as Chinese exports collapse:

On January 15 there were pitched battles at a textile factory in the nearby city of Dongguan between striking workers and security guards.

On January 16, about 100 auxiliary security officers, known in Chinese as Bao An, staged a street protest after they were sacked by a state-owned firm in Shenzhen, a boom town adjoining Hong Kong.

About 1,000 teachers confronted police on the streets of Yangjiang on January 5, demanding their wages from the local authorities.

In one sample week in late December, 2,000 workers at a Singapore-owned firm in Shanghai held a wage protest and thousands of farmers staged 12 days of mass demonstrations over economic problems outside the city.

And so on. Now, as Ms Smith notes, this is partially China’s fault for insisting on exclusively export-led growth. Had it done more in recent years to boost domestic wages and consumption, the collapse in global demand would not be hitting China this hard. But this also reflects the danger in policies like the “Buy America” provision Matt mentioned last week. When you have folks like John Judis arguing, bizarrely, that the world will ultimately thank America for addressing imbalances by raising protectionist barriers, it’s clear that the pundits aren’t thinking this through.

Yes, America needs to save and produce more, and China needs to spend and consume more. Getting there presupposes a functioning trade system. If developed nations add to protections bit by bit, China will simply collapse as its export lifeblood goes dry. China, it’s worth recalling, has 1.3 billion people and nuclear weapons.

The role of the superpower with the popular new president in this situation is to provide leadership. There is a deal to be struck, in which America leaves its markets open and quits fretting about China’s currency, while China adopts policies to boost wages and pursues a consumption oriented stimulus. That’s a deal that leaves everyone better off, and which doesn’t unnecessarily pressure an economy under considerable stress.