United States market declines on Monday were well under way in New York before it became clear that the US House of Representatives would vote down Treasury Secretary Henry Paulson's US$700 billion financial sector bailout proposal then in front of them. Every member of the chamber is up for re-election this year, and the Republicans who made the difference on the bill had been hearing from their constituents against it.
This was a revolt, by telephone and e-mail, of ordinary people against the financial technocracy who had persuaded the government to authorize their agent (Paulson) to spend their money anywhere he thought necessary with hardly any oversight, while doing nothing for those people themselves (who pay that money in tax) suffering the consequences imposed on them by those on Wall Street who have followed the financial system's incentive structure so well that they have destroyed it (but not themselves).
All this is pertinent to Asia, because much of the recent decline in commodity markets began with the collapse of Lehman Brothers. That event heightened skepticism over continued global growth, leading to fund liquidation.
Now it is true that the nearly one-quarter decline in the price of copper over the third quarter may be attributed at least in part to concern over the future level of Chinese consumption. And even a moderate slowing of the Chinese economy's growth rate may significantly affect global commodity prices.
China had been expected to provide close to half of growth in global demand for industrial metals in 2009. Yet falling demand in internal markets from the construction to the automotive industries has already led to declines in steel production, as local producers also seek increased exports, even as demand is falling off internationally. Indian iron-ore producers are now complaining that Chinese partners are trying to renegotiate agreed prices downwards or simply reneging on contracts.
While much attention focuses on the plight of export-oriented manufacturing in the east of China, the hinterland and west are no better off. Competition among political prefects outside the coastal areas goes back at least as far as the "Go West" campaign at the beginning of the decade. However, beyond being a sloganeering framework for the West-east Pipeline that was built from Xinjiang to the coast (the project that opened the door for foreign capital investment in infrastructure), that campaign was not much more than a chance Beijing offered to regional elites to demonstrate loyalty to the political center.
However, since the center never clarified many of the transport and communications improvements that it promised, nor provided adequate funding for them, it was left to the regional elites to generate the capital for these projects, often by local taxation, which more than occasionally went towards corruption and payoffs rather than for the intended capital investment.
The result was decreased consumer saving, and therefore less capital available for local business investment. The regional government projects and their associated flagship industrial specializations were proposed from the bottom up and never integrated with each other or on a national level.
Meanwhile, with the increase of world commodity prices beginning in 2004, the infrastructure in the east increased its loss-making, and light and medium industry begin to move "westward", but not yet even to the center of the country, in the search for lower wages and fewer bureaucratic controls. The deceleration of China's economy has, as a result, been oncoming for some time, even if it did not show up in the statistics under the past year.
Consensus estimates of the growth rate for the second half of the current year fall below 10%; even if the growth rate for the second half of 2008 is off, a slight Olympic blip in the third-quarter data may be compensated for by an increase (or lower decline) in the fourth. Factories were shut and restrictions introduced on use of automobiles during the Olympics, to decrease pollution in Beijing for tourists, yet it is hard to attribute any expected decline of Chinese growth to the Olympics. A consensus is emerging that Chinese economic growth will fall next year, even if it does not fall as much as doomsayers suggest. A decline from 10% to 8% annual growth seems a more than reasonable estimate.
Yet even such sanguine estimates are based on relatively short-term perspectives. They do not take into account the fact that the current conjuncture represents for China the strongest shock from the external economic environment since "liberalization" began under Deng Xiaoping more than three decades ago. Even the Asian economic meltdown a decade ago did not affect China as much because the country did not have open capital markets as it does today.
Its exports, geared to consumer markets in countries belonging to the Organization for Economic Cooperation and Development, were relatively unaffected during the Asian crisis of 1997-98 because this did not change the growth trajectory of those countries' national economies.
The current situation will have much different results, as can be seen already in the decline of the Australian stock market and also the Australian dollar, which has lost nearly a fifth of its value in just a few months and is projected to continue declining through much of next year.
Other raw materials producers, especially those in the developing countries of Africa, where China has established a high and highly criticized profile for exporting its "model" of industrial organization, are already more deeply affected and will fare even worse if the current crisis enveloping the entire globe continues.
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First published in Asia Times Online, 2 October 2008.