Will China be next after Indonesia?
S. P. Seth
Hong Kong was the jewel of China’s economy even before its return last year from British rule. Much of China’s foreign investment was either Hong Kong-sourced or routed. The territory was also a significant source of China’s foreign trade and its trade surplus. With the “one country, two systems” formula governing Hong Kong’s return, China hoped not only to continue reaping old economic benefits but also to use its massive resources to restructure the mainland’s archaic economy, such as the reform of its loss-making state enterprises.
But Asia’s economic crisis hasn’t spared Hong Kong. The news is of deepening economic malaise. Its economy is contracting, with soaring interest rates, a 50 per cent decline in property values, a stock market plunge, flagging retail sales, tourism nose-diving, and rising unemployment. According to Tung Chee-hwa, the territory’s chief executive, the economy is “slowing down very substantially.”
What it means is that Hong Kong is in deep trouble, with its inevitable effect on China’s economy. For instance, Hong Kong’s misfortunes will affect its role as economic facilitator for the mainland; with adverse effects on China’s foreign trade and investments. Besides, because Hong Kong is now a part of China, its problems become China’s problems. The economic contagion, therefore, cannot be quarantined. And that, at a time, when China itself is having serious economic difficulties.
Though China has so far escaped lightly (on the surface) from Asia’s economic crisis, the prognosis for the future is not good. Its growth has slowed, unemployment is rising fast, compounded by the closure/merger of loss-making state enterprises, foreign investments are no longer robust, exports are affected, the banking sector is ailing, and the real estate market is in crisis. Sure, China’s controlled economy has enabled it to ward off speculative raids on its currency (being not fully convertible). But the sharp devaluation of the regional currencies is bound to affect China’s international competitiveness resulting in reduced exports.
Beijing has committed itself not to devalue its currency; but how long it will be able to maintain that commitment (when its exports start falling, to hurt its economy) is anybody’s guess. During his recent European tour, Prime Minister Zhu Rongji sought to use the argument of China’s economic responsibility (by not devaluing its currency) as deserving of reward by way of increased foreign investments in his country. The implication being that without a corresponding economic advantage elsewhere (foreign investments to bolster up China’s domestic economy, for instance), Beijing might not be able to deliver on its currency stability. China is sending the message that if its economic circumstances force Beijing into devaluing its currency (thus setting a chain of competitive devaluations), it will be disastrous for the region and, possibly, for the world. Therefore, the world has a stake in its economic stability and growth, and a consequent obligation to help China. There is no evidence so far, though, that the world (meaning the rich industrialized countries) is listening.
With Hong Kong on a sharp downward slide and mainland China facing massive unemployment, the situation is pretty dismal. The overthrow of the seemingly impregnable Suharto regime in Indonesia has shown that social and economic turmoil is no respecter of “strong” political orders/systems. It should send a serious message to the rulers in Beijing about their own political mortality. China’s political elite is regarded with similar disdain by its people as was the Suharto government. The “princelings” of the Chinese Communist Party (children of top government and party functionaries) are as hated in China as were the Suharto children. China might not be facing an imminent economic collapse like the one in Indonesia. But with the unemployment of over 200 million (from natural accretion, and from the closure of state enterprises), the potential situation in China is not unlike in Indonesia. When people have no jobs and no social safety net, the tendency is towards mob violence and systemic breakdown. The Chinese leadership, therefore, has no reason to be coy about the country’s situation.
The developments in Indonesia demonstrate that economic and political reforms must go hand in hand. And the lesson for China is that as its economic situation becomes perilous (from burgeoning unemployment and likely social turmoil), it can no longer afford the luxury of delaying political reforms. Otherwise, the two will feed on each other, threatening to produce an explosive situation in the not-too-distant future.
The views expressed in the Article above are Author’s personal views and kashmiribhatta.in is not responsible for the opinions expressed in the above article.
Courtesy: The Tribune: 4 August, 2019