BEIJING The economic rebound has started in Asia. Yet this is not simply an economic story, it is a political one made of data and history.
The data first: In the second quarter, Korea grew by about 10 % on an annual basis. Taiwan grew even more, as its industrial production jumped by 89 %. India’s industry performed a brilliant 14 % increase in that period, and China, the engine of regional growth and main trading partner of all these countries, had industrial production up 11 % while the very significant indicator of car sales increased by a miraculously high 70 %.
All in all, emerging Asia in 2009 should grow by 5 % while the developed world of the old ruling class clustered in the G7 should contract by 3.5 %. In other words, during the crisis the Asian emerging economies led by China are catching up with the Old World even faster than during normal times. That means that Asia and China’s growth is increasingly decoupled from the fate of the West, as The Economist remarked in its latest issue, and the region is finding its own path to recovery without recourse to the former import markets of America and Europe, which only one year ago seemed to drive its growth.
There are doubts about the figures, especially those coming from China, but the data of car sales should prove that the rebound is real. Car manufacturers in China largely have foreign investment and are out of the grip of the central office of statistics. Increases in sales by 70 % were registered when the economy was growing at a double-digit pace, and thus China is definitely faring very well.
Now, history: The long march of the new global financial instruments that drove the present economic crisis started in the early 1990’s. In 1992, philosopher-financier George Soros managed to beat the Bank of England and made billions betting against the pound sterling. This proved many things, among which that a private fundraiser with enough gravitas could beat powerful states like the United Kingdom. That is, private entrepreneurs/profiteers could wage a financial war against a middle-ranking power and beat it.
The consequences were manifold. The system of fixed exchange between European currencies was smashed, and European leaders decided not to go back to the independence of their own currencies, which would make each country even weaker before Soros’ future threats, but to push ahead launching a new unified currency—the euro—which was bound to change the global economic order and could have a major political impact as well.
At the time, in 1992, China was out of the picture. It was still running two domestic currencies (one for Chinese and one for foreigners), there was really no central bank except in name, and banks loaned money not based on financial criteria but on political orders. In the next five years, things changed fast, but how fast could they move, starting from such a low point? This seemed to be the prejudice of Soros and his fellows in September 1997, when they attacked the Hong Kong dollar and thought of making an even greater fortune out of it.
Everything seemed ripe for the attack, with circumstances even better than the storming of the Bank of England in 1992. The Asian financial crisis was raging. The Thai baht, Malaysian ringgit, and Indonesian rupiah had fallen one after the other like blinded prisoners before a firing squad. Hong Kong asset prices had been tumbling out of fear for the July 1 return to the Chinese motherland. If Soros had managed to take over mighty England, then Hong Kong—the tiny former colony returned to China—should have been a piece of cake. The primitive Chinese financial systems would be no match for the sophisticated instruments wielded by the financiers.
In fact, Soros was wrong. Because it was more primitive, shrouded in layers of bureaucratic regulations, China was unbeatable by Soros’ over-sophistication. It was the old story of asymmetric strategy: China refused to fight the war Soros had in mind; it fought its own war on its own turf and predictably won.
In fact, the assault on the financial system on Asia was like a war: It vaporized decades of wealth, stirred social disturbances, and toppled governments and political systems. In a few days, the devaluation of the Indonesian rupiah squandered 80 % of the country’s GDP. Thailand's present suffering is a legacy of the collapse of the baht. And China owes its present resiliency to the battle waged and won then, in contrast to Japan, which let the then much stronger yen slump against the dollar, signaling something deeper than the simple lack of economic strength.
The attack on Asia was triggered by purely financial motives, but in the meantime, were there also political goals? Was it to teach those arrogant Asian "tigers" there was no new model of development on earth, only the Western one? And what did it mean politically that China dared to resist by playing old administrative rules against modern financial methods? Could China actually stand up to the U.S. when Japan buckled and even Russia was in far greater disarray because of the financial crisis?
Perhaps there was some of this hubris in 1999 when China openly rooted for Belgrade against America during the U.S. bombing of Yugoslavia over Kosovo. Then, the U.S. bombed the Chinese embassy in Belgrade. Was it deliberate? Was it an accident? In the end, even if China believed it was a deliberate action, prompted by some form of Chinese support for Yugoslavia, Beijing could do nothing.
This series of experiences taught China many lessons. You have to liberalize the financial system but also have enough reserves to withstand and trounce a financial attack from any side; monetary reserves are a military strategic tool, more important than ballistic missiles and nuclear bombs. You can never take on America—it is too strong and has too many friends. Instead, you have to be as close as possible to America.
With these two lessons in mind, China could claim its role in the financial crisis—it saved Asia. If the Hong Kong dollar had devalued, the RMB would have followed, and there would have been a new round of competitive devaluation in the region. All would have been spiraling down until some “masters of the universe” from Wall Street declared it was enough and came to buy everything extremely cheap, just like after a war. China, conversely, had saved itself and had saved Asia. In this, it proved more than anything its new political primacy over Japan. In fact, by doing so, China also saved Japan, which was under attack in a similar manner and even more than China.
China saw that the two lessons (manage reserves and side with America) could merge into one as it went into a buying spree of American bonds, which joined their transpacific interests, gained reserves, and secured American support all at once.
Now for China, beginning such a powerful economic rebound—while America and Europe are still struggling with very deep troubles—is a de facto political and strategic statement. The details are also interesting. The industrial recovery in Taiwan is crucial, as it proves that the destiny of the island is impossible to split from that of the Mainland. It is a major victory for Ma Ying-jiu and his “pro-Beijing” policy. The recovery in Korea is also important, as the country has moved from hanging on Japan to hanging on China.
With these in the pocket, the world will have to come to grips with this new Chinese role. America certainly did, when at the end of July, President Barack Obama saluted the new U.S.-China ties as the political cornerstone of this century.
Yet, these successes are no reason for joy in China, but causes for worry. There is no easy path ahead. In 1997 and 1999, China had many weaknesses, but they didn’t matter because in the end it decided to do what was right and follow the American leadership. Also, America had a model and a path, and was confident about it. Now America’s old model is gone, and the new one is as fuzzy as the lucky campaign slogan “we want change.” However, America has been the leader for decades, and there is an overall trust in it.
Although China’s primitive economic system is useful when defending itself, it is a major hurdle when the country is at the forefront of the world and everybody looks to it for direction and leadership. China has weaknesses all over. First, its economic profile is in an unhealthy state. Private consumption accounts for 35 % of the GDP, versus the 58 % in emerging Asia and 61 % in OECD countries. Recovery has been driven by investment, but perhaps as much as 30–40 % of it went into real estate and stock speculations. There is a bubble that must be contained, if it bursts, the whole Asian and world recovery will burst along with it. But because of China’s cumbersome bureaucracy, it is hard to hit the brakes smoothly. If the government hits them, it could come to a sudden dangerous halt. If it tries to move slowly, the bubble could grow even bigger.
These snags were not important a decade ago, but now that China is a world leader, these are major problems for everybody. As such, the recovery is uncertain and weak. There might be new, bigger problems down the road, while U.S and Europe are still deep in trouble. As David Goldman said in his blog, “the June personal income data were dreadful. I simply don't believe in the recovery story.” This may be true not only for America, but also for the rest of the world.