To splurge or not to splurge
By Debasish Roy Chowdhury (China Daily)
Updated: 2008-03-12 07:18

The annual NPC and CPPCC sessions, significant as they are for the country's policymaking, assume an added dimension this year that makes them relevant far beyond China's borders.

The sessions come at a time of unprecedented global financial instability. As the credit crisis triggered by the US subprime problem unfolds, the global economy finds itself in the throes of a possible recession. Banks in the West are writing down billions of dollars as mortgage-backed debts go bad. There are signs, such as poor retail and job figures, the crisis is spreading beyond financial realms and, more dangerously, beyond the realms of the US economy as national markets today are intertwined to the extent never seen before.

As all the tall talk of "containing" the subprime crisis looks hollow, the world searches for some substance that many feel emerging economies like China can lend at this critical hour. Can - and will - China deliver? The answer may well emerge in this annual meeting of policymakers and opinion leaders as they steer the course of the nation. And this time, of the world as well.

Emerging markets now account for roughly half the global economy. They are also thought to have fostered a substantial growth in demand and mutual trade, making them less dependent on exports to the West. With huge forex reserves, they are also capable of withstanding external shocks. So in times like these, many believe, emerging economies can not only hold their own, but also take up the slack by providing an engine for global demand if the advanced economies are derailed. Hence, the emerging economies have "decoupled" from the US, goes one school of thought. This year will put this thesis to serious test. If proven true, it will herald a new multipolar economic world order in which the almighty US economy is just another player.

That could indeed be the case eventually but not yet. As of now, such a scenario looks statistically untenable. Despite the bulging trade among emerging economies, a lot of it is for processing purposes, with advanced economies still the final destination.

At the end of the day, the US consumes nearly 10 times as much as China and 15 times as much as India. It's clearly not time yet to discuss the possibility of a life without the US. The People's Bank of China has acknowledged this fact, saying China is anything but decoupled from the US.

China's importance today lies not in its potential of replacing the US economy, but in helping to keep it humming. US problem is lack of liquidity, China's is excess liquidity. This extra cash can help resuscitate the troubled US financial institutions and grease the levers of international finance.

CITIC's cross-shareholding deal with Bear Stearns and China Investment Corp's infusion of $5 billion into Morgan Stanley are instances of China already playing that role. But China Development Bank's decision to refrain from a similar cash injection into Citigroup also shows its hesitancy in doing so.

While an influential section of Chinese opinion makers feel the country must use the global credit crisis to buy into ailing US financial powerhouses, an equally important section believes China should not burn its fingers by doing so in a climate of economic uncertainty.

The deliberations between the two sides during the current sessions will determine how China will calibrate its investments in Western financial majors. Much of global growth this year will hinge on which view prevails.

The author is a senior editor with China Daily

(China Daily 03/12/2008 page7)