China's Economy Slows To 6.8 Percent Last Quarter

By most countries' standards, China's economy is flourishing. It grew almost 7 percent in the last quarter and 9 percent for 2008. Still, that was a slowdown, snapping a five-year streak of double-digit growth. China is the world's third-largest economy after the United States and Japan.

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RENEE MONTAGNE, host:

Moving to China, Beijing today announced that its economy grew almost seven percent in the last quarter of 2008 and nine percent for the entire year. It sounds amazing, but in China, that's considered bad news. We called NPR's Louisa Lim in Shanghai to talk about why this is seen as such a problem. Good morning, Louisa.

LOUISA LIM: Good morning, Renee.

MONTAGNE: Why is this a problem? Here in the U.S., of course, we would be thrilled with the growth of even two or three percent.

LIM: Yes. Nine percent growth might sound like a lot, but let's put it in context. That's the slowest pace of growth in seven years, and it compares to economic growth of 13 percent in 2007. I asked an economist, CLSA's China strategist Andy Rothman, what to make of these latest figures, and this is what he had to say.

Mr. ANDY ROTHMAN (Strategist, CLSA): There was a significant slowdown. The GDP growth rate in the quarter that just finished was 25 percent slower than the previous quarter and at least 40 percent slower than the same period in 2007. But at the same time, it really wasn't too bad, especially if you compare it to the other two countries in Asia that have released their fourth quarter data. Both those showed contraction, negative GDP growth, in Korea and Singapore.

LIM: That was Andy Rothman of CLSA. Now, China's target is eight percent GDP growth for this year, but already, just three weeks into the new year, Chinese officials are warning that it could be extremely difficult to hit that target.

MONTAGNE: So, why does that eight percent mean so much there? I mean, your economist there just suggested that China's doing better than its neighbors, South Korea and Singapore.

LIM: Yes, but eight percent is the government growth target that's been repeated so much that it's acquired almost this sort of talismanic significance. And that's because a certain amount of growth is necessary to absorb the new entrance into the workforce. And I mean, one Chinese think tank has warned that unemployment in urban areas could be as high as 9.4 percent. So, having large numbers of dissatisfied, unemployed people obviously increases the risks to social stability, and we have seen a few small-scale labor protests already. And the most pessimistic predictions are saying there could be a threat to Communist Party rule, something which could have been barely imaginable just a couple of years ago.

MONTAGNE: So, how aggressive is the government in trying to tackle this?

LIM: Well, the government is trying very hard to kick-start the economy. They've announced this huge stimulus package of $586 billion. They've announced subsidies for steel and auto sectors, and they're also trying to get Chinese consumers out and spending their money, because there are very high savings rates in China. So, there are a huge range of measures in place, and economists say they are beginning to see a few signs of hope. Bank lending, for example, is up 1,000 percent in December. But still, there are these warnings that the year ahead, and particularly the first half of this year, could look quite dicey.

MONTAGNE: You know, Louisa, just finally, is there any kind of silver lining in this? I mean, there were economists over the recent years that have said China is growing too fast.

LIM: This is a slowdown, but it's a much faster slowdown than the soft landing China had been hoping for, and some have described it like falling off the edge of a cliff. And of course, when you have a very fast-paced contraction, that does bring lots of risks and it brings pain for ordinary people. I've just interviewed a local couple who just bought a flat for $200,000, and then over the next 30 days, they watched it lose value, and it lost about $1,000 a day. I mean, that's an awful lot of money. It is likely to be a painful year for China, and of course, that has global implications. When China suffers, it drags down growth across Asia, and ultimately, it will slow down the pace of economic recovery worldwide.

MONTAGNE: NPR's Louisa Lim speaking to us from Shanghai. Thanks very much.

LIM: Thank you, Renee.

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In IMF Bonds, A Possible Rival For The U.S. Dollar

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Chinese Premier Wen Jiabao i i

In March, Chinese Premier Wen Jiabao warned the United States to guard the value of its currency. Liu Jin/AFP/Getty Images hide caption

itoggle caption Liu Jin/AFP/Getty Images
Chinese Premier Wen Jiabao

In March, Chinese Premier Wen Jiabao warned the United States to guard the value of its currency.

Liu Jin/AFP/Getty Images

In times of global economic crisis, the International Monetary Fund lends money to nations in trouble. But in the current recession, the IMF has found that it, too, is running out of money.

"We have made quite a large number of commitments of our resources in the last year," says Craig Beaumont, division chief of the IMF's finance department. The organization has loaned out about $150 billion, leaving it with just another $50 billion on hand.

Now the IMF has decided to raise an additional $70 billion the same way large companies do — by issuing bonds (a first for the IMF).

That part of the story is simple enough, but the IMF bonds touch on a far more profound topic: namely, what the world's reserve currency should be. Reserve currency acts as an anchor and a safe haven. It's the currency everyone measures their own against, and the one everyone reaches for in times of trouble. Right now, the world uses the U.S. dollar.

But emerging players like China and Russia have said they wouldn't mind if that changed.

And that's where this story gets more complicated. The IMF's new bonds aren't denominated in U.S. dollars. Instead, they'll be issued in a kind of hybrid called Special Drawing Rights. SDRs are a mixture of the U.S. dollar, the British pound, the euro and the Japanese yen.

The IMF uses SDRs internally, to calculate the money it lends to various nations. A few months ago, the head of China's central bank suggested that SDRs could become the basis for a new kind of global currency.

"The emerging markets are hoping, and China in particular is hoping, that this will start the debate," says Eswar Prasad, a Cornell University professor who once led the China division at the IMF. The bonds could "also start some real progress toward challenging the U.S. dollar's dominance in international financial markets. The Chinese would dearly like to break free of the embrace they have of the U.S. dollar, because they have no alternative, and they would desperately like to have an alternative."

The Problem Of Dollars

Beaumont, of the IMF, is quick to point out that Special Drawing Rights are absolutely not a currency. They're more of an accounting tool, a way to track where the IMF's money is going.

"No one ever carries SDRs around in their pocket," he says.

The problem for China is that it has more money coming in than it knows what to do with. It sells tons of stuff to the U.S. and gets billions of American dollars in return. Where should it put those dollars? Often, China buys U.S. Treasury bonds, because they're the safest investment around.

The IMF bonds will also be very safe, because they're essentially backed by the entire world.

China has pledged to buy what amounts to $50 billion of the new bonds. Russia has pledged to buy up to $10 billion, and so has Brazil.

Against the scale of the global economy, Prasad says, these amounts are relatively small. But if countries decided they didn't trust Treasury bonds so much anymore and began moving a lot of money elsewhere — say, to IMF bonds — that could be a big deal. It could spook the U.S. bond and currency markets, he says, and they are in a fragile mood.

There are a lot of reasons to think China, for all its trash-talking about the dollar, doesn't want to knock it too much. Brad Setser, an economist at the Council on Foreign Relations and an expert on the relationship between the Chinese and American economies, says Beijing would hurt its own cause by moving away from the greenback. "I don't think this is a step toward a new currency that is going to rival the dollar," Setser says.

That's because China needs the dollar to remain strong. It happens to hold more than $700 billion in U.S. Treasury bonds. And it's still buying more.

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