Sol Sanders Archive

The last time the Chinese Communists let inflation get out of control preceded the Tiananmen massacre in 1987 when students – and workers as well – demonstrating in the heart of the capital were mowed down. Inflation as well as calls for democratic rights played a role in the protests of the dissidents. The crisis brought down high officials of the Communist Party, played hob with the military commands since the Beijing garrison could not or would not move on the demonstrators. And that crisis still hangs over the regime as it has had no success in its official campaign to blot it out and dares not try to spin an explanation beyond those offered at the time of treason and treachery by the protesters.

The immediate cause of the current round of inflation is said officially to be vast amounts of pigs missing from the market in a massive cull to wipe out an outbreak of blue ear disease, the resultant shortage of pork, an all important staple in the Chinese diet. [Some international veterinarian scientists are still not sure that is what struck the Chinese swine, and, hopefully, not another virus that could be passed on to humans with infected meat often reaching the market.] But shortages have also developed in grains – and the government has slapped new restrictions on their export. And there are even pressures on wages in the sweatshops of southern China.

But behind this more superficial explanation is the basic problem of the overall economic strategy. In a sense, the Chinese Communists are victims of their own success. The export drive – based in part on an undervalued currency and other subsidies – has brought in vast amounts of foreign exchange. The 2007 trade surplus with the U.S. may finally turn out to $300 billion alone. And foreign exchange reserves may have climbed to $1.6 trillion dollars by the end of 2007, not only the world’s largest, but the fastest growing.

While all this represents China becoming the workshop of the world [the assembler, really, since almost two-thirds of the exports are produced by the multinationals drawing in components from Taiwan, Japan, South Korea and elsewhere in Asia and China’s cheap labor], it also means that the Chinese central bank is flooding the country with matching local currency paid out to the exporters.

Luckily for the regime, so far, most of the Chinese who are making money are saving it. An unheard percent of China’s gross national product may be going into its banks – even though by international standards they are near bankruptcy because of their bad loans and flamboyant corruption. Some say as much as 42 percent although like all Chinese figures, there may be some creative accounting here. But in any case, Chinese savers, with fantastic prices for real estate and no social welfare net of any kind, haven’t had much of a choice even though the inflation may have been eroding their savings’ value with low returns.

Although the government has been talking a big line about trimming the rate of growth and “cooling” the economy, that may be easier said than done. The mechanism for fiscal control is to put it mildly primitive and largely inoperative. That’s why six raises in the interest rate by the central bank during 2007 seem to have had little if any effect – except, perhaps, to reassure the bank savers by giving them a little more return. [When for a brief moment, Wen decided to let Chinese Mainlanders invest in the Hong Kong “foreign” stock market, there was a run on banks in neighboring Shenzhen, windows were clamped down so fast it caught a few fingers.].

But more important, at the 17th Congress of the Chinese Communist Party last October, President Hu Jintao promised to quadruple the gross national product by 2020 simultaneously with promises a few days later to rein in the growth.

With economic development the only thing the regime has to offer since it abandoned Maoism for “socialism with Chinese characteristics”, the regime has to talk and promise rapid growth for the hundreds of millions of Chinese who are still waiting for its benefits. And despite talk about “democracy” – Hu mentioned it more than 60 times in his long, boring doggerel to the Congress – repression is stronger than ever if more unpredictable along with growing outbursts of popular protest over confiscation of property and other inequities of a regime which really has no legal system. [Even giving vent to complaints on the internet is being repressed with growing technologies supplied, shamelessly, by such companies as Google and Microsoft.]

You would never know it from the Western mass media nor from the China boosters among the multinationals, but recent studies have deflated the whole China boom. A World Bank paper using different methodology – comparing China through purchasing power of its currency for its people compared to other countries rather than the concept of gross national product that simply totes up everything. It has trimmed the size of the whole economy. It has, in effect, reduced the estimate by 40 percent, putting off those straight-line projections that have China outdistancing the Japanese and the U.S. and the EU in a few years.

Even less attention has been attracted to new analyses of how the Chinese calculate their cost of living and inflation. It is not just a question of bad arithmetic and false entries – as everyone knows replete in all the official Chinese statistics – but in the whole methodology. There is considerable evidence now that instead of the stable price structure which had been said to be one of the parts of the Chinese miracle, inflation has been zipping along all the time, but has just become dramatized now because of the dramatic increase in food prices.

There is also now the question of whether that a big, fat middle class – some said as much as 300 million – as a product of the modernization is really there. If the size of the economy and the inflation figures are now redefined, it could well be that the unlimited Chinese market for imports from the West – the Marco Polo Syndrome – is really a mirage. In any case, Beijing is pursuing every tactic it can to block imports except for the European luxuries for the super rich.

Another aspect of the problem is that though the Forbidden City headquarters of the Party is issuing sheaves of orders, new regulations, and new laws, and new reams of propaganda these days, the local cadre are pretty much going their own way. That old saw that the Emperor’s Write Ends at the Village Gate is again becoming the reality in China. Party hacks at the middle and lower level are finding ways to avoid disciplining themselves or those below them. Corruption has become not only a way of life but the lifeblood of the regime, whether it is forcing the banks to make “political” loans based on little or no vetting or grabbing the property of villagers for new factory or “luxury” housing expansion or casting safety standards to the winds and polluting local water and air resources to make unlivable in some instances..

It is highly unlikely they could or would enforce new commands to halt the black marketing and price gouging which is the inevitable result of inflation in any economy and a regime that tries to fight it by beating back the waves.

The problem at hand, inflation, then is going to be the tiger that Hu-Wen have to ride in the next few months before the Olympic Games in the late summer. The games have taken on a mystical quality for all sectors of the Chinese – those who hope for sports victories, of course, but also the growing body of young nationalists [perhaps some in the military as well] who see the event as final recognition that China is now a world power, and those who hope, somehow, some of the fundamental problems of the regime will be overcome in the aura of the games and their international audience.

There may be a terrible hangover awaiting the Chinese – and the rest of the world – in the morning after the last gold medal has been awarded. And that could be continuing and unabated inflation ripping up Chinese society once again.