Q&A: Author Will Hutton on China's Future
U.S. News recently exchanged E-mails with Will Hutton about his new book, The Writing on the Wall: Why We Must Embrace China as a Partner or Face It as an Enemy.
What would be the impact on China domestically if the yuan appreciated 40 percent, as some U.S politicians would like to see happen?
The more than 50 percent rise in the yen in the late 1980s was the single most important cause of Japan's near-15 years of economic stagnation that followed; if the yuan went up by 40 percent suddenly against the dollar, it would have a similarly devastating impact on China. It would bite in two huge ways.
Firstly, it would cause peasant incomes to fall sharply because China's internal food prices would fall by up to 40 percent as food imports became cheaper with the appreciation of the yuan; 780 million Chinese still live on the land. And it would stop the 25 percent growth of China's 1 trillion dollars of exports in their tracksthe most important source of economic growth and employment in China's coastal cities.
It is already hard enough to find work for more than 10 million migrants who leave the land each year; with a yuan appreciation of that magnitude the numbers would swell into a flood of migrants just as the opportunities for their employment in the eastern coastal cities dramatically worsened. Open and disguised unemployment in China is estimated to exceed 170 million. Unrest is growing even under current conditions. Such a rapid appreciation of the yuan over a short period could be a tipping point for a wave of unrest, which could threaten the regime's stability. The party leadership sees the demand for fast yuan appreciation as an act of economic warfare. In these terms, you can see why.
What would be the international economic impact if growth in China were to stagnate?
China's growth, because the country has been so open to imports, has been the single most important stimulus to the Asian and, thus, world economy over the past five years. China's stagnation would trigger a global slowdown, maybe even recession. On the plus side, oil and commodity prices would fall.
On the negative side, there would be all the ills of a slowdown, but on top there would be major financial implications. The World Bank estimates that if China's growth rate fell by just 2 percent, up to 60 percent of China's bank loans would become nonperformingso threatening both China's and, via Hong Kong, Asia's financial system. The flow of saving to finance the U.S.'s deficit would dry up, probably forcing U.S. interest rates upso worsening the economic slowdown.
What's the greatest threat to continued fast growth in China, and what are the probabilities of its occurrence?
There are four great economic threats. I've discussed the revaluation of the yuan. Next there is the threat of protection against Chinese exports. Then there is the threat of a sharp rise in inflation, forcing an increase in interest rates and credit controls. Or there is the risk of a credit crunch forced by the banking system being overwhelmed by nonperforming loans. The fifth threat is politicalthe turmoil that would follow a fight for political power. I think there is more than a 50 percent chance of protection against Chinese exports, a 30 percent chance of a sudden sharp revaluation of the yuan, and a 20 percent chance of dangerous inflation and of a credit crunch. The risk of political instability is low, but it exists.