The China Boom (Extract)

By ZIV HELLMAN
Extract from an article in Issue 21, February 2, 2009 of The Jerusalem Report. To subscribe to The Jerusalem Report click here. Trade between Israel and China has expanded by an average of 40 percent per year, making China Israel's second-largest trading partner after the United States, with even more trading opportunities opening up There is an old Chinese saying that a time of crisis is a time of opportunity. And like many old Chinese sayings, it's as valid today as it was millennia ago, although the wise old Mandarin who thought it up did not have the 21st century world economic crisis and Chinese-Israeli trade in mind. The current crisis has put a crimp on growth in both countries, but nevertheless it could serve as a catalyst for more intensive economic activity between them, say veteran analysts. And Israeli entrepreneurs, even if they've never heard that old Chinese saying, are not going to let any opportunities slip; any mention of China, the world's most dynamic rising economic power, gets their attention. This was evident in Jerusalem in late December, when so many business people were in the packed house at a seminar on "China, Israel and the Global Economic Crisis" at the Hebrew University, that the organizers had to scramble to find enough seats. The lectures were crammed with dry economic and business statistics that reveal dramatic developments: Bilateral trade between Israel and China has grown from between $30 million to $50 million per year in the mid-1990s to $5 billion in 2008, expanding by an amazing average of 40 percent per year, making China Israel's second-largest trading partner, after the United States. Major Israeli exports to China are telecommunications equipment, chemical products, medical and optical equipment, and agricultural and irrigation expertise - for example Netafim, an Israeli company specializing in drip irrigation technology, has seen business in China expand to such an extent that it now has seven offices spread throughout China. Israel imports consumer goods, textiles and chemical products from China. But even these achievements pale in light of what the future may hold in store. "There is a lot of money up for grabs in China right now," says Lillian Safran Shaked, a partner in a major Tel Aviv law firm, where she heads the China desk. "Israel can be well-placed to take advantage of that, because Israel needs to diversify from over-reliance on the United States. That's why we are seeing increased interest right now. Clients who in the past have said that working with China was too difficult, that it is too far, foreign and unfamiliar, are now expressing interest." Dr. Graham Jackson, director of MBA programs at of Haifa University, agrees. "China has a symbiotic relationship with the rest of the world, and its economy is particularly dependent on the purchasing power of consumers in developed countries such as the U.S.A.," he tells The Report. "The U.S. financial crisis has had a ripple effect. China is intent on instituting changes in its economy now. The Chinese government wants to expand industry from reliance on low-tech to high-tech and to upgrade its health sector. There is a lot of opportunity for Israelis." Much of the background to the current situation is provided by Richard Herd, the chief economist of the China and Asia Unit of the Organization of Economic Cooperation and Development (OECD) ("I study one-fifth of world's GDP", he says), who was visiting Israel in December for high-level talks with Israeli officials and addressed the seminar. Herd points out that China's current poverty relative to Western nations is not going to last forever. China now commands 11 percent of world GDP, with the U.S. and EU each producing about a quarter of world economic output. There are analysts who predict its economy may equal that of the United States in absolute size by the middle of the 21st century. Diplomatic and military muscle-flexing is accompanying China's increasing economic might. Chinese investments are increasingly visible in Africa, for example, and the expected deployment of Chinese naval vessels on the high seas to protect Chinese shipping from piracy will mark the first deployment of a Chinese fleet outside its territorial waters since the 15th century. The basic economic path chosen by China was copied from a model that worked for other Far Eastern nations, such as South Korea and Taiwan - to take advantage of the country's inexpensive labor to solicit foreign capital and spark large-scale manufacture of labor-intensive commodities - from textiles to plastics to electric and electronic appliances - for the world market. To this end, China created free-trade zones, invested billions in infrastructure and entered the export arena. But despite the adoption of capitalist modes of production to replace Mao's communism, the tradition of economic directives emanating from a central bureaucracy remains strong in China, points out Herd. For example, when the Chinese government decided that its state-owned sector was too bloated earlier this decade, it cut 40 percent of the state sector labor force within five years. Two-thirds of state-owned enterprises were closed or privatized, with a speed no other country in the world can match. This has brought some advantages at a time of global economic crisis, when rapid and forceful government intervention is sometimes called for. China's construction and housing markets were as buoyant as those of the United States in the middle of this decade. When some American economists began expressing discomfort at the over-exuberance in the housing market, fearing it indicated a bubble, there was little that could be done to slow the boom in a free-market environment with millions of independent decision-makers, short of drastic interest-rate hikes. In contrast, China's government-administered banking system clamped down on mortgage lending from above, throttling the booming market. China's financial markets are also proving to be more stable than their Western counterparts. While corporate borrowing rates in Western bond markets have shot up to 6-7 percent compared to previous rates of 1-2 percent, China's interest rates have remained stable, with little or no volatility evident since October 2007. This does not mean that China has been immune to the world crisis. Herd's office in the OECD estimates that GDP growth there will be between 7 and 8 percent in 2009, the lowest growth, which has often been higher than 10 percent in recent years. This is causing consternation in Beijing. Wages have fallen, and the unemployment rate has expanded to 9 percent - the first time China has experienced a serious unemployment problem since it adopted a Western-style labor market. There is no unemployment insurance in China, and welfare benefits amount to only 3-4 percent of average wages. In line with policies adopted by many other governments in response to the economic downturn, China has said it intends to implement a stimulus plan to the tune of $586 billion over the next two years - roughly 7 percent of its gross domestic product each year - to construct new railways, subways and airports, and to rebuild earthquake-damaged communities. It remains unclear how Chinese officials arrived at the $586 billion figure or how much of the stimulus plan would be spending over and above what Beijing normally earmarks for infrastructure projects. State-driven investment projects of this kind have been a major impetus to Chinese growth throughout the 30 years of market-oriented reforms, a strong legacy of central planning. Beijing is also embarking on expanding and institutionalizing formal agreements with trading partners. It joined the World Trade Organization earlier this decade and negotiated a landmark free-trade agreement with New Zealand in April of last year. "China has a clear interest in seeking free-trade agreements with smaller countries, with economies the size of Israel's and New Zealand's," Herd tells The Report. "Israel might well be on the agenda for such talks in the near future." The credit crunch and severe recession in the United States resulting from the bursting of the housing sector bubble have had knock-on effects in both China and Israel, despite the fact that both China and Israel would appear to have relatively sound economic fundamentals. Israel, like China, came into the worldwide economic crisis with economic fundamentals that significantly differ from those of the United States. It continues to experience relatively low unemployment, a small budget deficit and a declining public debt - although a legacy of past public debt is hampering the government's room for maneuver. Its banks are stable, with little exposure to sub-prime assets, and it did not experience a housing boom and bust. Kobi Braude, of the Bank of Israel's Research Department, notes that Israel has a positive current account balance - "a good position to be in during a recession." On the other hand, growth in 2009 is expected to fall from several years of 5 percent growth to 1.5 percent, about equal to population growth. Extract from an article in Issue 21, February 2, 2009 of The Jerusalem Report. To subscribe to The Jerusalem Report click here.