China Benefits from SARS Crisis, Weak US Dollar
Conventional wisdom says that China is bound to suffer
from the SARS crisis, losing at least one percentage point
of growth from the crisis. A closer look, however, reveals
that the SARS crisis gives the new Chinese leadership
team of Hu Jintao and Wen Jiabao an opportunity to re-align
China's economic policy with the country's increasingly
complex social needs.
Prior to the SARS crisis, China's economic policies were
simple: focus foreign and domestic investment on the main
cities of Guangzhou/Shenzhen, Shanghai and Beijing. Invest
heavily on infrastructure so that it can pull of the Beijing
2008 Olympics and Shanghai 2010 World's Fair, and show
the world that China is a modern power. Keep economic
growth at a minimum of 7 percent so that the danger of
social unrest and unemployment are minimized.
The SARS crisis has changed all that. Investing solely
on manufacturing for export and domestic consumption,
and building skyscrapers in Shanghai are no longer enough
to build a modern nation and society. Local governments
must be able to quickly report up to the central government
about potential health and social threats so that they
can be acted on. Local officials must be allowed to report
bad news up the bureaucracy without fear that it will
destroy their careers. And, in certain instances, local
government and central government bureaucrats must quickly
report to international organizations, such as the World
Health Organization, about new diseases so that they can
be quickly contained, since rapid disease spread from
a China source will hurt China's international image.
In the immediate future, this means that Hu Jintao and
Wen Jiabao will act to change, or try to change the government
and party bureaucracy in China. This will be an immense
challenge: changing the bureaucratic culture is almost
impossible. Instead of trying to change it, it will be
easier to install a new generation of more open-minded
officials, and to tell them to force changes on the national,
provincial and local levels.
For business, China will not focus solely on monster
infrastructure projects. More attention and spending will
go to healthcare infrastructure which will help Chinese
in the countryside as well as those in the cities. Pharmaceutical
and healthcare projects focused on helping Chinese in
China will get a much higher priority. More investment
will be put into modern management methods and "soft"
skills, as well as hiring key personnel with these skills.
China will put much greater emphasis on cooperating with
international healthcare organizations; key personnel
with international presence and skills and PR knowledge
will he hired.
Before last week, it was believed that China would suffer
a serious setback in growth because of the SARS crisis.
But this was all changed with US Treasury Secretary Snow's
remarks, which were seen to support a weaker US dollar
exchange rate vis a vis the euro and Japanese yen. In
the short-term, a weak dollar policy will help US exports,
while slowing down the flow of foreign capital to the
US.
The Chinese yuan, or renminbi, is pegged to the US dollar
at a rate of 8.2 to 1. Before the SARS crisis, the Japanese
Finance Ministry had been pushing for a revaluation upward
of the RMB against the dollar because Japan has recently
been flooded by cheap Chinese imports. This pressure disappeared
with the SARS crisis.
China will benefit because before SARS, the flood of
foreign investment into China had become so great that
the Chinese economy was in danger of overheating. Now,
after SARS, foreign investors will become a little bit
more wary and cautious before making an investment. Now,
with the cheap dollar policy, it is likely to pick up
again to some degree. And new investment will be spread
more evenly throughout the Chinese economy, instead of
being just concentrated in a few areas.
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