High Consumer Savings, Reduced Government Role,
Drive China's Improved Credit Ratings
Standard & Poor's, the leading credit rating agency,
gave China an improved rating of one notch to BBB+/A-2,
on its foreign currency ratings, saying that the outlook
on the country is positive. The move was seen as a positive
judgment on China's wide range of reforms, which amount
to the downsizing of the government role in the economy.
In the past few years, the Chinese economy has shifted
from one driven by large state-owned enterprise projects,
to one in which the Chinese consumer is the main determinant
of economic growth. Currently, the economy is at an awkward
phase, where the government is trying to come up with
solutions to get out of many state-owned enterprises,
without creating new problems in society.
In particular, the Chinese government is anxious to avoid
the Russian-style privatization which gave rise to the
"new oligarchs" during the Yeltsin years. During
this period, a few well-connected businessmen were able
to leverage connections to buy state-owned assets at fire-sale
prices. Much of the funds which changed hands then ended
up in Swiss or Cypriot bank accounts, with very little
of the money staying in Russia and going into the hands
of working Russians, and leading to the large-scale bankruptcy
of the country.
China's improved credit rating means the country has
improved its outlook, and does not face the large-scale
economic lobotomy Russia faced in the nineties. In effect,
China has been bailed out by the high savings ratio and
now, spending capability of the Chinese consumer, who
it turns out, is very hard-working and economically smart.
This has made it much easier for the Chinese government
to reduce its entitlement programs without creating widespread
social instability.
However, the country continues to face challenges on
the privatization of its large financial sector. While
Premier Wen's move to help the healthier state-owned banks
have been positively greeted on Wall Street and in the
West, the reception in China has been much more guarded,
and sometimes critical.
While the profitability of many state-owned enteprises,
especially those involved in commodities, have been helped
by growing domestic demand, many privately-owned manufacturers
are facing a profit squeeze because of rising commodity
prices. While commodity traders just pass on their price
rises, the manufacturers are facing downward pressure
from their buyers.
When inflation starts, it always starts from commodities.
Last year, China strongly resisted international pressure
to let the yuan rise against the dollar because of its
wish to keep unemployment low, and to resist foreign pressure.
Now, with the dollar falling more than 30 percent, resulting
in higher petroleum prices and OPEC reducing production,
there are more voices calling for a revaluation of the
yuan against the dollar, and for diversifying assets away
from the US dollar.
Another major challenge for China is the scramble to
find oil and petroleum resources. Just when oil consumption
was peaking worldwide, Chinese consumers began to buy
automobiles in 2003 in a big way.
For China, the trend is positive, but there are going
to be many bumps on the road.
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