Engaging Cautiously: China and the Financial Crisis

Part 2: Opportunity.

If one should try to find positives in the gloomy current environment, to identify any new opportunities brought on by the crisis, the situation facing China could be full of possibility.

In the current financial climate, the fact that China has a lot of money - with a record trade surplus of USD35.2 billion and foreign-exchange reserves of USD1.9 trillion, as well as a stable financial system, a USD586 billion stimulus package and retail sales growing at 22% year-on-year - meant it held all the cards at the eminent G20 Summit held in Washington over the weekend. Hence China - one of the few participants with the financial power to aid countries in distress - got what it wants more of: Influence in the machinations of global finance.

Money talks - especially during a financial crisis. And for Chinese companies looking to invest and make acquisitions in Europe and elsewhere, the crisis has created ample opportunities for a bargain. 

Yet despite claims of the dawning of a new world order with a distinct Asian leaning, China has shown no great inclination to expand its focus much beyond protecting its domestic economy, or as government spokesman put it, to put our own house in order, stimulate consumption and ensure domestic stability. Keeping the Chinese economy running smoothly, Wen Jiabao affirmed, would be China's greatest contribution to the world.

But if the crisis is forcing China to put its own house in order, it could also hold the potential for China to significantly reform its economy. This is the view of a Financial Times editorial which urges the Chinese authorities to use its stimulus package not to bolster the Chinese economy as it is, but rather to fashion a new one where consumption at home has more than a cameo role. Priming the economy just so it can start exporting again would only prolong a development model that is no longer sustainable, it concludes, and would forego the golden opportunity of redirecting China's pattern of growth towards consumption.

Irrespective, however, of whether the Chinese government are jumping at any golden opportunities, the financial crisis may yet present its greatest potential not in altering the world order but rather in intensifying China's engagement with it. The hopeful tone of US Treasury Secretary Henry Paulson, speaking recently in New York, is an insightful perspective on the kind of opportunities that China is likely to respond to positively, albeit cautiously, in the wake of the financial crisis (h/t China Economic Review):

Today more than ever the world is looking to China to be a big contributor to global economic growth. While some see China as a threat that must be countered or contained, I believe that they only path to success with China is through engagement. We must recognize that China's growth is an opportunity for US companies and consumers, for our producers, exporters and investors. A stable, prosperous and peaceful
China is in the best interest of the Chinese people, the American people and the rest of the world.

Image: Main Street Meltdown (In the first part of our look at China and the financial crisis, we included a picture of the same ice sculpture, erected in imitation of the melting US economy. The picture in this posting shows the sculpture at the end of its existence in a last, potent image)