China Shares Blame for Financial Crisis

by Peter Hannaford
12/11/2009


Like the sound of one hand clapping, silence greeted the release of the annual report the other day of the U.S.-China Economic and Security Review Commission. The “mainstream” media were too preoccupied with how Mr. and Mrs. Salahi crashed the White House dinner to notice that the Commission had concluded that China bore a lot of the blame for the global financial crisis.

The bipartisan 12-member Commission in this, its seventh annual report, wasn’t bashful about laying out its assertions. They say that while the economic crisis originated in the United States it “has its roots in massive global economic imbalances. The responsibility for these...can be placed partially on the U.S. as the world’s biggest spender and borrower and partially on China as the world’s biggest saver and lender.”

The reports says that China pursues policies that promote exports over all else by pushing increased savings, restraining domestic consumption, keeping its currency undervalued and directing subsidies and incentives to exporters. As a result, China’s booming export business means that the country now has the world’s largest foreign exchange reserves, $2.27 trillion.

The perverse effects of China’s obsession with exports are spelled out: “In response to the crisis, China introduced a fiscal stimulus package, raised rebates to exporters” and supported them with other measures. “This will only exacerbate overcapacity, aggravating the overall problem.” Indeed, production overcapacity increases pressure to push the products out in ever greater numbers, with prices kept rock-bottom in order to keep consumer interest (such as here) at a high level.

According to the Commission, China provides generous incentives to foreign manufacturers who relocate their plants to China. Labor costs are kept low because workers are not allowed to bargain collectively or join independent unions. Chinas also uses a Value Added Tax (VAT) as an export weapon. It charges 17 percent on everything that is manufactured, but rebates the proceeds to domestics companies that export, but does not do so for importers. This puts imports at an even greater disadvantage.

In the early days of China’s industrialization a joke went around to the effect that China would “buy one of everything; reverse-engineer it, then mass produce replicas at half the going price.”

That impulse still is apparent in the current industrial policy set by the Chinese government, but the Chinese are using other means to sharpen their competitiveness. Take cyber-espionage. The Commission reports, “There has been a marked increase in cyber intrusions originating in China and targeting U.S. government and defense-related computer systems. This malicious activity has the potential to destroy critical infrastructure, disrupt commerce and banking systems and compromise sensitive defense and military data.”

The number of incidents of malicious cyber activity has gone from 23,031 in 2005 to 43,880 in 2007 and 43,880 this year.

Free speech is not tolerated by the Chinese government which also monitors dissidents and others with almost paranoid intensity. The report cites one Chen Yonglin, a defector who was once a senior government official in China. He produced an internal government document that referred to “Five Poisonous Groups,” namely, the Falun Gong, Tibetans, Uighurs, Taiwanese and pro-democracy activists. Operatives were instructed to list activists, monitor them and use propaganda against them.

Carolyn Bartholoew, chairwoman of the Commission, in an Epoch Times interview, said, “Every year there is sufficient information out there to put together 300 to 400 pages of documentation of troubling things that are going on.”

The Commission's report delivers to Congress no fewer than 42 recommendations on dealing with China. Among these:

• The U.S. should use World Trade Organization trade remedies more aggressively;

• Congress should make adequate funds available for defense, law enforcement and intelligence agencies to implement sophisticated techniques to counter Chinese espionage and cyber attacks;

• Push China to draw down its military forces opposite Taiwan (including missiles) to demonstrate “its desire for improved cross-Strait relations”;

• Assess the adequacy of U.S. export control policy and make necessary changes to prevent transshipment of controlled technologies (that is, those that can be used for consumer and military purposes) through Hong Kong into China itself.

Will Congress dig into these and the other 38 recommendations? Don’t bet on it.