Spillover effect

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Spillover effect

     Spillover effect / Öx‡øÖÒ

    2011-03-03 22:22 | ÔÄ?Á(757) | ?êÇ?: Ð??úÖÒ, ÓÍ?Û, ÖÐ??, ÖÐ?ú | ×ÖºÅ?º?ó ÖÐ Ð?

    A burgeoning oil crisis will exacerbate the problems of China's energy-hungry growth model.

Andy Xie

March 4, 2011

    The upheaval in the Middle East is igniting a massive oil shock that is presenting the biggest challenge to China's growth in three decades. If it is not handled carefully, it may lead to persistent stagflation. The social and political consequences of such a scenario could be catastrophic.

    China's net import of crude and oil products may reach 6 million barrels per day this year, nearly quadrupling in a decade. If the current trend continues, China's net imports will reach 16 million barrels per day by 2020, far higher than the US' 13 million. The rapidly rising dependency on imported oil is taking place despite China's massive increase in coal production that is half of the world's total now. The rapid increase in coal imports, though from a small base, suggests that China's coal supply may be hitting bottlenecks. Energy has become the soft belly of China's modernization.

    The Middle East accounts for 37 per cent of the world's oil production, of which two-thirds is exported, and 62 per cent of the world's proven oil reserves. The instability is increasing the risk premium in oil prices and may push them above the 2008 peak. The political consequences of the revolutions could make oil prices go even higher and for longer.

    The revolutions in the Middle East have deep social, political and economic roots. The economic factors are high unemployment, declining real wages due to inflation, and wealth concentration. If the outcome is instability, it will deter investment, there will be less production and, hence, a persistently high oil price. The case for stability depends on much higher oil prices that allow the oil-rich countries like Saudi Arabia to invest in their less fortunate cousins like Egypt. Oil prices would stay high in such a case.

    The global economy is already on a path to mild stagflation, as the unsustainably high debt levels in economies of the Organization for Economic Co-operation and Development force central banks to keep interest rates low. The oil shock makes the stagflation scenario more severe - with growth lower and inflation higher. The extent of stagflation may be comparable to that after the 1973 oil shock.

    The oil shock decreases global demand for China's exports, raises its production costs and worsens current inflation. Without structural rebalancing to reduce the energy intensity of the growth model and export dependency, China could slide into stagflation along with the rest of the world.

    The central government has talked for a decade about changing the growth model from exports to consumption, yet, in reality, dependency on exports and fixed investments is rising. The global situation requires urgent action now, not talk. The Nationa

    China's current economic structure results from the government's relentless efforts to mobilize resources for investment. Tens of millions of Chinese have graduated from college in the past decade. It should have led to a robust middle class - the foundation for social stability. Instead, they are taxed heavily and are deprived of any dream of economic security. The top marginal income tax rate is 45 per cent. On average, a property now costs 20 times annual income. We all know that property is a revenue earner for the government; high property prices are a form of tax.

    On top of the high income tax and property prices, inflation is decreasing the value of people's savings in banks. And inflation, of course, is a "tax" that takes money from the savers to the debtors. In this case, the state sector is the debtor.

    Chinese people are being pushed to the edge. No matter how hard they work, their money ends up in the government's pocket. Social stability is already at risk. The oil shock may tip it over. Government officials should stop talking about change and start taking action. And it is easy to do: just give money to the people.

    First, China should reduce the top personal income tax rate to 25 per cent, the same as for companies. A high tax rate usually redistributes income from the rich to the poor, but not in China. Rich people can set up companies and spend money for personal purposes out of company expenses. Instead, the high tax rate weighs down white-collar workers, robbing them of the chance to become solidly middle class. The high

    tax rate is pushing China towards a small super-rich class and a vast underclass.

    Second, China should increase interest rates quickly to protect the value of people's savings. A negative interest rate is robbery. Two hundred million migrant workers have worked very hard for very little over the past decade. They have saved money for their children's education. Letting inflation erode their savings is unconscionable. The discussion on interest rate policy should not rest on technical terms; thought must first be given to these 200 million people.

    Third, property should be forever taken off as a speculative asset. Local governments have become dependent on revenue from the property sector. They have behaved like property agents in fanning the speculative fever. The government should introduce a 90 per cent capital gains tax on property transactions. The property market is cooling a little now because of monetary tightening that targets inflation. But, this is a cyclical phenomenon. The market will become speculative again. Property speculation is perhaps the biggest threat to China's stability. The central government should introduce a policy to remove this risk.

To keep them affordable, housing prices per

    For too long, China's policies have paid too much attention to special interest groups and too little to the plight of working men and women. If this doesn't change, China's stability will be put at risk. Whatever policy option is considered, top officials need to ask first whether it takes from the people, or gives to the people.

Andy Xie is an independent economist

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