A fog of war that China can ill afford

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A fog of war that China can ill afford
http://www.ft.com/cms/s/0/6f17ff0c-09bb-11de-add8-0000779fd2ac.html
Published: March 5 2009 19:35 | Last updated: March 5 2009 19:35

A general, said Sun Tzu, “must be able to mystify his officers and men by false reports and appearances” to ensure secrecy. Chinese officials applied their Art of War this week: global financial markets were left mystified when Prime Minister Wen Jiabao’s speech to the National People’s Congress contained no sign whatsoever of the stimulus package it had been suggested he would announce. That was unfortunate, both for what it says about China’s anti-crisis policies and about its approach to communication.

In this downturn, China is relatively enviably placed. Many other countries face the paradox of having to sustain deficit spending right now but save more over time. For China, the right policy today – compensating for lost exports by boosting domestic spending – is also a sound policy for tomorrow: moving towards a permanently higher share for consumption in national output. That is a rare luxury, which will serve not only the Chinese people. As they become bigger consumers, they will also benefit the rest of the world through increased imports.

So what is China waiting for? With some $2,000bn in reserves – the result of years of accumulated trade surpluses – it has no difficulty financing public deficits to boost domestic demand. The government has already taken some useful steps. It has put in place a subsidy programme for rural residents that encourages them to buy household appliances and consumer electronics. It has also successfully expanded domestic lending through its state-owned banks.

But other actions have been half-hearted. A Rmb4,000bn investment plan was announced last year, but it is not clear that it contains much spending above what would in any case have taken place. A more reliable measurement of stimulus is the budget deficit the government plans to run next year, which Mr Wen said would be 3 per cent of China’s economy. That is something – but it seems too unambitious to achieve Mr Wen’s stated goal of 8 per cent growth in 2009 when exports are falling by 17.5 per cent year-on-year.

A convincing stimulus package from Beijing is the single most promising opportunity to reinvigorate economic activity in China and around the world. This was illustrated by the sharp bounce Asian markets enjoyed from expectations that Mr Wen would announce such a package. The market reaction revealed the deeper challenge confronting China’s leaders. They understand that they must act to slow the global downturn – and indeed that they have more power than anyone else to do so. But they have not yet grasped that inspiring certainty and market confidence is an important part of that task.

Cash is being hoarded everywhere by savers too afraid to lend and consumers too afraid to spend. Ending the crisis requires lifting their uncertainty. Governments’ plans must therefore be clear and resolute – but clarity is something China’s Communist party still struggles with (not just in economics).

The time has passed when China’s opacity mostly caused trouble for itself. Today the whole world needs it to put some of Sun Tzu’s lessons aside.

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