Jubak's Journal Recent articles: • 4 ways to unearth tech-stock winners, 5/13/2003 • In this rally, dont spit into the wind, 5/9/2003 • Don't let your portfolio go on vacation, 5/8/2003 More... | Jubak's Journal Epidemic threatens more than China's health SARS already has damaged growth -- and without the prosperity that makes allies of the government and its billion-plus citizens, China is a very different place. By Jim Jubak For something so hard to measure, Chinas growth rate is incredibly important. In the first quarter, the official number put the countrys economic growth at 9.9%. But economists outside of China think that number is wildly exaggerated. Many suspect that China inflated the growth rate so that even with a second-quarter slump because of SARS, the government could still meet its target of 7% to 8% growth for the year.
China will have a tough time meeting that number, according to foreign economists. Outside projections for this year range from 5.5% to 7.5%. How quickly the SARS outbreak in China is controlled is the most important factor in deciding where in that range the actual number falls. For example, if SARS is contained in the next quarter or two, Goldman Sachs puts the damage at half a percentage point. If controlling the disease takes longer, the damage could easily amount to 1.5 percentage points. The reports out of China dont point to an early containment. The World Health Organization is worried that SARS, or severe acute respiratory syndrome, has spread to rural provinces near Beijing that have extremely limited medical resources. And with some provincial officials still trying to hide the dimensions of the problem, it'll be difficult to implement the kind of strict quarantines that have apparently halted SARS in Vietnam and Singapore. The key to its importance Why is Chinas growth rate so important? In the short run, it's vital because a global economy in search of a growth engine to drag it out of the current slump cant afford slower-than-expected growth from China. Yes, China is a huge exporter, but its also a huge consumer of everything from oil to lipstick. For example, the International Energy Agency estimates that SARS will knock 1.2 million barrels a day out of world demand for oil this year. In the long run, China's growth is important because SARS exposes the fragility of the Chinese miracle. You see, 7% economic growth is the magic number in China. At that level, Chinas economy grows fast enough to provide a job for every new worker. Above that level of growth, the economy actually manages to soak up some of Chinas many unemployed and underemployed. But when the growth falls below 7%, the rolls of the unemployed rise. Thats a big deal in a country that has produced a middle class of 400 million in the last two decades, but that still has 100 million official unemployed and 200 million surplus agricultural workers. At 7%, the ruling Communist Party can deliver on its implicit deal with the middle class -- in exchange for improving living standards, these educated and urbanized workers dont demand a greater say in running the country. Constant tension Despite a long tradition of bureaucratic government, Chinas rulers have never had it easy. The countrys history demonstrates a constant tension between a central government and distrustful and rebellious regions. Reports that villagers in coastal Zhejiang province smashed furniture and beat up government officials because SARS patients were being quarantined in a government office belong to a long tradition in China. So, too, do reports of truck drivers refusing orders to drive into Beijing and stories of frightened urbanites ignoring government orders and simply setting out to walk back to their rural homes. None of this yet constitutes a true challenge to the current regime. That would require more government bungling and misinformation, creating even greater levels of distrust and anger and a sense by the middle class that the government wasnt going to be able to deliver on its promises. Its likely that the Communist Party would try to head off any foreseeable challenge to its authority by returning to more central control and to economic policies that sought to once again level the deep divides between the haves and the have-nots. The drive to cut redundant workers at inefficient state-owned businesses would slow again, for example. So far the governments response to the political risk posed by SARS has been to order widespread dismissals of province-level officials guilty of negligence, the government says, in fighting SARS. More than 120 officials have been sacked so far. High stakes And the government has promised financial assistance to any workers whose income drops below the local poverty line because of SARS. The government clearly knows that the stakes are high. Any increase in social unrest and any backlash that moved the country away from market reforms could unleash a kind of negative cycle. Instead of more prosperity enabling the government to let market forces make more decisions that in turn produce more prosperity, the result would be greater central control of the economy and less prosperity that would then require more central control. SARS is more than a terrible and terrifying disease that has killed close to 500 people around the world. It's also a reminder that projections of an increasing wealthy and economically powerful China are just that -- projections. Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBCs Business Center most Wednesday nights at approximately 5:45 p.m. ET. Selected CNBC stories can be found in the TV Reports index. At the time of publication, Jim Jubak didnt own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||
|
|||||||||||||||||
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.