Oil Price Surge: How Libya Threatens China Growth
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The Fiscal Times
April 13, 2011

Who’s the biggest winner in Libya? Certainly not Muammar Gaddafi, whose antics make Charlie Sheen look ambassadorial by comparison. Nor is it NATO, which is struggling to coordinate with the rebel leadership after more than one misguided attack on that rag-tag band. It surely isn’t President Obama, whose last-minute entry into the fray looked as disorganized as it did reactionary. 

The real victors in Libya to date seem to be China and Russia, which abstained from the U.N. vote authorizing the no-fly zone, happy to let the U.S. and its allies get sucked into another costly military entanglement. They likely are not wholly dismayed that we are lavishing our treasure on the North African country; and considerable treasure at that. The Pentagon has reported that we spent $608 million in the first few weeks of the effort alone.

Moreover, Russia is doubtless thrilled that the Libyan conflict has helped drive oil prices into the stratosphere again – nothing pumps up its economy faster. In addition, both countries have milked the Libya engagement for propaganda purposes. Vladimir Putin has likened the attacks to a medieval crusade, which has about the same impact on young Muslims as throwing raw zebra before hyenas.  The Chinese, meanwhile, have cheerfully spread their view that the fight was all about oil, suggesting the kind of ulterior motive they can speak of with authority.

For China, though, the Libyan engagement is not entirely positive. Beijing is surely overjoyed to have the world’s attention focused elsewhere, and away from its increasingly harsh repression of political opponents. On the other hand, rising oil prices will buttress higher inflation in China, and consequently feed dissent.

Beijing’s escalating crackdown on dissidents has shocked the international community – especially since the international community began to shift its gaze from the calamities in Japan and Libya.  In the past few days, after the arrest of famed artist Ai Weiwei, the world has seen the extreme lengths to which Beijing has gone to preempt uprisings of the sort that have convulsed the Middle East.

Tentative efforts to import Tunisia’s “Jasmine Revolution” to China have met with beatings of bystanders and assaults on journalists, the shut-down of innumerable web sites, widespread arrests and the “disappearing” of a steadily growing number of activists – so terrified is the government of civil unrest. 

It is an extraordinary setback for a country that “came out” to the world just three years ago hosting the most spectacular-ever Summer Olympics.  In staging that extraordinary event, Beijing presumed to take its rightful place near the top of the pyramid of nations. With the reign of terror now underway, that ascension seems premature.

The increased crackdown in China may presage Beijing’s expectation that its remarkable economic gains of the past thirty years are unlikely to continue. Chinese officials may fear that slowing growth will not provide the employment opportunities so necessary to satisfy those still migrating from the country to the cities. China’s Minister of Human Resources and Social Security recently reported that notwithstanding indications of labor shortages in certain industrial cities, worker supply still exceeds demand, requiring China to create about 25 million new urban jobs annually for the next several years. 

The possible disruptive impact of high unemployment makes a potential slowdown in the country’s growth a serious threat. China’s problems are exacerbated by the need to rein in inflation, running at 5.4 percent in March, which has led the government to raise interest rates five times since the financial crisis. It is also causing some to expect a speedier revaluation upwards of the yuan, which would further curtail growth.

These issues perhaps explain why China will spend roughly $95 billion this year on security – an outlay for the first time topping the military budget, expected to be about $91 billion. (Many think that China’s military spending substantially exceeds the stated budget, but it does provide a benchmark.)      

Recent economic news from China  indicates that its prospects may have changed. Beijing recently projected that growth will decline from about 10 per cent to 8 percent this year and to 7 percent for the next four years. Since the country has a long history of outperforming expectations, most economists continue to project near-double digit growth. However, with interest rates and currency levels on the rise, it is possible that analysts are too optimistic. Indeed, the Organization for Economic Cooperation and Development suggested as much in a report out this week in which it forecast moderating gains for China.

Certain data points support this notion. Economists at the OECD and elsewhere were taken by surprise by news that in the first quarter China recorded its first net import deficit since 2004. Soaring commodity prices were blamed, and it is expected that more common trade surpluses will again become the norm, but the change in tone is noteworthy. Similarly, recent vehicle sales gains in China have slowed drastically, with the industry posting gains a mere fraction of former levels (up 5 percent in March, for instance, against a 75 percent gain a year ago).  Overall, the picture is unusually cloudy.

The Libyan conflict may have distracted the world’s attention from the repression in China. However, in helping to push up oil prices it also feeds the inflation that ultimately may create the greatest threat to China’s society. Beijing may not be a winner after all. It might prove easier to squash Gaddafi’s forces than to put the “inflation tiger” back in its cage.

Related Links:
US Human Rights Report Looks at China with Concern (Christian Science Monitor)
IMF Warns China of Credit and Asset Bubbles in Economy (Economic Times)

After more than two decades on Wall Street as a top-ranked research analyst, Liz Peek became a columnist and political analyst. Aside from The Fiscal Times, she writes for FoxNews.com, The New York Sun and Women on the Web.