IMF’s prescription for China will promote reforms of its rare earth industry
The International Monetary Fund (IMF) has issued a report putting pressure on China to adopt economic reforms, which are essential to ensure its continued growth. The IMF has stressed that the Chinese economy, the world’s second largest, has been driven by model for growth that relies too much on credit and investment, which is becoming “unsustainable.” The IMF has urged China, therefore, to pursue a more balanced growth and that it must adopt a package of reforms to contain the growing risks of collapse. The report is actually less alarming than some of the headlines suggest. Indeed, while the head of the IMF, Christine Lagarde observed that emerging markets have been losing momentum in the past few months, she also confirmed China’s growth estimates for 2013 at 7.75%, which is actually higher than the 7.5% indicated by the Chinese government. The IMF is rather more concerned with measures to stimulate domestic and sustainable growth, which imply that China should adopt significant changes to its current ‘free for all’ economy.
The actual statistics, as opposed to estimates, have been very much in line with these indications: Chinese gross domestic product in the second quarter of this was about 7.5% (it was 7.7% in the first three months of the year), which is in line with expectations, quelling fears that China was headed for a ‘hard landing’. Indeed, Asian markets, today, have reacted with relief, having already accounted for negative surprises, which actually failed to pop up. The Chinese growth slowdown, actually, reflects the fact that Beijing has already started to adopt the IMF’s suggestions as it has curbed the availability of and taken more control of growth. However, the IMF report has suggested that China focus more on its own local economy and shifting to an economy driven more by domestic consumption (now less than 50% of GDP) rather than exports. The government of Xi Jianping is under its own pressure to liberalize banking services and to address the growing problem of environmental degradation and safety standards, which have favored corruption and weak labor standards. China also has to fill the growing socio-economic significant gap and living standards that exist between urban and rural areas. Urban space is at a premium and a growing number of workers in the big cities commute between rural villages and the cities filled by modern skyscrapers.
A deep economic crisis (by Chinese standards this might be a growth rate failing to meet the 7.5% expectation rate) would hurt this latter segment of the population more intensely, risking a revolt. Chinese citizens lack the rights of their counterparts in the ‘West’ and other OECD member states; their ‘covenant’ with the State has hinged on the Chinese government’s leadership in promoting greater prosperity. If this fails, if current labor standards and wages have become unsustainable, then the government’s legitimacy would begin to erode. China must now pay more attention to health services, higher wages, pension benefits and environmental protection. This will lead to China losing its low cost labor advantage, prompting an increase in the price of its exports. In REE terms, this means that China will intensify its cleanup campaign of illegal or unsafe REE production facilities, which will stimulate REE mining outside Chinese borders and eventual Chinese demand for imported REE resources.
Rare earth mining, which grew in China thanks to the West being all too happy to allow it to absorb this industry’s environmental and socio-economic risks, will itself have to change. It will become less price-competitive as labor and regulatory costs increase resulting from stricter emissions, tougher industry entry obligations or even energy consumption standards. Accordingly, the IMF urges China “to ensure a more balanced and sustainable growth, you need a package of reforms to contain the growing risks, while we are facing the transition to an economy based more on domestic consumption, inclusive and respectful environment.” The IMF argues that, in the short term, the priority is to curb credit growth and prevent further accumulation of risks in the financial sector. The Fund emphasizes the increase in the so-called ‘shadow banking’, i.e. credit available outside the regular channels, which is likely to create masses of hidden suffering, a threat to financial stability. Of course, ‘shadow banking’ makes other ‘shadow’ businesses possible, and a curb on irregular financing sources will help to curb irregular mining as well.
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