Ever since we entered the 21st century, the opinions of academics and businesspeople regarding the future of the Chinese economy have been diametrically opposed. Why do they hold such diverse opinions?
One faction led by Gordon Chang (
Overall, the Chinese economic situation is one of outward strength and domestic weakness. Its strength derives mainly from foreign capital and the increase in exports it creates. Currently, both the foreign investment and the export situation are looking quite good, seeing 23 and 19 percent growth, respectively, during the first three quarters of last year.
Domestic problems basically stem from issues created by state-owned enterprises, the financial system and agricultural reform. These include problems in national finances, social security, unemployment, deflation, income distribution and imbalances in regional development. These problems are worsening continuously.
There is thus a strong contrast between the performance of the external and domestic economies, making a correct assessment of the future of the economy next to impossible.
Let's take look at the sources of China's economic growth -- active financial policies and the contributions by foreign capital and exports. Financial policies and foreign capital (including exports by foreign-owned businesses) each contributed about 30 percent of economic growth in the late 1990s. It will probably be impossible to maintain this situation in future.
China's budget deficits have in recent years risen to the level where warning bells go off internationally -- 3 percent. Add to this other explicit and hidden debts. Chinese officials and academics are all of the opinion that these policies cannot be perpetuated.
During the 1990s, Chinese exports grew at an average annual rate of 16 percent. International markets will probably not be able to support such growth ad infinitum. Further, many foreign investors are still losing money. Inability to turn these losses into profits in future will probably affect the willingness of foreign businesses to invest.
The above assessment seems to be slightly pessimistic, but not to the point where it sees the Chinese economy collapsing. Quantitative research by many different economic models by Chinese officialdom, the World Bank, the Organization for Economic Cooperation and Development, the Asian Development Bank, Chinese academics and US investment consultancies shows that the rate of economic growth will remain between 3 percent and 8 percent between 2000 and 2020.
The main factor affecting the speed of economic growth will be whether economic reform and transformation will be successful, leading to more efficient use of economic resources and increased productivity.
This forecast, however, is purely based on economic premises and it only considers the supply side, ignoring the demand side, social stability or political variables.
The main question about economic development is not one of speed or the difference between 3 percent or 8 percent, but rather one of the difference between success or failure, prosperity or collapse.
Unless China can keep up effective economic growth of about 8 percent, it will be unable to handle the challenges posed by economic reform and transformation. This may create social and political turmoil, a withdrawal of foreign capital and a serious financial crisis, and lead to a steep decline in the Chinese economy. This would create a serious vicious circle possibly leading to an economic, social and political collapse.
The question, thus, is not whether the economy can continue to grow, but whether it can grow quickly.
This is also why academics and businessmen can hold such diverging opinions -- one faction takes a more comprehensive approach, the other only a fundamental economic approach.
This assessment is corroborated by Chinese leaders. Premier Zhu Rongji (
Chinese officialdom estimate that aggressive financial policies added about 2 percent to GDP growth between 1998 and 2001. That a difference of 2 percent is enough to cause an economic entity enjoying an 8 percent economic growth rate to collapse shows that China's problems can only be solved through rapid growth. Other-wise the economy might collapse.
Tung Chen-yuan is an assistant research fellow in the Institute of International Relations at National Chengchi University.
Translated by Perry Svensson
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