Thu, Nov 13, 2003 - Page 8 News List

China's enigmatic economic 'miracle'

By Orville Schell

The PRC is a country in precarious transition from one political or economic system to another. Monumental contradictions abound. Indeed, probably no nation of global significance has more unresolved issues concerning its ruling principles and structures. But what really makes forecasting China's future so difficult is not only that recent developments have so often defied prediction, but that virtually opposite, if logical, scenarios are plausible.

China emerged over the past decade-and-a-half as a paradigm of economic energy, determination and progress. Few other areas in the world have been deemed an "economic miracle" for so long. Through thick and thin, China has managed to maintain impressively high economic growth rates.

In 1989, China rose from the ashes of the Tiananmen Square Massacre. In the early 1990s, it weathered the implosion of the Japanese economic miracle, and maintained a steady course through the Asian economic crisis later in the decade.

This year it came through the SARS epidemic with banners flying. Now it seems to have repelled US efforts to force it into revaluing its currency.

Anyone who has visited China's large cities over the past few years must be impressed by the energy, pace and scale of development. The sheer number of projects -- from highways, ports, railroads and airports to skyscrapers, housing developments, telecom infrastructure, and industrial parks -- leaves even skeptics gasping in awe.

But behind the dazzling skylines and impressive statistics, another reality exists, one replete with unresolved problems and daunting numbers that suggests a far darker scenario. Consider the following:

China must create some 12 million to 15 million new jobs annually just to keep up with population growth;

? The government must deal with an estimated 270 million unemployed or underemployed people;

? A "floating population" (dis-possessed rural workers who have moved to the cities to find work) of between 100 million and 150 million is growing by almost 5 percent annually, representing the largest migration in human history. These migrants exist with no job security, no long-term housing, and no health care;

? 800 million rural peasants have been largely left out of China's latest boom, creating rising, but frustrated, expectations;

? China has no functioning pension system, and the cost of creating one is estimated in the hundreds of billions of dollars;

? New stock markets are all too often little more than elite-manipulated casinos, leaving China without the capacity to form the indigenous pools of investment capital needed to power its own development;

? State banks must provide 98 percent of all financing for local companies. But, having been used to keeping state-owned enterprises afloat for too long, the banks are essentially insolvent. Standard and Poor's estimates that it would cost around US$518 billion (40 percent of GDP) to clean up their non-performing loans;

? Environmental degradation from rapid industrialization, overpopulation and uncontrolled resource exploitation is extreme and, given the pressure to maintain high growth rates, very difficult to remedy; and

? Since 1998, the Chinese government has become increasingly reliant on ever larger bond issues for fiscal stimulus, pushing debt onto the next generation; estimates of the government's growing aggregate liabilities (bank debt, un-funded pension plans, bonded indebtedness for infrastructural projects, etc) range from 70 percent to over 150 percent of GDP.

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