How strong is China’s economy?

By Sushil Seth  / 

Sat, Feb 11, 2012 - Page 8

There is a growing fear that the world might be heading toward an economic Armageddon, with the eurozone crisis looking increasingly intractable by the day. The US economy, too, is in a holding pattern with not much light ahead. In such times the Chinese economy appears healthy, though its rate of growth is slowing. However, this is not to say that China is trouble-free.

China’s economy has some deep-rooted problems that do not augur well for its future. This is the assessment of Chinese Premier Wen Jiabao (溫家寶), who said some time ago: “We must ... address the long-standing problems in China’s economy of a lack of balance, poor coordination and unsustainability...”

If anyone else had said this, he would have been laughed out of town, because China’s is a “slower” growth rate of about 9 percent is a rate most other countries would die for.

China’s growth strategy has been underpinned by three important factors.

First, it has been export-driven, with seemingly unlimited demand for Chinese goods in the US, Europe and even among developing countries.

Second, production costs in China are low because of low wages and long working hours, which gives China an important and decisive competitive advantage compared with other countries.

Third, an undervalued currency further enhances China’s competitive advantage. Not surprisingly, Chinese goods have flooded international markets to undercut local production with consequent job losses.

Until the global financial crisis hit the world in 2008, the availability of cheap and easy credit had not created too much resentment in the West against Chinese exports. For instance, with China buying US treasury notes and bonds with recurring and expanding trade surpluses, and its cheap goods helping to keep inflation under control, it did not seem like a huge problem.

However, all this is changing, for a number of reasons. First, China’s export markets in Europe and the US are shrinking because of severe economic problems in these countries. They simply cannot afford to keep buying Chinese goods as they did before.

Second, these countries, especially the US, have been pressuring China to revalue its currency to create a level playing field for their exports to China. Because of China’s resistance to freely floating its currency, protectionism is rising in the US.

At the same time, labor unrest in China has put wages under upward pressure. This competitive advantage might diminish as labor costs rise.

With the rise of protectionism and rising labor costs, the export-driven growth strategy might not be as attractive as it has been for the past 30 years.

China will, therefore, need to reorient its economy to produce goods and services for internal consumption, because any slow or sluggish growth will worsen unemployment and lead to social unrest.

The problem, though, is that it is not like switching gears in a car to change the direction of an export-driven economy to focus on creating and meeting internal demand. The state has to have a road map for this and a strategy to execute it. Beijing has no such plan.

When the global recession hit in 2008 affecting Chinese jobs and exports, Beijing sought to meet the situation with a hefty stimulation package of about US$600 billion. However, this also created a property bubble and led to wild stock market fluctuations.

Yet the government has once again eased up on liquidity because it fears a contraction of the economy. This kind of stop-go economic approach is too arbitrary for a country of 1.3 billion people, which needs more jobs with a strong component of social welfare for difficult times. As it is, China’s estimated 300 million floating rural migrants working in the urban economy are not entitled to the benefits that accrue to their urban cousins.

Many poor and low-income Chinese have difficulty accessing education and health facilities for their children because of prohibitive costs.

After all, China calls itself a socialist country and presumably seeks to promote economic and social equity.

Tsinghua University’s Social Progress Report last year warned that China had fallen into a “transition trap” and faces a series of systemic “abnormalities,” such as lopsided growth that has privileged the state and its monopoly industries.

It is a top-heavy system with entrenched corruption. It needs overhauling. However, with a small elite at local, regional and central levels controlling the levers of power, it is easier said than done. This elite has parceled out businesses among their children and a select group of favorites.

Given this situation, any systemic transformation would seriously impact the relatively small political and economic elite that feed on the system.

This is why that despite all the noise about corruption and the need to eradicate it, nothing much can be done because of the nature of the system.

Liu Xiaobo (劉曉波), a Chinese Nobel Peace Prize laureate who is serving an 11-year prison sentence, has said: “In China the underworld and officialdom have interpenetrated and have become one. Criminal elements have become officialized as officials have become criminalized...”

Apart from entrenched corruption, there is rank inefficiency, colossal waste, structural imbalances and overproduction — with social justice and welfare a serious casualty.

Since the system lacks transparency and accountability in the absence of a participatory and responsive political system, China’s economy will continue to sputter with no medium or long-term solution.

To sustain growth, China needs political reform, as even Wen said.

“Without political restructuring, economic restructuring will not succeed and the achievements we have made in economic restructuring may be lost,” Wen said last year in Beijing.

“If we are to address the people’s grievances we must allow the people to supervise and criticize the government,” he added.

There is no chance of this happening any time soon, if ever.

Sushil Seth is a commentator in Australia.