How strong is China’s economy?


LAHORE: China’s economy has been transformed from Maoist basketcase to the second largest in the world in the course of a couple of decades. Analysts eagerly anticipate that it is only a matter of time before it assumes the position of number one and outstrips the faltering colossus that is the American economy.
It possesses, they point out, a massive capital base, hordes of proficient, cheap, automaton workers and an enormous trade surplus running into a tidy sum of $2.5 trillion.
China’s economic model has been based, in large part, upon cheap labour, abundant capital and insatiable demand for its mass produced products from the world.
But “socialism with chinese characteristics” needs an overhaul.
A number of, mostly Western, writers have highlighted inherent problems that China’s model of development poses.
Although a degree of skepticism must be attached to the more hyperbolic of the statements, some assertions bear valuable insights which must be scrutinised at a time when the ‘Beijing Consensus’ or China’s state capitalist brand is being emulated by members of the developing world as a winning alternative to the failed free market.
No one can dispute the success of China’s capitalist revolution, launched by the pragmatist, Deng Xiaoping. However, the economic model carries a distinct trace of its communist heritage. Deng’s reforms aimed at fostering the profit incentive and professional management could not wipe out the pervasive influence wielded by the ubiquitous Communist party.
The legacy of this policy is the ambiguous nature of many Chinese corporations.
“Red Hat” companies were formed at first as private entities under the auspices of the state.
As recently as 1988, the only legal private economic activity was by private households employing less than eight employees. Although this is no longer a precondition, there remains a close link between corporations and the Communist party in modern day China.
It is not surprising that many business leaders come from families of senior party officials.
The symbiotic relationship between state and private entities naturally lends itself to stability, precedent to national interest and integration. However, it subordinates private enterprise to the dictates of the state. While adequate for the mass production of cheap goods, the system is vulnerable to nepotism, inflexible and ultimately inefficient. The Communist party arms well-connected individuals with a massive advantage. In the long run, this renders the Chinese economy less able to meet future challenges.
Furthermore, the very foundation of China’s economic strength is being eroded. The Economist observes that Chinese workers are traditionally perceived as “docile, diligent and cheap”. That image is fast changing as workers seek a bigger share of the pie and grow assertive in seeking increases in wages.
Strikes over pay have only increased in duration and frequency. The wages of temporary workers rose more than 17 percent in a single year. Despite a lowering of overall unit costs; labour costs tripled in a single decade. Workers are aware that the government is a far cry from its Maoist forbears and a ferocious crackdown is a remote possibility.
In addition, China’s long term labour supply has peaked and its population is graying fast.
While hailed as a major feat of social engineering, China’s one-child policy has drastically altered its demographic structure.
China’s planners are faced with tough decisions. If they appreciate wage rates, a prime advantage will be eclipsed by regional upstarts like Vietnam and India touting relatively lower labour costs. Some argue this is perhaps inevitable, a necessary realignment of Chinese policies.
By boosting wages, domestic consumption will rise, ease discontent and the economy would be weaned from its unhealthy dependence on exports as the sole driver of activity. This has been a major policy goal since 2004- easier said than done.
Another alarming issue is that of overcapacity; China has developed massive economies of scale. The financial crunch drew attention to an uncomfortable question; what would China do if demand for its products suddenly dries up? The crisis revealed the fragility of global finance. The US’s voracious demand is based on credit, but it has only a finite capacity for borrowing. Although demand has since rebounded on the back of massive stimulus packages; it has posed unsettling implications for China.
China’s own stimulus package is symptomatic of its problems. China has splurged resources on ghost cities such as Kangbashi in the middle of nowhere and a high speed rail system most of its citizenry does not need. Needless to say, most construction activity is undertaken by state corporations funded by an easy loan policy directed by the State bank.
Some have lauded China’s high tech ventures such as Lenovo as part of an inevitable drive towards the production of high quality and technically advanced products mirroring Japan’s metamorphosis from mass producer to technology titan.
But it is hardly a foregone conclusion. The vaunted JF-17 Thunder’s engine is Russian, the RD-93, the same that powers Indian Mig-29s. In many fields, despite its penchant for reverse engineering, China is well behind the West.
As Paul Midler shows in “Poorly Made in China”, China is engaged in a number game where quality is not always ensured. Manufacturing standards are often poor.
Corners cut to cut costs to a bare minimum, often to a dangerous degree, can result in contaminated baby food and toxic toys; perhaps not a fertile environment for technical innovation and R&D.
Although China’s achievements are impressive, Chinese planners face an unenviable task, the need to provide sustainable development in a changing world. Interest groups vie for influence and further complicate the decision-making process.
China needs to emulate Deng Xiaoping and his genius for reinvention, to take on the challenges it will face in the coming decades.