Author : Colonel SC Tyagi, (Retd),

CAN CHINA AVOID THE ECONOMIC DOWNTURN

Colonel SC Tyagi (Retd)*

To remember your visit to a country, if you wish to pick up a memento from an airport anywhere in the world; be it from Chicago, Frankfurt, Prague, Bratislava, Budapest, Vienna, Bangkok, Melbourne or New Delhi, there is a chance and in most of the cases it would turn out to be ‘Made in China’. The road to become a manufacturing giant began with China’s collectivization efforts. “The Great Leap Forward”, starting from 1958 and ending by 1961, was intended to become self-sufficient in industry but it rather led to the biggest famine in history where in 30-45 million people died. Mao Zedong launched “Cultural Revolution” in 1966. For next ten years dissident party leaders in Communist Party of China (CCP) were eliminated as China saw factional warfare. After Mao’s death in 1976, Deng Xiaoping started his economic reforms and beginning 1978, Chinese economy had sustained a growth of nearly ten per cent and nearly half a billion people have been lifted from poverty. Every eight year China’s Gross Domestic Product (GDP) has doubled and in the last eight years the GDP has trebled[1]. Today China has second largest economy in the world in terms of Nominal GDP and largest in terms of Purchasing Power Parity (PPP). China is the world’s largest exporter and along with it, China boasts of the world’s largest army; a combination which catapults it to a status of emerging super-power in its own rights. In many analyses, the prediction is overwhelmingly favouring China over-taking US economy and becoming number one. But it remains to be seen as to how much of these predictions have taken into account the boastful accounts made by Beijing which conceal more than what they reveal. The weakness in its structural form, the under currents in the society and lack of technological innovations are some of the factors which are forcing Chinese economy to slide down ward.

China has structurally embedded CCP elements in the corporate management thereby making state intervention less visible in the industry. Constant regulations are ensured through shadow bureaucracy. While bringing in available technology through an informal understanding by the investor, technology and special expertise is shared and access to the market is controlled which effectively improves competitiveness to even block foreign business for further expanding their market[2]. State functionaries have kept a tight control on key profitable sectors and have ensured state ownership in disguise.

By ensuring limited foreign access to the industry, China has been able to prevent well-funded rival power centres emerging. It may thus be apparent that state control and appointments of senior level personnel has bred macro-economic stability in China. But it has a flip side too. Discontent, corruption and Red Culture Movement reminiscing of Maoist era has seeped in and is amply evident from removal of a ‘princeling- a son of Eight Elders of CCP’ Bo Xi Lai on perceived lawlessness of his anti-corruption campaigns and alleged involvement in a homicide plot[3]. Despite being a strong contender for a top post in the forthcoming CCP elections, he was removed. Chinks in the shining armour are now visible. With opaque accounting practices, State Owned Enterprises (SOEs) are fostering the environment where the gap between the rich and poor and urban and rural masses is ever increasing. The growing disaffection has the potential to become an uncontrolled hurricane as was witnessed in the southern manufacturing town Shaxi in Guangdong where it became the scene of China's most recent large "mass incident." Although it was contained, can China cope with many more likely Shaxis?

China had joined the WTO in 2001 and its global export has the advantage of low labour cost, good infrastructure and easy availability of credit. Being mainly export oriented, the trajectory is based on consumer demand. The demand is dwindling after ‘Subprime crisis’ in US and specially now during the ‘Eurozone crisis’. China has by passed them through massive infrastructure creation but it has led to over-capacity in production and supply far exceeding the demand. Chinese goods are competitively cheaper but lack good design and quality e.g. China has 60 billion dollar world toy market but especially after 2007 recall, it needs redesigning and improvement in quality to stay put on course. As per conventional economic wisdom, unless the price is lowered to neutralize the over-capacity - which will wipe out all profits - no expansion of overseas market is feasible. Volume of overall exports of goods and services percentage change, as per latest IMF report, has gone down from 28.3 in 2010 to 8.189 per cent in 2011 and is estimated at 6.675 per cent in the current year[4], which is alarming to say the least.

Anticipating the structural problems posing hindrance to China’s growth, it adopted “Inclusive Growth Model” some two years ago and as per Professor Kondapalli, Chinese government has made efforts to restructure the economy by emphasizing on domestic consumption and thus hopes to raise it from the current about 35 per cent of the GDP to about 50/60 per cent in a decade. It might prove to be a tall order especially when compared to Indian domestic consumption of nearly 60 per cent of the GDP. 

While Anoop Singh, Director, International Monetary Fund's Asia Pacific department opines - China's economic growth model will accelerate integration in Asia as the world's second largest economy is shifting its focus to consumption, away from its reliance on investment and demand from China is likely to shift away from where it is recently and more towards commodities and capital goods that will meet rising consumption within China. [5]

Raising domestic consumption warrants a balance in supply and demand, the current dilemma China faces is how to handle glut in supply as a result of poor domestic demand. The glut has created surplus stocks which could force business to bankruptcy. Any slowdown in manufacturing will end up in mass unemployment. China has so far consistently managed approximately four per cent[6] unemployment rate out of the total employable labour force, as any government bereft of popular legitimacy cannot afford to do it otherwise.  With the closure of this option and if the production is maintained at the current level and export remaining stagnant, domestic consumption needs to go up for which wages will have to be increased to create disposable income. Additionally, hike in interest rates will have to be adopted to encourage savings simultaneously. China has deliberately kept Yuan undervalued which now warrants appreciation. Cumulative effect of this cascading situation will lead to Chinese exports becoming more expensive to foreign consumers. The quantitative advantage enjoyed by China over West’s qualitative advantage in industrial design thus now becomes a handicap. Without technological assistance and innovation in design, a slowdown in the Chinese economy is imperative and looks unavoidable.

Cascading effects of slowing down of exports are visible partially in the form of bad debts as a result of big stimulus for last three years provided by Beijing and rising inflation.  At the end of 2008 when global trade ground to a halt and the country purged nearly 20 million jobs, Beijing responded with a 4 trillion Yuan ($635 billion) stimulus programme that opened up lending from Chinese state banks. The move helped kick off growth across the country as local governments went on a construction frenzy from new ports and airports to ambitious housing developments. Although that kept China's GDP growth higher compared to the rest of the world, in the face of the global slowdown; but it caused twin problems of rising inflation and bad debt. Particularly with bad debt right now - that problem's coming home.[7]

According to an estimate 65 million houses and many Malls are lying vacant. Towns like  Jing Jin City, portrayed by the developers as the biggest villa development in China, was a $3 billion investment designed to eventually become home for half a million people. Really a satellite city of Tianjin, the city government there had aspirations of Jing Jin eventually becoming a new Manhattan. However, as credit has dried up and speculators have now shown reluctance to sink money into risk property developments, Jing Jin City is effectively a ghost town.[8]

Another important issue relates to China’s focus on economic development at breakneck speed leading to widespread environmental degradation. What are some of China’s major environmental challenges? China suffers from the twin problems of water shortage and water pollution. Desertification in China leads to the loss of about 5,800 square miles of grasslands every year. In 2008, China surpassed the United States as the largest global emitter of greenhouse gases by volume. (On a per capita basis, however, Americans emit five times as much greenhouse gas as the Chinese). Rapid development means increasing urbanization, consumerism, and pollution. Roughly fifty thousand environmental disputes took place during the previous year. This mirrors an overall trend of a rise in the number of protests over the past decade. China must meet energy efficiency standards and owners of existing constructions will be expected to spend an estimated $200 million to improve efficiency before 2020, by which time the number of buildings in China is expected to nearly double.[9]

Notwithstanding the above, with China’s current growth rate dipping to the lowest in three years; signs are ominous and dark clouds seem to be gathering mass. According to the National Bureau of Statistics of China, Gross Domestic Product grew at a 7.6 per cent rate in the second quarter of 2012, down from 8.1 per cent pace in the first quarter and marking the sixth consecutive quarter of slowing growth on the mainland dating back to 2009.

A key driver to China’s growth is its huge work force; which is largely drawn from 700 million people living in the rural areas. There are 150 million people below the poverty line accounting for 36 per cent of the population as per a Chinese Scholar from China Centre for Contemporary World Studies. Socio-economic conditions are a constant factor which worries Beijing the most. In addition to the unrest in Tibet, China is extremely cautious about any mass up-rising, as seen in Tiananmen Square, which can weaken the hold of the CCP in governance besides gaining adverse international publicity. The 13.8 per cent jump in China's planned budget for internal stability to 624.4 billion Yuan ($95.0 billion) is an indicator of this main worry.  By contrast, China's People's Liberation Army budget is set to rise 12.7 per cent to 601.1 billion Yuan ($91.5 billion). China's ruling Communist Party also issued its loudest warning yet against recent Internet-spread calls for "Jasmine Revolution" protest gatherings inspired by popular uprisings in North Africa and the Middle East.[10]

The change of guard in CCP is likely to bring the next generation to power containing Princelings mostly. Although the next generation has been groomed and has proven administrative experience and capabilities, it remains to be seen whether anger from middle class can be contained by the governance with ever increasing chasm between them and the masses. Controlled slowdown or the international situation improving drastically can alone bail out China from the economic slide before the volcano of mass-movement erupts. The period beginning the end of the year 2012 and thereafter will see the transition from old to new and how it fares on its journey will decide the outcome.

Endnotes