There is general agreement that China is entering a new economic phase as its economic growth declines, its stock market plummets and its currency is devalued. Some economists are interpreting the change in the Chinese economy as an indication of its maturity. Other economists foresee that it is the bust that follows a boom as predictably as thunder follows lightning. Given the importance of China to the world economy, and particularly to the Asia Pacific region, it is worth digging a little deeper.
There are a number of challenges that China is facing: wealth disparity, economic mismanagement, skewed population demographic, reduced economic competitiveness, to name a few.
While China is officially a communist government, the last two decades of economic growth have also coincided with growing inequality, particularly between rural and urban Chinese. Until recently this has been accepted as a natural bi-product of economic growth. The reasoning went that those that are involved in the new economic activities are going to be better off than those that remain in the old ways. It followed that if one wanted to be better of then one would join the new way – and so tens of millions of Chinese moved from the country to the city to better themselves. In recent years the wealth divide has become more apparent, with the top 1% owning over 30% of the wealth. Further to this there is widespread suspicion that much of the wealth has been achieved through corruption and/or exploitation; resulting in a very public crackdown on corruption both within the Communist party and elsewhere.
The government has also being accused of economic mismanagement. Initially this was related to a range of infrastructure projects that appeared to provide little or no return on investment, such as building high volume freeways between points that few wanted to travel. More recently it has related to promoting investment in a stock market that was clearly overpriced, and then trying to prop up the share market when the bubble burst after widespread speculative investments reached a peak. There has also been a degree of distrust from the west, firstly in relation to the government sanctioned economic data, and secondly in relation to what is or is not bribery when dealing with officials. All of these types of economic mismanagement have been undertaken by other countries at various times, rarely have they all been apparent in a single country at one time.
Another major challenge on China’s horizon is a skewed demographic as a result of the one child policy that was introduced to curb population growth late last century. This has not only accelerated the average of the population, it also means that in the near future the population that is of working age will have to carry a record percentage of elderly citizens. The other demographic skew is that the one-child generation is predominantly male. There are many historic examples of generations that have been predominately female in the aftermath of war, but none that have been predominantly male.
If these issues were not enough, China is also finding itself on the wrong side of changes in its trade-weighted index. This means that Chinese exports will not earn as much in local currency as they used to. Combine this with inflation in Chinese wages and the overall profitability of the Chinese factory is significantly reduced. This is very important as manufacturing is the primary driver of the Chinese economy.
With all of these challenges to over come one might wonder what a government should do. Certainly the Chinese people are asking what the future holds. In response, the government, (like many before it across the world at various points in history and today), is trying to distract them with external demons. Ironically the Chinese have pointed the finger at Japan. It is ironic, not only because they are accusing a pacifist nation of war mongering, but also because it is Japan’s economic stagnation that they are most likely to emulate if they do not address the issues at hand. China’s economy’s last three decades match closely with the Japanese economy through the 1960’s, 70’s and 80’s. The final decade in the pairing even finished with property and share market speculation, artificially propped up by significant government intervention. China will want to avoid the three decades that followed.
The advantage China has is that it has a much stronger government that can implement any economic measures it deems necessary. In contrast, Japan had a succession of compromised coalition governments through the 90’s that prevented the government from taking decisive steps. The key question is; what measures will be taken? Certainly the very public crack-down on corruptions is a step in the right direction. Also China has a much larger domestic economy than Japan, which gives it greater scope to make necessary reforms. Certainly it will need to turn its focus inward to ensure it capitalises on the necessary transition from an export economy to a domestically integrated global economy. Part of this will be dealing with the divisions within the country, between urban and rural, old and young, rich and poor, male and female, that all have the potential to undermine economic growth if mishandled. This recipe will need to include the following ingredients:
Economic efficiency – As the currency goes up, Chinese manufactures will need to be more efficient.
Values are relative – Skewed demographics can lead to skewed values and extremism, the Nazi’s first targets were the homeless, disabled and elderly, then the Jewish. With things get tough, China needs to resist going down a similar path.
Trade – China is rattling is saber at the USA – it is not a good idea to fight with your biggest customer.
Money – The US dollar still dominates international trade, China’s dreams of a Yaun dominated world need to be shelved for now.
Ecosystems – The Chinese economy is now an important part of the world ecosystem, if it falters, so will the world – China needs to focus on itself for now.
Measurements – China needs to be more transparent about its economic data.