Chinese economy: reality and perception
China’s evaluative report on economic quality in its western region has predicted that the region’s economy will grow by 13 percent, higher than the national average. The report was based on six indices of efficiency, compatibility, stability, sustainability, creativity and sharing of economic growth.
“I don’t think there is anything we can’t build in China today,” says Brian Lau, vice-president and general manager of Celestica’s Asia sales group. China’s manufacturing sector is quickly moving up the value chain. Where once it produced poorly made clothes and plastic playthings, Chinese factories are now capable of making sophisticated electronics or pieces of machinery each worth hundreds of thousands of dollars.
China’s move to producing higher-end products is driven by necessity. Labour costs, while far cheaper than in North America, are rising fast and making value-added products is the key to offset inflation and to keep the country’s massive manufacturing sector competitive. Producing more sophisticated products is also boosting income for both workers and companies, helping China towards its long-term goal of shaping an economy driven primarily by domestic consumption rather than overseas export demand.
Also, the country has exported more capital goods than consumer goods since 2003. The GaveKal report says that during the past decade, Chinese exports of capital equipment have risen from 2 per cent of the global total to 8 per cent, while US and Japanese shares in the market declined.
As the United States and Europe struggle with the debt crisis, China’s economy appears strong, but analysts say its growth model is increasingly dependent on investment and cannot sustain. Moreover, China’s cost advantage is under threat. According to Asia-focused investment and advisory firm Intercedent, rising wages and an expected increase in the value of China’s currency means that mid-tier manufacturing wages in China will be equal to minimum wage levels in the United States by 2017.“If this occurs, then there will likely be acceleration in the repatriation of low-end manufacturing jobs from China to North America, or to other lower-wage countries,” the report says.
For this reason, Carl Walter and Fraser Howie, in their book ‘Red Capitalism,’ negate the strength of China’s economy and call the macroeconomic data misleading. To fight the economic crisis of 2008, China unleashed a torrent of credit to finance new highways, highspeed railways and real-estate projects, in a bid to stimulate domestic demand. But that has led to a warning from experts that now China’s growth has become increasingly reliant on investment. Economists foresee China’s economy going into a bad debt phase in the coming years.
According to the state auditor of China, an estimated debt of $1.65 trillion was held by the local governments by the end of 2010. The global ratings agency Moody disqualified this debt burden as an understatement of about $541.6 billion. China has adopted bad loans as a norm for new economic growth. Analysts view bad loans as a threat to China’s economic model, disregarding the immense growth as they do not find it to be sustainable.
Importantly, during the last few growth years China has remained less concerned with the threat of a stunted economic model. The country’s economic aims have shifted more to social goals and, in particular, a ‘harmonious society’. As a result, its financial reform has stalled and the country has never truly opened itself to the world. Foreign firms hold trivial amounts of domestic financial assets (under 2 percent), and play only a marginal role in any domestic sector.
The Chinese banks have, however, gathered advantage by not getting exposed to Western debt and methods of hiding risks, though China’s specific approach brings a different set of problems. The bigger problem is that the system trades almost entirely with itself. Critical information about liabilities and pricing is deliberately concealed or is impossible to access; there are no outside entities establishing prices by bidding in the market. That undermines efficient capital allocation and allows excesses to decay.
The risk has been distributed largely from state-controlled banks to other state entities. This distorts external perceptions of China’s ability to meet all of its financial obligations. The book ‘Red Capitalism’ says that the State debt appears to be quite low by international standards (just under 20 percent of GDP) but when all government obligations are lumped together, it is actually 76 percent.
Carl Walter and Fraser Howie also suggest that it may be in China’s overall interest for the system to open itself up. The economy does offer a combination of enthusiasm for the rapid changes and cautions for future