Chi­nese econ­omy: re­al­ity and per­cep­tion

Enterprise - - Economy -

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

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