China Tells

For the last two decades, China’s phenomenal growth has been one of the most critical changes in the world economy. Such a growth was given tags such as ‘wonder’ or ‘miracle’, and boosts the confidence of all Chinese people by the expectation that were China to continue to grow at such pace, it will be sooner rather than later for China to surpass Japan, and eventually USA to become the world’s leading economy.

The growth story is still under its way. For example, China registered one of the worlds’ best growth rates in the second quarter of 2010 (10.3%). Consider that most developed economies are still struggling in the mire of double dip or debt crisis, for such a big and export oriented economy as China to continue to post a double digit growth, it has to be outstanding if not astounding.

From time to time, however, people do pause and think, and start to raise the questions such as: is this what we want? We are living in the worlds’ fastest growing country, so what? Are we really happier than ten years ago?

Such self doubting is being felt by the government official in Beijing. In fact, it is becoming increasingly obvious to the country’s leaders that the dark sides of an excessive growth in China are starting to emerge. Among them:

First, there is a growing income gap between the rich and poor. According to the statistics from United Nation, the Gini coefficient of China has steadily increased from 30 to 45 since 1970, reaching the level of USA, but far above that of European countries. Such a widening gap has at least partially fueled the anger and hatred of low incomers towards the whole society. In 2010 alone, more than six kindergartens in different parts of the country at different times have been attacked by violent intruders who stab kids and toddlers and then committed suicide. The attackers don’t even know these kids, or the parents of them, and it is hardly believable that all the attackers have mental problem especially that none of them have been hospitalized before.

Second, it is unclear whether the country’s biggest work force – the factory labors – benefit from a phenomenal growth story. One of the key advantages of China’s export sector is her productivity, which largely attributes to its super low wage, further cheapened by a pegged currency rate to USD. However, such advantage is unlikely to continue in the near future. To start with, China’s labor supply, especially in coastal areas, is going to shrink in the next few years, mainly due to the one child policy started in 1980. As a result the employers are likely to enter a period of competing for young labors, and inevitably the wage will have to be increased for such competition. Next due to incidents such as suicide workers in Foxxcon, the government will likely support a policy of increasing the minimum wage continuously in the next few years. Thirdly the pegged FX rate is being criticized and challenged by numerous trading partners, lead by USA from time to time. Since 2000 China has received most complaints in WTO (search WTO in Chinatells), more than double the second runner (South Korea). The international pressure will likely make it more difficult to peg the currency while keeping a record amount of trade surplus at the same time.

Third, China has accumulated record amount of Foreign reserve (mainly in USD) through her trade surplus. However, it is increasingly unclear whether it is a blessing or cursing. Since the beginning of June 2010, USD has lost about 15% to 20% of its value against major currencies. Given the gloomy outlook of US economy such as its anemic growth prospect, record high unemployment rate and continuously ballooning debt, the second and third round of quantitative ease and monetization of its debt looks more likely to happen. If USD has a chance of being largely devalued due to the preference of US Fed and US government, what is the point to accumulate such a record amount of reserve through so much hassle risking so much international reputation? How to protect the value of the foreign reserve is going to be one of the biggest challenges of Chinese government in the foreseeable future.

Fourth, the environment of China has paid dearly for the growth of economy. In July 2010 there was a leakage of oil in Dalian, a northern city in China. The scale is not as big as the BP leakage in US Gulf. However, the detrimental effect on the rivers in Dalian is severe and it is estimated that it will take at least 10 years for the polluted river to become clean again (See graph on top). At some point people start to doubt whether it is worth to sacrifice the air and water quality for a further one percentage point in the GDP headline number.

Overall, it is becoming increasingly clear that the leaders in Beijing are fully aware of the negative side of an unsustainably excessive growth rate in China’s economy, and are likely to deliberately slow down the growth engine. As history proves, the will of a central government in a still highly centrally planned economy shall have a deciding effect on the outcome of its economic system. To put it simple, China wants to slow down, and will slow down. The phenomenal growth of China that we saw in the last decade probably won’t be repeated again in the next few years.

This Article is published on Business Times and can be downloaded from HERE.