The Western economies, tottering from the financial crisis, have been depending on
and other emerging markets to drive economic growth. Increasingly, machinery exporters, energy suppliers and metals producers across the globe look to China and other fast-growing emerging economies for business growth. China
Never has been so much riding on China's success as now - Foreign direct investments, global trade, the energy, metals and mining sectors dependence on continue demand from China, property and currency speculators, macro hedge funds and above all the lives of more than a billion people. The growing influence of
has in both the global scene and the Asian region has been palpable. China
However, what’s interesting is how different sets of prognosis are being made by economists based on the same set of facts. Well that's what makes a market. Of course you could also dismiss it as economists are six of one and half a dozen of the other! On one side of the spectrum we have some who argue about
’s bright future and declare that it’s a forgone conclusion for it to emerge as the largest economy in the world by the turn of this decade. On the other end, some see a looming disaster on the horizon and a collapse of the Chinese economic miracle by 2015. In The Coming Collapse of China, Gordon Chang forcefully argues the pessimist's case. So which side should we believe? China
…..current economic outlook
Chinese officials have warned that their economy is poised to slow. In late February, Premier Wen Jiabao announced that the target for annual GDP growth over the next five years is 7%. This represents a significant decline from the 11% rate averaged over the five years through 2010.
That blistering growth was achieved despite the global financial crisis as they aggressively pushed up bank lending in 2008. It is hard to fault the Chinese policy as it had ensured country’s robust growth in tough economic times, nothing short of a miracle. So should we believe
’s forecasts as they have always under-promised and over-delivered? China
Or is it a response to foreign and domestic pressure against currency revaluation.
will have to rebalance its economy, placing less weight on manufacturing and exports and more on services and domestic consumption. China China appears to be absolutely no closer to the hallowed goal of rebalancing with currency being the focal point of any US and talks. China
Inflationary pressures are growing with high commodity prices and increasing wage pressures. Chinese workers have started demanding higher wages and better working conditions which could lead to more consumption as well as reduced wage arbitrage resulting in slowing exports and lesser investment. All of this implies could imply slower growth.
So what is at issue is not whether Chinese growth will slow, but when.
…..increasing wage pressures
have been rising fast in the past couple of years and workers have demanded better pay and conditions. Foxconn came into spotlight last year due to increasing workers’ suicides arising from stress and poor wages. Thus the wage arbitrage is eroding fast and it seems then that manufacturers are going to raise their prices on account of increase in commodities prices and increase in wages. This could further fuel inflation across the consumer goods. There is already significant social unrest in many markets over increase in food prices. China
Herein lies the conundrum: Producers cannot pass higher costs to consumers which will lead to the exit of high cost producers. It follows that this will mean an increased number of liquidations with concurrent increases in the unemployment rate in the short term till demand/supply imbalance is restored.
While wages in
China are still a fraction of what workers earn but that difference is expected to narrow, with the weakening US Dollar, increasing Chinese wages and factoring the transportation costs and the risk of Intellectual Property rights violations. U.S.
, high unemployment is already driving state incentives to attract factories, while unions are becoming increasingly flexible. The next few years could see a wave of reinvestment by US U.S. multinational manufacturers in their home base, as rising wages and a strong yuan currency make a less attractive proposition according to BCG. There is some evidence of this trend emerging with the likes of Caterpillar and NCR moving some of their units back to China . United States
…..abundant labour supply?
The converging consequences of a disappearing labor surplus and the transition to an older population with more non-working retirees dependent on their families and welfare will be an "enormous challenge" for
, per Ba Shusong, a senior economic advisor to the Government. China
…..reaching Lewis’s turning point
Nobel-prize winning economist Arthur Lewis' theory contended that as a developing country modernizes, workers' wages begin to rise quickly once surplus rural labor shrinks to the point that labor shortages emerge.
The shortages of rural migrant workers since 2004 have been no passing blip, but it is now signaling a major turning point -- a transformational trend.
…..other empirical studies
Empirical studies on fast growing economies indicate that a slowdown kicks in typically when the per capital income reaches around the USD 16,500 mark.
will achieve that by 2015. There is no cast-iron law on slowdowns, of course as not all fast-growing countries slow when they reach the same per capita income levels. But slowdowns come sooner in countries with a high ratio of elderly people to active labor-force participants, which is increasingly the case in China , owing to increased life expectancy and the one-child policy implemented in the 1970’s. China
Slowdowns are also more likely in countries where the manufacturing sector’s share of employment exceeds 20%, since it then becomes necessary to shift workers into services, where productivity growth is slower. This, too, is now
’s situation, reflecting past success in expanding its manufacturing base. China
Most strikingly, slowdowns come earlier in economies with undervalued currencies. While currency undervaluation may work well as a mechanism for boosting growth in the early stages of development, when a country relies on shifting its labor force from agriculture to assembly-based manufacturing, it may work less well later, when growth becomes more innovation-intensive than labour-intensive.
Finally, maintenance of an undervalued currency may cause imbalances and excesses in export-oriented manufacturing to build up, as happened in
in the 1990’s, and through that channel make a growth deceleration more likely and the economy vulnerable to external shocks. Korea
…..how big is the bubble
On Thursday, Moody's Investors Service downgraded
’s property sector from "stable" to “negative". This may have something to do with the significant property construction in China despite the large number of vacant and under-performing commercial and residential properties. There are approximately 64 million vacant apartments in China , essentially creating "Ghost Cities." These vacancies are due in large part to the speculative investment leading to the increasing divide between China 's rich and poor leaving many without adequate housing. China
Residential housing investment as a share of
China's GDP has tripled from 2% in 2000 to 6% in 2011 - the same mark the housing market hit before imploding. Additionally, over the past eight years, housing prices in U.S. China have gone up 140 percent nationwide and as much as 800 percent in . Beijing
…..the extreme view
Gordon Chang, author of ‘The coming collapse of
China’, contends that the glitzy Shanghai, increasing foreign trade and investment, and a developing high-tech sector do not represent the real . Instead, the real China China is characterized by massive banking problems, failing state-owned enterprises (SOEs), corrupt and repressive Chinese Communist Party (CCP) rule, dissident movements such as Falungong, and separatists in and Xinjiang. The situation is so critical that " Tibet has about five years to put things right". Unfortunately, he believes, the shock of Beijing 's World Trade Organization (WTO) obligations, the government's lack of fiscal resources, the straitjacket of Communist Party ideology, the Party's lack of ideological authority, and the power of the Internet mean there is no hope. China is a lake of gasoline and one individual "will have only to throw a match. An extremely grim view indeed! China
Finally, which side should we believe? We will have to wait a few years before we see whether either of them got it right! My view is that China will begin to encounter a slowdown in growth but will still post super growth by Western standards, although not as blistering as in the past.
Higher wages and demand from a growing Chinese middle class, while raising costs, will increase domestic consumption and reduce export, resulting in a rebalancing of the economy, a goal that has been elusive so far.
Both the pace of investment and economic growth will slow with a decisive shift to domestic consumption as the main driver of economic growth.
While there are headwinds, prognosis of a major collapse is far too dramatic.
will remain a significant global player both in political and economic terms. An economically strong China is vital for global growth, I say, break a leg for that! China