Last time I checked China is the second biggest economy and well on her way to become the largest. So do share with us your knowledge on the money issue here.
Five myths about China's economy
China's stunning economic rise is one of the biggest stories of this generation. In just three decades since beginning to embrace market economics, China has left its desperate poverty behind to become the world's top exporting nation. The transformation has occurred so quickly that myths and misperceptions abound about the challenges and opportunities that China poses to America and the rest of the world.
1. China will quickly overtake the United States as the world's most powerful economy.
According to a November poll by the Pew Research Center, 44 percent of Americans believe that China is already the world's top economic power, while 27 percent put the United States in that position. That perception is completely at odds with the facts. This year, China's economy is expected to produce about $5 trillion in goods and services. That would put it ahead of Japan as the world's second-biggest national economy, but it would still be barely one-third the size of the $14 trillion U.S. economy and well behind the European Union, if taken as a whole.
One reason China's economy is so big is simply that it has 1.3 billion people. But China's per capita gross domestic product is only one-seventh the U.S. level. And in household living standards, China lags even further. Each year, an average Chinese household consumes one-fourteenth the value of goods and services purchased by an average American household.
And despite its chronic losses in manufacturing jobs, the United States is still the world leader in that arena because its manufacturers excel at high-value products such as airplanes and high-tech equipment, while China still mainly produces low-cost clothing and consumer electronics. In terms of the value of goods, the United States produces more than 20 percent of global manufacturing, or about double China's share.
2. China's vast holdings of U.S. Treasury bonds mean it can hold Washington hostage in economic negotiations.
China has the biggest holdings of U.S. Treasury bonds of any country -- around $1 trillion. Many people think this means China is "America's banker" and that, like a bank, it can withdraw its line of credit by selling off its Treasuries whenever Washington does something Chinese leaders don't like.
But China's Treasury holdings are not like regular loans that a bank extends to a company. They are more like deposits: safe, liquid and carrying a very low interest rate. Like a depositor, China has little ability to tell its bank how to run its business. It can only vote with its feet, by taking its deposits elsewhere -- but its deposits are so huge, there is no other "bank" in the world that can take them. The European and Japanese bond markets are not big enough to absorb that much Chinese cash, nor can China buy enough oil fields, ore mines or real estate to soak up its money. And it can't simply invest all its dollars at home, because doing so could lead to rampant inflation. So like it or not, Washington and Beijing are stuck with each other -- and neither has the power to hold the other hostage.
3. Letting its currency grow in value is the most important thing China can do to reduce its trade surplus.
Some American companies, unions and politicians complain that by keeping a fixed exchange rate between the yuan and the dollar, China is unfairly making its goods cheaper on the world market, thus driving its trade surplus at the expense of its trading partners. Certainly, the exchange rate is important, but it's a mistake to think that letting the yuan rise in value would magically make China's trade surplus disappear. In the late 1980s, Japan allowed the yen to double in value, but its trade surplus didn't budge. Conversely, in 2009 China kept the value of the yuan fixed against the dollar, and its trade surplus fell by a third.
Secretary Treasury Timothy Geithner was in Beijing on Thursday and discussed the currency issue with Chinese economic officials. Most observers -- including China's top economic policymakers -- agree that the yuan should rise in value. But for that move to offer any benefits, it must be accompanied by other policy shifts. By far the most important thing China can do to reduce its trade surplus is to stimulate domestic demand (including demand for imports), something it has started to do through a massive infrastructure spending program. There's some evidence that Chinese households are also beginning to spend more freely as wages rise and people feel optimistic about the future.
4. China's hunger for resources is sucking the world dry and making major contributions to global warming.
It's true that China is now the biggest producer of carbon dioxide and other greenhouse gases that contribute to global warming. And it's true that China uses more energy to produce a dollar of its GDP than most other countries, including the United States. But on a per-person basis, China's use of resources is still modest compared with that of rich countries. For instance, despite its rapid increase in car use, China consumes about 8 million barrels of oil a day. The United States consumes about 20 million barrels a day. Put another way, China, with nearly a quarter of the world's population, accounts for less than one-tenth of the world's oil consumption. The United States, with only 5 percent of world population, accounts for nearly a quarter of global oil consumption. Whose appetite is really the bigger problem?
Moreover, unlike the United States, China has recognized that it cannot let its fossil-fuel appetite grow forever and is working hard to improve efficiency. Chinese fuel-economy standards for new cars are higher than America's, for instance, and on average, coal-fired power plants are more efficient in China than in the United States.
5. China's economy has grown mainly through the cruel exploitation of cheap labor.
Every time a developing economy starts growing fast, richer countries accuse it of "cheating" by keeping its wages and exchange rate artificially low. But this isn't cheating; it's a natural stage of development that comes to an end in every country, as it will in China. China has grown in much the same way as other economies we now view as mature and responsible success stories -- including Japan, South Korea and Taiwan. Those nations invested heavily in infrastructure and education, and quickly moved their workers from low-productivity jobs in rural areas to more productive jobs in cities. When rural labor was abundant, wages were low, but they rose rapidly after those surplus workers joined the urban labor force.
China is hitting that spot now: The number of young people of workforce entry age (15 to 24) is projected to fall by one-third over the next 12 years. With young workers more scarce, wages have nowhere to go but up. This is already happening: Last month, Guangdong province (China's main export hub) raised its minimum wage by 20 percent.
China still has plenty of workers moving from the countryside to the cities, but the age of ultra-cheap Chinese labor will soon be gone.
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Arthur Kroeber is the managing director of GaveKal-Dragonomics, an economic research firm in Beijing.
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By William Pesek Jul 19, 2013 3:30 AM GMT+0530Email Print
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Email Print Save Can we please have a moratorium on the word "Likonomics"? Premier Li Keqiang's plans to overhaul the Chinese economy have hardly earned such a grand moniker yet.
Say what you will about "Thatchernomics" or "Reaganomics," but Margaret Thatcher and Ronald Reagan fundamentally altered the British and American economies. No one is rolling their eyes at "Aquinomics," President Benigno Aquino's thus-far successful prescription for the Philippines, the onetime "sick man of Asia." By contrast, Likonomics is a ridiculously premature nod to ideas that are, at best, still on the drawing board and might never come off it.
In Japan, economists and a cheerleading media now seem to realize they bought into "Abenomics" too hastily, creating the myth that Prime Minister Shinzo Abe's revival plan is succeeding when it has only just begun. Game-changing reform efforts take several years to implement. We are a long way from knowing if Li has the skill or political will to manhandle China onto a more sustainable growth path, led by domestic demand.
How will we know? There are three clues to whether Likonomics is more than a hollow slogan.
First, can Li avoid further stimulus? The premier's supposed shock-therapy program already has its own myth: that China is engineering a sharp slowdown. Li doesn't WANT growth to slide toward 5 percent -- no Chinese leader in his right mind would at a time when protests are becoming commonplace. Rather, China's export- and investment-led growth model is burning out on Li's watch.
Magic Wand
Well before Li and President Xi Jinping officially took the reins in March, exports were falling, manufacturing was contracting and economists were downgrading forecasts. Big reforms are always easier when growth is booming. If Li could wave a magic wand and get gross domestic product back into double-digit territory without pumping more air into China's credit bubble, he would in a Shanghai minute. He needs reasonable growth to stabilize his power base and figure out how to turn the economy upside down without crashing it.
At the same time, Li's program is about "deceleration, deleveraging and improving growth quality," according to economist Huang Yiping of Barclays Capital Asia Ltd. in Hong Kong, who is credited with coining the term Likonomics. Carrying it out will hasten China's downshift. The premier is sure to face mounting calls for the government to throw new cash at the economy -- from businesses and from 1.3 billion Chinese, who are becoming more vocal and defiant.
Li himself has pledged that China's growth and employment will stay above a certain floor. That raises doubts about whether he's ready to accept the pain necessary to see through his reforms. Economists are already buzzing about a "Li Keqiang put" not unlike former Federal Reserve Chairman Alan Greenspan's. More stimulus would only exacerbate China's overcapacity problem and make the eventual debt reckoning bigger and costlier.
Second, is Li ready to allow a headline-grabbing default or two? The secret to China Inc.'s success has been plentiful and mispriced credit. Reckless borrowing, largely through local government-financing vehicles, was the fuel behind China's years of double-digit growth. Special-purpose companies set up by authorities across China used this cheap money to fund giant infrastructure projects.
Companies such as China Rongsheng Heavy Industries Group Holdings Ltd., China's biggest shipyard outside state control, are already begging for bailouts. Entire cities such as Ordos -- a white-elephant project in Inner Mongolia -- need help, too. According to the National Audit Office, the brand of financing vehicles that got Ordos in trouble amassed totaling $1.7 trillion at the end of 2010 (you can bet it's much, much higher now).
Cutthroat Politics
Only after a big default or two will markets begin to price Chinese risk appropriately, allowing Beijing to liberalize interest rates. Is Li willing to accept the consequences -- turmoil in markets, mass unemployment and credit downgrades?
That's nothing compared to the third test: inviting the Communist Party's wrath. There's ample reason to doubt Li's doctorate in economics will help him navigate Beijing's cutthroat politics. If you think Abe faces resistance from vested interests, imagine what awaits Li as he tries to get Communist Party power brokers, ambitious regional leaders, a vast network of state-owned companies and the Chinese people to make sacrifices.
Li must take on thousands of party stalwarts who make millions, or billions, of dollars from dodgy land grabs, insider trading and old-fashioned rent-seeking. Politics will stymie Li's every effort to reduce the state's role in the economy and create the vibrant private sector China needs in order to thrive. We'll have a sense of whether he's serious when the number of unnamed-source gripes in the official media starts to spike.
We are years from knowing if Li can live up to the example set by Deng Xiaoping, who truly did revolutionize China's economic system. If Li can, Likonomics will deserve to go down in history as a model for developing nations everywhere. Until then, let's give the phrase a rest.
(William Pesek is a Bloomberg View columnist.)
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