China Economy: News & Discussion
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India will soon start to outpace China: Economist
Washington, Oct 5, (IANS):
India will soon start to outpace China, thanks to a young and growing workforce and its ''much-derided democracy'' says The Economist.
The cover story on "How India's growth will outpace China's" in its latest issue attributes "India's surprising economic miracle" largely to its private sector saying, "the country's state may be weak, but its private companies are strong."
Despite the poor headlines generated in the run up to the Commonwealth games, "India is doing rather well," the internationally regarded magazine said noting, "Its economy is expected to expand by 8.5 percent this year."
"It has a long way to go before it is as rich as China - the Chinese economy is four times bigger- but its growth rate could overtake China's by 2013, if not before. "Some economists think India will grow faster than any other large country over the next 25 years. Rapid growth in a country of 1.2 billion people is exciting, to put it mildly," it said.
Citing demography as one of the two reasons why India will soon start to outpace China, the magazine noted "China's workforce will shortly start ageing; in a few years' time, it will start shrinking."
"That's because of its one-child policy - an oppressive measure that no Indian government would get away with." "India is now blessed with a young and growing workforce. Its dependency ratio - the proportion of children and old people to working-age adults - is one of the best in the world and will remain so for a generation," it said.
India's economy will benefit from this "demographic dividend", which has powered many of Asia's economic miracles. "The second reason for optimism is India's much-derided democracy," said The Economist noting, "Indian capitalism is driven by millions of entrepreneurs all furiously doing their own thing.
"Since the early 1990s, when India dismantled the "licence raj" and opened up to foreign trade, Indian business has boomed." "Ideas flow easily around India, since it lacks China's culture of secrecy and censorship. That, plus China's rampant piracy, is why knowledge-based industries such as software love India but shun the Middle Kingdom,"
"Given the choice between doing business in China or India, most foreign investors would probably pick China, The Economist said. "But as the global economy becomes more knowledge-intensive, India's advantage will grow."
India will soon start to outpace China: Economist
Washington, Oct 5, (IANS):
India will soon start to outpace China, thanks to a young and growing workforce and its ''much-derided democracy'' says The Economist.
The cover story on "How India's growth will outpace China's" in its latest issue attributes "India's surprising economic miracle" largely to its private sector saying, "the country's state may be weak, but its private companies are strong."
Despite the poor headlines generated in the run up to the Commonwealth games, "India is doing rather well," the internationally regarded magazine said noting, "Its economy is expected to expand by 8.5 percent this year."
"It has a long way to go before it is as rich as China - the Chinese economy is four times bigger- but its growth rate could overtake China's by 2013, if not before. "Some economists think India will grow faster than any other large country over the next 25 years. Rapid growth in a country of 1.2 billion people is exciting, to put it mildly," it said.
Citing demography as one of the two reasons why India will soon start to outpace China, the magazine noted "China's workforce will shortly start ageing; in a few years' time, it will start shrinking."
"That's because of its one-child policy - an oppressive measure that no Indian government would get away with." "India is now blessed with a young and growing workforce. Its dependency ratio - the proportion of children and old people to working-age adults - is one of the best in the world and will remain so for a generation," it said.
India's economy will benefit from this "demographic dividend", which has powered many of Asia's economic miracles. "The second reason for optimism is India's much-derided democracy," said The Economist noting, "Indian capitalism is driven by millions of entrepreneurs all furiously doing their own thing.
"Since the early 1990s, when India dismantled the "licence raj" and opened up to foreign trade, Indian business has boomed." "Ideas flow easily around India, since it lacks China's culture of secrecy and censorship. That, plus China's rampant piracy, is why knowledge-based industries such as software love India but shun the Middle Kingdom,"
"Given the choice between doing business in China or India, most foreign investors would probably pick China, The Economist said. "But as the global economy becomes more knowledge-intensive, India's advantage will grow."
India will soon start to outpace China: Economist
Can we not wait till India actually out-paces China? People have been saying this since I was a child, now my son will soon attend school.
China to Enter Three Year Decline as Problems Mount
Op-Ed Commentary: Chris Devonshire-Ellis
Oct. 4 – In the job I have, I am fortunate enough to be able to compare over 20 years' experience of actually living in China with the past five years of travel across emerging Asia – India especially – and, in that time I have witnessed firsthand the development of China's relationship with the United States and Europe. It gives me, I like to think, a unique perspective on how China is doing. When my business began in Shenzhen for example, Deng Xiaoping was still the leader of China. As Jiang Zemin and Zhou Rongji spearheaded China into global trade with the ultimate objective of WTO membership, they were replaced with Hu Jintao and Wen Jiabao who delivered the Olympics yet have had to deal with the aftermath of their predecessors occasionally cavalier efforts to make China a global player.
Perspectives on China always need a base to judge them from, and I have four – a first hand knowledge of China's growth over the past two decades, the ability to compare China with another massive emerging economy in India, frequent travel to the United States and the intellectual and international trade capabilities that provides, plus I have to run, manage and develop a business in the country as a foreign investor. While pro-China (after all I run a successful business with 10 offices there), it is also in my interest to try and work out what is happening, as much for my own businesses benefit quite aside from the consultancy aspect I am paid for. If I judge China incorrectly, my own business suffers. That's a little more motivating to get it right than the average China commentator paid to produce just words.
I do believe that in comparison with previous occasions, China is going to enter into a period of some uncertainty over the next three years and that the process of doing so has already begun. There are a number of reasons for this, but all are to do with failings of government. Propping up the uncertainty is the issue surrounding the current party leadership. With two years to go prior to the curtain being drawn on Hu and Wen's leadership, the Communist Party has to find successors. With a hard core of about 300 decision makers at the National People's Congress, and even that concentrated further within the Communist Party Politburo, jostling for power is now taking place in bids to secure the most coveted positions. While Western-style democracy puts the decision making power in the hands of the people to decide and political campaigning begins a few months before election-day, in China the process of power broking lasts considerably longer. In terms of political decision making and forming a government, it's actually a far less efficient system. It is also having the effect of stymieing China's development as we speak.
While politicians wrangle and jostle for position, much of the actual power then rests with the military in securing China's borders while the politicos wrangle over individual favorable positioning. This, I suspect, is behind the unseemly and quite heavy handed approach China is currently taking with its border disputes. The recent Japanese issue was blown up rather more than it should have been, and China demonstrated a somewhat unsavory approach to what should be a diplomatic issue by allowing it to enter commerce and cultural exchanges. That's a pretty hard line, but then again which general would want to be the fall guy for conceding an inch of disputed territory while the party is occupied debating its future leadership. No one would, and until we have a new Chinese leadership in place, I expect the hard-line attitude over border disputes to continue.
I also expect the same for the RMB position. There are arguments for both sides, that the Chinese are playing it right, and that the Americans are also correct in labeling China a currency manipulator. The latter is probably true, but does that mean China will shift its position? It hasn't so far, aside from a few, tiny moves when Washington starts to get overheated. So what will happen? America can't afford a trade war, and China won't budge. Expect more of the same for the foreseeable future.
Another aspect of China now is the desire to involve politics in trade. That's a worrying development, and is again caused by hard line factions within the government. No quarter is being given while leadership issues have to be resolved. It's also a form of bullying; China poking sticks at nations that don't follow its diplomatic desires. Want to meet with the Dalai Lama? Trade meetings get canceled. Want to send patrol ships to monitor disputed islands? We'll cancel shipments of supplies to you. Want to award a Nobel Peace Prize to someone we don't like? We'll threaten diplomatic sanctions. All this is happening now, and it doesn't bode well for the next three years until a new leadership can assert itself and restore a more diplomatic approach.
There's also the issue over the economy. I'm not an expert, but I do know how to read a balance sheet and I've been in China a long time. I can't quote the numbers, and even if I did someone else would come up with an opposite theory. All I can say is that is just doesn't feel right. Traveling around China I have come across acres and acres of empty, prestigious property developments. I've seen entire cities built for a population of millions but with actual residence of 100,000. "Build and they'll come" seems to be the mantra. But they won't. China's population is actually shrinking, and unlike India, another 100 million people are not coming into the labor pool. China needs more people to sustain its previous growth, but they aren't being born.
China's new found urban wealth also has largely been built on credit. The enormous numbers of cars that have come onto China's roads the past 18 months has largely been the result of virtually interest free loans. Add to that the money that appears to have filtered away into unsustainable property projects and the entire picture seems wrong. Build a property for US$10 million, the speculators move in and prices rise, and the government can report a profit on the original project. Yet it's useless without people actually living in them. When that bubble is pricked, China's bad debt in its government and banking sectors is going to really hurt, along with the ordinary folk who bought into the dream.
That won't necessarily affect foreign direct investment, but it will affect the mood of the nation. China's new leaders need to fix it, and that is why so much attention is being paid to the next generation. Yet with two years to go before that is decided, the forthcoming period is going to be very uncertain, and along with that, strict adherence to rules, regulations over business and civil rights along with more stressed diplomatic and trade relations will occur.
The economy also has to be recalibrated away from export manufacturing and more towards boosting its own consumption. That's a process that is currently underway, but it has proven patchy, and some of those empty property developments would have been far better money spent on developing infrastructure in China's central and western regions, and Sichuan in particular. That is China's most populous region (if you include Sichuan Province and the neighboring municipality of Chongqing), and the dynamics it has, if unleashed, could rejuvenate the region and its surrounding provinces. Yet it remains under-invested, with a lack of infrastructure, a distinct lack of interconnectivity with its neighbors, and totally inappropriate projects being put in their place. Local annual income is about US$4,000 per annum yet there are US$1 million apartments for sale on the road close to Chongqing to "the elites." What elites? I get increasingly concerned when I see, on a regular basis, such promotion of prime real estate across the country. As I said, acres of such developments have been built. Over-inflated, over built and totally out of reach of the ordinary Chinese citizen. Its not real development, and the prices asked and profits shown are unattainable and false.
As wages have also increased, and costs across the country have risen, China's path the next few years is going to be difficult. The bad debt I suspect is throughout the system will have to be dealt with at some point, although a lid will probably be kept on it until the next leadership can formulate a policy to deal with it. If the hammer does fall, and China enters into recession and housing goes into negative equity, the repercussions for the party are extremely serious. That is also being reflected in a harder line in policing and security issues. China is indeed becoming rather less friendly than it was. some sections of Chinese media are already placing blame on foreigners for China's economic problems. They vary from the U.S. government for creating the global credit crunch, to foreign investors not paying workers enough, to accusations of rampant profiteering from low cost China production. It's an old political sleight of hand, when the economy starts sliding, blame someone else. In a one-party state, the someone else is the foreign investor, their government, and the overly capitalistic ways. "Give us more money" cry the Chinese. "We're being exploited." Expect such rhetoric to increase. Managing a Chinese workforce is going to become more demanding.
Five years ago, when I started our India practice, there were many reasons for doing so, not least because the country was a similar size and I felt it was also opening up just as China had done in the 1980s, the signs and signals looked the same to me in India then as they did in China in 1987. However, another reason that I didn't mention so much was also a pillar catalyst behind the decision to open in India, and that was to hedge against China if things turned for the worse. If profit levels begin to slip (fortunately that hasn't happened to us in China at this point), then I'll need to make those up from elsewhere. Increasingly, establishing a business to contribute profit levels in India looks like a shrewd decision. As China slows, India is growing, and providing an increasing amount of sales revenue into our own bottom line, becoming more important as time goes on. That may yet become vital as an additional income stream if China's economy deteriorates. Hedging against China I would suggest, would be a wise strategy to consider.
Meanwhile, for the next three years in China, until the new government hierarchy is determined, expect a bumpy ride, a slowdown, and a decline in domestic business confidence. Foreign investors should be OK as China's domestic market opens up, but be cautious over expansion plans. Buyers from China are likely to face an increase in quality problems, and an upsurge in China derived bad debt, so take steps to enforce contracts properly and ensure letters of credit are in place and drawn down only when the goods are clarified as appropriate. Meanwhile, occasional ultra nationalist fervor, a very strict adherence to rules and some erratic diplomacy is likely to become the norm until China's next generation can take the helm and steer the ship back into calmer waters. It will take at least three years.
Chris Devonshire-Ellis is the principal and founding partner of Dezan Shira & Associates, establishing the firm's China practice in 1992 and its India practice in 2006. The firm now has 10 offices in China, five in India, and two in Vietnam. For advice over China, India and Vietnam comparisons, strategy, investment, legal and tax matters please contact the firm at [email protected]. The firm's brochure may be downloaded here.
China's misread property 'bubble'
By Francesco Sisci
Is Chinese real estate a real bubble? The question, because of its global implications, has been floating around for many months. Pessimists believe it is - and that it is something that could trigger a larger crisis possibly like the one engulfing the United States, which started in 2008 with the bursting of the country's real estate market.
Yet, Jin Pei, head of the influential department of industrial economics at the Chinese Academy of Social Sciences, has weighed in recently with a look at the Chinese real estate problem from a totally different perspective.
He argues that when China started its development offerings in
the global market, everything was at very low prices - not only labor costs but also the cost of the land and of its resources. [1] Land for industries and coal for energy was given free or very cheaply to factories. China could do this because everything belonged to the state, and the state could offer anything as it wished.
This massive injection of low-capital investment kept prices down and conquered a place for China in the world market. In other words, it was not only the Chinese workers who sacrificed their income to get competitive products. China also sacrificed overall by charging no or little money for things such as energy (produced by state-monopolized coal, sold at a discounted price) or land - that could have been a source of revenue for the country and elsewhere could be quite expensive.
Then China exchanged actual revenues in all its forms in return for the transfer of technology and know-how that entailed new market share.
All of this is now coming to a close as China wants - and it is pushed - to expand internal consumption. To consume its own products, export less, and import more, China needs money - real cash. One way is to increase workers' salaries, but a broader policy needs to turn into real value what was previously given for free - mainly land. Land could become collateral for banks, which in turn could lend money and create a cash flow.
Not all land is the same in China. Commercial land is sold for high prices, industrial land is still given out at a discount, and land for state or military buildings is granted for free.
If the real estate problem has to be addressed, it must start here: land must have a price and thus cannot be used liberally (and greedily) by entities that own them for non-commercial reasons but can in the future turn them to commercial use. Jin Pei argues that there should be restrictions on the size of government buildings or on the use of military barracks.
Arguably, although the state may decide to let them out for free, these plots of land should be accounted for and have a price tag next to them on the official books.
Only if all this land is brought onto the books can we have a real picture of the market. This could certainly cause a drop in prices, but here Jin takes a different turn.
He explains that in the last 10 to 15 years of reforms, China has created immense wealth for its urban middle class. A very conservative estimate reckons that some 500 million Chinese collectively sit on at least 100 trillion yuan (US$15 trillion) of capital. (About 80%, or 500 million, of the roughly 600 million urban Chinese own their homes, constituting some 200 million family homes each worth at the very least 500,000 yuan.)
These people are the foundation rock of social stability, the ones who have gained from the reforms, and now they have concrete capital to defend. The interests of those people must be defended and taken care of. A drop in the value of those assets benefits only a small minority of people who are looking for a flat to buy in the cities, but hurts the majority of the urban population concerned about their key financial asset and safety net.
The rest of the population is also not completely deprived. Many are given lots of land in the countryside, where they have a house. The vast majority of the population thus has a stake in the overall stability of the country. Therefore, the goal of the state should be to protect those assets, which can also be monetized and given as collateral to banks or sold for other developments.
Then forget a huge drop in real estate prices. They are more than assets to be traded in an inconstant market - they are guarantees of social stability.
Beyond commercial and agricultural land are the land lots given for industrial development and official purposes. State-owned enterprises (SOEs), local governments, and central ministries sit on huge potential and actual property treasure booties inherited from when the communists took power in China and all private property was nationalized and split among potentates. This land - under-paid for and under-utilized - is a potential threat to the value of homeowners' assets.
This land can reach the commercial market any time and in any given quantity. Industries previously located in the central urban district have been expelled, leaving areas for development. Or a local administration can take over land previously "left behind" by former agricultural communes or factories. This land is a potential huge distortion in the market, and it is also a huge waste of resources for the already inefficient SOEs.
Sheng Hong, a professor at Shandong University, has been detailing for years the inefficiencies of the SOEs. But last month the semiofficial Global Times (Chinese edition) carried a strong article by Sheng arguing that private companies produce 96% more industrial value added than SOEs and 39% more profits.
Still many very inefficient SOEs survive thanks to their monopolistic position and their better connections with the credit system. Another way for SOEs to grease their profits is to sell their land assets to developers or turn themselves directly into real estate developers.
This creates a further distortion of the market, and it creates unfair competition against private companies that have to purchase their land directly in the market.
Moreover, the appreciation of land prices, resources, and labor makes it more difficult to get the transfer of technology and know-how that powered Chinese growth in the past 20 years. Foreign companies are no longer enticed by the cheap land, labor, and resources, so they skip China and move elsewhere.
In theory, China now has money earned from exports surplus and it can monetize its land and buy foreign necessary technology and know-how. Yet there are many visible and invisible barriers to Chinese acquisition of foreign companies, as there are many similar restrictions for foreigners buying controlling stakes in "strategic" Chinese industries like automotive or telecom.
It is impossible to think of a wholesale liberalization of the investment market for foreigners, just as it is impossible to think of a total deregulation of the land market. Things could easily get out of hand. But it is possible to think that if China were to grant more latitude to foreigners investing in China then it should be rewarded in kind.
Possibly the realigning of all these distortions, land evaluation and SOEs' privileges, could send a stronger message to the world about China's long-term intentions and future. It certainly would address deep-rooted problems caused by the conflict of modern economy (private companies, land for commercial use) with legacies of the past (SOEs and land granted to industries and government offices) that could drag its future development and endanger the engine of its past growth - non-state companies and private home owners.
Rahul92
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China's rapid economic growth slows in third quarter
China says its economy has maintained robust growth in the third quarter of 2010, albeit at a slightly lower rate.
Official figures show a drop from just over 10% growth to 9.6%, still far ahead of any other major economy.
China's growth has far outstripped that of other major economies
The Chinese government has been taking measures to cool a credit boom in order to achieve more sustainable growth levels.
Meanwhile consumer prices rose at the fastest pace in nearly two years in September, official data showed.
Rate rise
For several months China's government has been withdrawing stimulus measures it used to get China through the economic downturn.
Access to credit has been curbed and public spending on infrastructure scaled back, reports the BBC's Chris Hogg in Shanghai.
But this latest data suggests other drivers of economic growth are now taking up the slack.
Domestic consumption remains strong and investment in the private sector is robust.
One concern though for policymakers is inflation.
Consumer prices rose 3.6% year on year, the fastest increase since October 2008, with prices for food - the item poorer Chinese spend most of their income on - rising by more than 6%.
A surprise interest rate rise on Wednesday is being seen as a sign that the government wants to tackle inflation to bring it back towards its target of 3% by the end of the year.
source : BBC
China says its economy has maintained robust growth in the third quarter of 2010, albeit at a slightly lower rate.
Official figures show a drop from just over 10% growth to 9.6%, still far ahead of any other major economy.
China's growth has far outstripped that of other major economies
The Chinese government has been taking measures to cool a credit boom in order to achieve more sustainable growth levels.
Meanwhile consumer prices rose at the fastest pace in nearly two years in September, official data showed.
Rate rise
For several months China's government has been withdrawing stimulus measures it used to get China through the economic downturn.
Access to credit has been curbed and public spending on infrastructure scaled back, reports the BBC's Chris Hogg in Shanghai.
But this latest data suggests other drivers of economic growth are now taking up the slack.
Domestic consumption remains strong and investment in the private sector is robust.
One concern though for policymakers is inflation.
Consumer prices rose 3.6% year on year, the fastest increase since October 2008, with prices for food - the item poorer Chinese spend most of their income on - rising by more than 6%.
A surprise interest rate rise on Wednesday is being seen as a sign that the government wants to tackle inflation to bring it back towards its target of 3% by the end of the year.
source : BBC
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- May 20, 2009
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as a Chinse bank risk-supervisor, I am now busy the chaos caused by the abrupt rise of rate.
China's Economic Miracle Is Over
by Chriss W. Street.
China funded the largest economic stimulus programs in world history from July of 2009 through June of 2010. As a percentage comparison to the U.S. stimulus plan; the Chinese spent twice the amount of money in half the time. China focused their stimulus on encouraging production, whereas America's stimulus went to consumption. It now appears that the Chinese produced a huge portion of the consumer goods Americans bought with their stimulus dollars. Consequently, China's unemployment rate fell to 4.2%, whereas the U.S. unemployment rate rose to 9.6%. Unfortunately for China, their stimulus success has also sown the seeds of their economic demise. A vicious combination of inflation and a strengthening currency is about to end the Chinese economic miracle.
China's economy is only a third as large as the U.S. economy, but the total amount of goods and services traded are similar. China exports $2 trillion and imports $1.5 trillion; the U.S. exports $1.5 trillion and imports $2 trillion. But as shown below, in the Great Recession, China achieved high growth and employment; but the cost of success is high interest rates and raging inflation.
Int. Rate Growth Rate Jobless Rate Inflation Rate Food % GDP Food Inflation
China 5.56% 9.60% 4.20% 4.40% 34.0% 10.8%
US 0.25% 2.00% 9.60% 1.10% 12.4% 1.4%
To understand the Chinese "miracle" it is important to be aware of China's history. President Nixon may have opened China to the outside world in 1970, but it was the collapse of the Soviet Union in the 1980s that forced China to abandon communism and flirt with capitalism. From 1981 to 1993 China devalued its currency six times, from 2.8 Yuan to 5.3 Yuan to the dollar. Facing economic crisis and famine in 1994, China embraced capitalism as "Socialism with Chinese Characteristics". The exchange rate was devalued to 8.7 Yuan per dollar and tax rates were set at a 40% discount to the U.S. and Japan.
The combination of a 68% devaluation of the currency and dramatically lower tax rate fueled China's economic boom.
Over the last fifteen years, China's economy quadrupled; while the U.S. doubled and Japan had no growth. The graph below demonstrates China has not taken advantage of its success to develop competitive domestic manufacturing. The Chinese export "miracle," as shown in yellow, is still due to U.S. and Asian manufacturers outsourcing their low-tech "processing" of component assemblies to benefit from China's low effective wage rates. China continues to run a small deficit in "ordinary" finished goods manufacturing and a larger deficit in the "other" category of services.
Consequently, the success of the Chinese economy remains very susceptible to changes in China's costs of production. Until recently, China could count on millions of impoverished peasants leaving the farms in the countryside each year to head to the cities for low tech jobs and a better life. This seemingly "endless pool of labor" kept worker wages low. But the stimulus program was so successful that the economy has now reached full employment. To get more workers, companies are forced to offer higher wages to convince workers to switch employers. The higher employment and rising wage rates have increased the demand for food, which is over one third of Chinese personal consumption. The higher demand for food has created rampant food inflation. With food prices up almost 11% this year, farmers who might have considered moving to the cities are staying on the farms and getting rich. Workers in the cities are being squeezed by consumer prices that are rising faster than wages.
China's labor force is 800 million versus the U.S. labor force of 154 million workers. Currently China's unemployment rate is 4.2%, or 33.6 million versus the U.S. unemployment rate of 9.6%, or 14.8 million workers. Chinese exports amount to a massive 45% of their economy versus 11% for the U.S. economy.
China could put an end to this domestic demand-pull and cost-push inflation by allowing its currency to float up in value; but any increase in currency exchange rate would directly increase the cost competitiveness of Chinese labor. Since over two thirds of Chinese exports are process manufacturing for corporations in other countries, changes in the exchange rates with China would have a direct proportional relationship to the willingness of corporations to out-source their low tech processing work to China.
Several recent academic studies have determined that, every 10% appreciation of China's currency, would result in a 17% reduction in China's processed exports. Estimates of how much the Chinese currency would rise in value if the Chinese government allowed it to float, range from 10% to 40%. Therefore, a free floating currency could increase China's unemployment by 40 to 160 million!
China's economic miracle allowed the country to become the second largest economy and the largest exporter in the history of the world. This miracle continues to be grounded on the third world economic model of providing foreigners impoverished peasant labor at the lowest effective cost. High unemployment in the rest of the world is driving labor costs down, whereas full employment and high demand are driving China's labor costs up. Rapidly growing inflation will soon force the Chinese to allow their currency to appreciate. China is not prepared to handle hard economic times. The government has kept its tax rates very low by not providing social services. As inflation and unemployment rise, China's economic miracle will be over.
China's Economic Miracle Is Over
by Chriss W. Street.
China funded the largest economic stimulus programs in world history from July of 2009 through June of 2010. As a percentage comparison to the U.S. stimulus plan; the Chinese spent twice the amount of money in half the time. China focused their stimulus on encouraging production, whereas America's stimulus went to consumption. It now appears that the Chinese produced a huge portion of the consumer goods Americans bought with their stimulus dollars. Consequently, China's unemployment rate fell to 4.2%, whereas the U.S. unemployment rate rose to 9.6%. Unfortunately for China, their stimulus success has also sown the seeds of their economic demise. A vicious combination of inflation and a strengthening currency is about to end the Chinese economic miracle.
China's economy is only a third as large as the U.S. economy, but the total amount of goods and services traded are similar. China exports $2 trillion and imports $1.5 trillion; the U.S. exports $1.5 trillion and imports $2 trillion. But as shown below, in the Great Recession, China achieved high growth and employment; but the cost of success is high interest rates and raging inflation.
Int. Rate Growth Rate Jobless Rate Inflation Rate Food % GDP Food Inflation
China 5.56% 9.60% 4.20% 4.40% 34.0% 10.8%
US 0.25% 2.00% 9.60% 1.10% 12.4% 1.4%
To understand the Chinese "miracle" it is important to be aware of China's history. President Nixon may have opened China to the outside world in 1970, but it was the collapse of the Soviet Union in the 1980s that forced China to abandon communism and flirt with capitalism. From 1981 to 1993 China devalued its currency six times, from 2.8 Yuan to 5.3 Yuan to the dollar. Facing economic crisis and famine in 1994, China embraced capitalism as "Socialism with Chinese Characteristics". The exchange rate was devalued to 8.7 Yuan per dollar and tax rates were set at a 40% discount to the U.S. and Japan.
The combination of a 68% devaluation of the currency and dramatically lower tax rate fueled China's economic boom.
Over the last fifteen years, China's economy quadrupled; while the U.S. doubled and Japan had no growth. The graph below demonstrates China has not taken advantage of its success to develop competitive domestic manufacturing. The Chinese export "miracle," as shown in yellow, is still due to U.S. and Asian manufacturers outsourcing their low-tech "processing" of component assemblies to benefit from China's low effective wage rates. China continues to run a small deficit in "ordinary" finished goods manufacturing and a larger deficit in the "other" category of services.
Consequently, the success of the Chinese economy remains very susceptible to changes in China's costs of production. Until recently, China could count on millions of impoverished peasants leaving the farms in the countryside each year to head to the cities for low tech jobs and a better life. This seemingly "endless pool of labor" kept worker wages low. But the stimulus program was so successful that the economy has now reached full employment. To get more workers, companies are forced to offer higher wages to convince workers to switch employers. The higher employment and rising wage rates have increased the demand for food, which is over one third of Chinese personal consumption. The higher demand for food has created rampant food inflation. With food prices up almost 11% this year, farmers who might have considered moving to the cities are staying on the farms and getting rich. Workers in the cities are being squeezed by consumer prices that are rising faster than wages.
China's labor force is 800 million versus the U.S. labor force of 154 million workers. Currently China's unemployment rate is 4.2%, or 33.6 million versus the U.S. unemployment rate of 9.6%, or 14.8 million workers. Chinese exports amount to a massive 45% of their economy versus 11% for the U.S. economy.
China could put an end to this domestic demand-pull and cost-push inflation by allowing its currency to float up in value; but any increase in currency exchange rate would directly increase the cost competitiveness of Chinese labor. Since over two thirds of Chinese exports are process manufacturing for corporations in other countries, changes in the exchange rates with China would have a direct proportional relationship to the willingness of corporations to out-source their low tech processing work to China.
Several recent academic studies have determined that, every 10% appreciation of China's currency, would result in a 17% reduction in China's processed exports. Estimates of how much the Chinese currency would rise in value if the Chinese government allowed it to float, range from 10% to 40%. Therefore, a free floating currency could increase China's unemployment by 40 to 160 million!
China's economic miracle allowed the country to become the second largest economy and the largest exporter in the history of the world. This miracle continues to be grounded on the third world economic model of providing foreigners impoverished peasant labor at the lowest effective cost. High unemployment in the rest of the world is driving labor costs down, whereas full employment and high demand are driving China's labor costs up. Rapidly growing inflation will soon force the Chinese to allow their currency to appreciate. China is not prepared to handle hard economic times. The government has kept its tax rates very low by not providing social services. As inflation and unemployment rise, China's economic miracle will be over.
kickok1975
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Although there are some merits from this article, overall I jut find it is not convincing and lack of enough supportive facts. China's exporting miracle is probably fading but China's economic miracle is just warming up.
"¢ China did export a lot of low end products. But more than 2/3 of our export now is in heavy machinery, Electronics, Medical devices and other industry finished goods. We are exporting everything from toothpick to airplane, from socks to telecommunication servers and networks. We offer full product line to the world. It's hard to challenge. Our telecom company just signed 10 billion dollars deal with Indian customer recently.
We also imported more than 40% of world raw materials to make these finish goods. A lot of these raw masteries are imported from these so called "2nd world" countries.
"¢ It is true Chinese labor cost and everything will go up. It already happened. It will reduce our export competitiveness but at the same time enhance our domestic purchasing power, which we like it happen. We would rather see a robust economy rely more on domestic market. This market is getting bigger everyday. We are NO. 1 consumer in a lot of categories nowadays and will gain more titles in year ahead.
"¢ Our infrastructure and work force is not replaceable easily in a "short time". It takes years to build those high ways, air ports, sea ports and factories, let along trillions of dollar invested. Our work force is arguable most efficient and disciplined under years of modern management. Whoever wants to withdraw from China and move to a cheaper country need think twice about all the invisible cost factors before he/she make final decision.
"¢ Even our population is peaked, we still have hundreds of million of people willing to do hard work with far less wage than industrialized country. So even our price will be not as competitive as today it is still good enough to remain competitive. Eventually our low end business will give away to other countries, but by then China is in totally different shape.
"¢ China did export a lot of low end products. But more than 2/3 of our export now is in heavy machinery, Electronics, Medical devices and other industry finished goods. We are exporting everything from toothpick to airplane, from socks to telecommunication servers and networks. We offer full product line to the world. It's hard to challenge. Our telecom company just signed 10 billion dollars deal with Indian customer recently.
We also imported more than 40% of world raw materials to make these finish goods. A lot of these raw masteries are imported from these so called "2nd world" countries.
"¢ It is true Chinese labor cost and everything will go up. It already happened. It will reduce our export competitiveness but at the same time enhance our domestic purchasing power, which we like it happen. We would rather see a robust economy rely more on domestic market. This market is getting bigger everyday. We are NO. 1 consumer in a lot of categories nowadays and will gain more titles in year ahead.
"¢ Our infrastructure and work force is not replaceable easily in a "short time". It takes years to build those high ways, air ports, sea ports and factories, let along trillions of dollar invested. Our work force is arguable most efficient and disciplined under years of modern management. Whoever wants to withdraw from China and move to a cheaper country need think twice about all the invisible cost factors before he/she make final decision.
"¢ Even our population is peaked, we still have hundreds of million of people willing to do hard work with far less wage than industrialized country. So even our price will be not as competitive as today it is still good enough to remain competitive. Eventually our low end business will give away to other countries, but by then China is in totally different shape.
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Patriot
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China's State-Planned Economy Is Doomed to Flop: David Pauly
The biggest obstacle to China becoming the world's No. 1 economy is China.
The communist nation's determination to keep as tight a rein on its economy as it has on its citizens will lead to failure -- just as it has for other countries that embraced central planning schemes.
China is reversing its flirtation with a type of quasi- capitalism that allowed entrepreneurs to thrive and propelled the economy forward at an annual rate of about 10 percent.
The Chinese now follow the so-called Beijing consensus, a belief that concentrating more control of industry in government hands will avoid the financial debacles caused by free markets.
The nation's state-owned companies are buying up independent businesses in the auto, steel and energy industries. A government-run company even plans its own Internet search business to compete with Baidu Inc., whose shares trade on stock exchanges.
Monopolies in China might appeal to investors who think merged companies can cut costs and maximize profits. Though huge Chinese companies may be well run today, they will die from the inefficiencies, cronyism and corruption that often plague state- controlled enterprises.
Manipulating the Economy
Inflationary pressures springing from China's rapid growth has the government threatening to interfere even more in the economy -- by imposing price controls on items including food and fuel.
Capping prices doesn't stop inflation, it's merely a delaying tactic. China's decision to raise interest rates and this month's order to force banks to increase reserves are better tools to combat the current inflation rate of 4.4 percent.
As it moves away from free markets, China ignores two recent central-planning failures.
Remember Japan Inc.? Thirty years ago, pundits said Japan's economy would rule the world as its bureaucrats allocated capital to key industries, protecting them from foreign competition. The U.S. railed against Japan's manipulation of the yen to keep its exports moving -- just as today it moans about China keeping the yuan low.
Russia's Troubles
Although Japan did become the second-largest economy after the U.S. -- until being dethroned by China earlier this year -- it's been in a prolonged stall. Its peak growth rate in recent years was 3.4 percent in 1997.
The collapse of the Soviet Union starting in 1989 is a more pertinent cautionary tale. The communist nation that controlled everything within its borders down to the barbershops is now defunct. Sadly, Czar Vladimir Putin is reversing Russia's chaotic moves toward democracy and capitalism.
China won't collapse tomorrow. Its exports continue to flood the globe, earning it money to make major investments -- and amass political clout -- abroad. But don't let so-called experts fool you into thinking China has discovered a new and better way to organize an economy. State-run capitalism is an oxymoron.
(David Pauly is a columnist for Bloomberg News. The opinions expressed are his own.)
To contact the writer of this column: David Pauly in Fort Myers, Florida, at [email protected]
http://www.bloomberg.com/news/2010-11-23/china-s-state-planned-economy-is-doomed-to-flop-david-pauly.html
The biggest obstacle to China becoming the world's No. 1 economy is China.
The communist nation's determination to keep as tight a rein on its economy as it has on its citizens will lead to failure -- just as it has for other countries that embraced central planning schemes.
China is reversing its flirtation with a type of quasi- capitalism that allowed entrepreneurs to thrive and propelled the economy forward at an annual rate of about 10 percent.
The Chinese now follow the so-called Beijing consensus, a belief that concentrating more control of industry in government hands will avoid the financial debacles caused by free markets.
The nation's state-owned companies are buying up independent businesses in the auto, steel and energy industries. A government-run company even plans its own Internet search business to compete with Baidu Inc., whose shares trade on stock exchanges.
Monopolies in China might appeal to investors who think merged companies can cut costs and maximize profits. Though huge Chinese companies may be well run today, they will die from the inefficiencies, cronyism and corruption that often plague state- controlled enterprises.
Manipulating the Economy
Inflationary pressures springing from China's rapid growth has the government threatening to interfere even more in the economy -- by imposing price controls on items including food and fuel.
Capping prices doesn't stop inflation, it's merely a delaying tactic. China's decision to raise interest rates and this month's order to force banks to increase reserves are better tools to combat the current inflation rate of 4.4 percent.
As it moves away from free markets, China ignores two recent central-planning failures.
Remember Japan Inc.? Thirty years ago, pundits said Japan's economy would rule the world as its bureaucrats allocated capital to key industries, protecting them from foreign competition. The U.S. railed against Japan's manipulation of the yen to keep its exports moving -- just as today it moans about China keeping the yuan low.
Russia's Troubles
Although Japan did become the second-largest economy after the U.S. -- until being dethroned by China earlier this year -- it's been in a prolonged stall. Its peak growth rate in recent years was 3.4 percent in 1997.
The collapse of the Soviet Union starting in 1989 is a more pertinent cautionary tale. The communist nation that controlled everything within its borders down to the barbershops is now defunct. Sadly, Czar Vladimir Putin is reversing Russia's chaotic moves toward democracy and capitalism.
China won't collapse tomorrow. Its exports continue to flood the globe, earning it money to make major investments -- and amass political clout -- abroad. But don't let so-called experts fool you into thinking China has discovered a new and better way to organize an economy. State-run capitalism is an oxymoron.
(David Pauly is a columnist for Bloomberg News. The opinions expressed are his own.)
To contact the writer of this column: David Pauly in Fort Myers, Florida, at [email protected]
http://www.bloomberg.com/news/2010-11-23/china-s-state-planned-economy-is-doomed-to-flop-david-pauly.html
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I am no economist and I admit I am a greenhorn in this sphere.
I feel that a total free for all economy, as in the US, has greater chance for a tailspin, that a semi controlled economy as in India.
True that India is not a skyrocketing economic powerhouse, but it is plodding its way up with caution, care and control. The fact that when the world economy collapsed, India could absorb the shock, does indicate that our way is not too bad.
Over control as in China is a signal for the bells to toll.
I don't think that China will collapse, but it will groan!
Poe's "The Bells".
Hear the tolling of the bells -
Iron Bells!
What a world of solemn thought their monody compels!
In the silence of the night,
How we shiver with affright
At the melancholy menace of their tone!
For every sound that floats
From the rust within their throats
Is a groan.
It will not be this:
John Donne (1572-1631), Devotions Upon Emergent Occasions, Meditation XVII: Nunc Lento Sonitu Dicunt, Morieris:
"Perchance he for whom this bell tolls may be so ill, as that he knows not it tolls for him; and perchance I may think myself so much better than I am, as that they who are about me, and see my state, may have caused it to toll for me, and I know not that.
I feel that a total free for all economy, as in the US, has greater chance for a tailspin, that a semi controlled economy as in India.
True that India is not a skyrocketing economic powerhouse, but it is plodding its way up with caution, care and control. The fact that when the world economy collapsed, India could absorb the shock, does indicate that our way is not too bad.
Over control as in China is a signal for the bells to toll.
I don't think that China will collapse, but it will groan!
Poe's "The Bells".
Hear the tolling of the bells -
Iron Bells!
What a world of solemn thought their monody compels!
In the silence of the night,
How we shiver with affright
At the melancholy menace of their tone!
For every sound that floats
From the rust within their throats
Is a groan.
It will not be this:
John Donne (1572-1631), Devotions Upon Emergent Occasions, Meditation XVII: Nunc Lento Sonitu Dicunt, Morieris:
"Perchance he for whom this bell tolls may be so ill, as that he knows not it tolls for him; and perchance I may think myself so much better than I am, as that they who are about me, and see my state, may have caused it to toll for me, and I know not that.
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SHASH2K2
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CONFIDENT MULTI-TASKER: China's planning agency says the government has the capacity to control surging prices while keeping economic growth on track. The comments were seen as an effort to calm public anxiety about rising food costs.
THE PROBLEM: Food costs jumped 10.1 percent in October over a year earlier, boosting inflation to 4.4 percent, above the government's 3 percent target. Chinese stock markets have fallen on fears a rate hike or controls to curb inflation might slow growth that has declined after hitting double-digit levels this year.
BACKING IT UP: The National Development and Reform Commission called on local authorities to ensure steady production and supplies. China's Cabinet promised last week to ensure adequate supplies of coal, power, oil and gas and said it would impose price controls on daily necessities if required.
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well, I know my salary is 10 time more than the combined of my parents 10 years ago.
I know that it was just a dream to most of Chinese to buy a new modern apartment like my new house 10 years ago.
I know that 10 years ago,there was no skyline in the small city where I live,but now it is growing fast.
I know that it was just a dream to most of Chinese to buy a new modern apartment like my new house 10 years ago.
I know that 10 years ago,there was no skyline in the small city where I live,but now it is growing fast.
SHASH2K2
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Even my salary is 10 times more than My parents , so is inflation.That means my standard of living is almost same as that of my parents . Only difference is that I am in a bigger city.
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well,guy, my life quality is obviously much higher than it was 10 years ago. In fact, in the past 10 years, inflation has be quite limited in CHina. Instead, the price of industry products has kept going down and down!
10 years ago, one PC costed me 6 months salary . one cellphone costed me 2 month salary. 1 AC costed 3-5 moths salary. one car costed 20-year salary.
Now, one desktop PC costs me 2-week salary. the cellphone I am using just cost me 3-day salary.which almost become
consumables. 1 AC for smallroom cost me 2-week salary.one popular car costs me 1-year salary.
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BTW, before 1996, there was neither railway nor expressway in the prefecture where I live.
But now,it is full of railways and expressway. it small airport has also been upgraded .
Besides, the highspeed railway between it and the privince capital is also being planed to be finished in 3-5 years.
But now,it is full of railways and expressway. it small airport has also been upgraded .
Besides, the highspeed railway between it and the privince capital is also being planed to be finished in 3-5 years.
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Besides,
15 years ago, 70-80% of people in the prefecture lived on agriculture.
Now, if it is considered that the "peasant workers" also live on non-agricuture sections,70%+ of the people in the prefecture live on industry and service sections.
15 years ago, 70-80% of people in the prefecture lived on agriculture.
Now, if it is considered that the "peasant workers" also live on non-agricuture sections,70%+ of the people in the prefecture live on industry and service sections.
SHASH2K2
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Thats too much of data and I may not be able to collate them at once.
In my/your fathers time Black and white TV was a luxury and now that's been replaced by LCD . percentage of salary spend on items like this will almost be same. All I am trying to saya that unless you are doing exceedingly well or getting your salary in Dollars standard of living will be more or less the same . salaries are increasing but at same time value of money is also depreciating.
