It is currently pretty difficult to argue with China’s economy. Averaging growth rates of 10% p.a. throughout the noughties, it is probably the BRICS member that has come furthest in its quest to eclipse the economic powerhouses of the West. A 2003 report for Goldman-Sachs predicted that China would soon become the ‘dominant global suppliers of manufactured goods’, and the so-called ‘workshop of the world’ has not disappointed.
To name just a few examples, in 2013 Chinese exports accounted for 90.6% of the world’s production of laptops, 63% of global shoe production, and 80% of the world’s air conditioning units. It is perhaps little wonder then that at least until a few years ago, it was fashionably controversial to confidently inform your dinner guests that they ought to be learning mandarin.
However, while it is impossible to deny that China is now a truly global financial player, there may be a bumpy road ahead. The problem with China’s economy, and the reason why some economists tap their noses mysteriously and tell their eager proteges to ‘bet against China in the long run’, is that there are doubts over its sustainability.
The million dollar question then, is what will happen when these growth rates fall further, and unemployment begins to rise.
Over the past couple of years Chinese growth has slowed to a (still pretty massive) approximation of 7%, and though this is partly due to a very slight contraction in manufacturing, it is mostly because the Chinese government had been keeping growth rates arbitrarily high. The government does this by pumping huge amounts of money into state-sponsored building projects and industrial subsidies, keeping employment high and putting a gloss on a productivity level that their market would not otherwise provide for. The result is the emergence of ghost towns in the Chinese countryside, plain to see out of train windows; housing estates that no one will live in, and roads that no one will drive on. The coal industry is another good example – there are mines across the country producing poor quality coal and operating at a substantial loss that are kept going purely by government funds. A bit like Britain in the 70s on steroids and with no Margaret Thatcher.
The million dollar question then, is what will happen when these growth rates fall further, and unemployment begins to rise. China can only do what it is currently doing because of its political structure, forcing through expensive construction projects that don’t require the economic projections and regulatory processes that a responsible private sector would insist on. At the moment the government are doing all they can to maintain the status quo, but the stocks are slowly dropping regardless and the grass roots prosperity that has kept the population (relatively) satisfied could at some point be endangered. China is not, in many ways, a ‘settled’ country, and it is difficult to predict what financial repercussions substantial change could bring.
The counter-argument to all this is the old question of whether or not China is ‘too big’ to fail; its manufacturing base is still absolutely gargantuan and some argue that its overall value is now so great that it could survive virtually anything. But with the credit crunch still reverberating around global markets this argument is perhaps lacking in credibility. The recent blip in the Shanghai Composite Index (since called ‘Black Monday’) was simply the result of a stock market bubble bursting (Western markets in particular have actually recovered fairly quickly), but it could be merely a warning of things to come. Western economists are terrified of another Wall Street crash, but it is in Shanghai and Beijing, not New York and London, where there is the most danger.
China’s economy is now undeniably vast, but you can perhaps hold off on that Mandarin phrasebook for a least a couple of years.