In most senses, the Chinese economy is a juggernaut of irrefutable proportion. Averaging growth rates of 10% p.a. throughout the noughties, China is 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.
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 China’s status as a truly global financial player, there may be a bumps in the 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 severe 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 an approximate (and still pretty massive) 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. By pumping huge amounts of money into state-sponsored building projects and industrial subsidies, the ruling party has put a gloss on productivity levels and employment levels that the market could not otherwise sustain. The result is a succession of rural ghost towns, plain to see out of the windows of China’s many high-speed trains: housing estates no one will live in, and roads no one will drive on. The coal industry is equally propped up – mines across the country produce poor quality coal at a substantial government-funded loss.
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. 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 soon 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 adage that China is ‘too big’ to fail; its manufacturing base is still gargantuan and some argue that its overall value is now so great that it could survive almost anything. But with the credit crunch still reverberating around global markets economic certainty is hard to come by. The recent blip in the Shanghai Composite Index (since called ‘Black Monday’) was the result of a stock market bubble bursting (Western markets in particular have recovered pretty quickly), but it could be a mere 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 undeniably vast, but you can perhaps hold off on that Mandarin phrasebook for a least a couple of years.