The "China Miracle”, a rapid economic growth spanning three decades, has changed the international economic landscape but is it sustainable? Right now, China is poised to overtake the world-leading US economy, China's largest export market, by 2019(5)
yet there are clear signs that ultra-rapid Chinese economic growth is ending. This leads to the obvious question; can China's economy survive slowing in a faltering world economy?
Before we can predict future trends, we must understand China's emergence as an export powerhouse. Like post-WWII Japan before them, China followed a simple, but effective, combination of a low-cost manufacturing labour force assembling export products based largely on foreign designs and using imported materials coupled with a high domestic savings rate and under-valued currency (yuan), which gave exporters a competitive advantage in pricing(1)
. The result was a foreign consumer driven economy which sacrificed consumption in favour of investment and abandoned the service industry in favour of manufacturing(4)
(growth chart – The Economist.com)
With high trade surpluses, China was able to make smart overseas investments – particularly in foreign government securities(1)
. However, these investments are vulnerable to international economic slowdown, as is the mighty Chinese economy. Export orders began to fall in March, 2013, leaving China's overall growth at 7.7% in the first quarter, slightly short of the expected 8%(2)
. While either number outpaces current Western standards, this is a disappointing and troubling shortfall for Chinese investors and government - though it needs mention that this growth rate statistic is misleading – China doesn't compensate for leap years, and the addition of a single day could have changed the percentage to meet predictions(3)
More unexpectedly weak growth in May raised concerns about a further slide in the second quarter. 2012 saw China's slowest paced growth in 13 years and the trend appears to be continuing. Raw materials imports for manufacturing have dropped – showing signs of sluggish demand(9)
. To add more stress to an economy operating at its limits, China's credit rating dropped slightly, to A+, in April, 2013(6)
. A decrease in exports has forced China toward a more Westernized economic model; credit-driven investment, low interest rates and increased government spending, which has potential to lead them into a familiar trap of high government and personal debt coupled with growing budget deficits(1)
The necessitated credit expansion has resulted in a domestic investment boom, especially in property and infrastructure(1)
, but this carries risk. Large scale infrastructure projects, while they encourage economic growth and employment during the construction phase, do not yield high profits, yet they make up a large portion of Chinese bank loans. Many of these debts remain unpaid, which leaves the Chinese government potentially having to dip into the still large, but shrinking, savings pool to prop up a vulnerable, and shifting, banking system(1)
Where previously all saving was via state-owned banks lending primarily to State Owned Enterprises (SOEs) - protected by taxpayer bail-outs - there are now a variety of wealth-management products (WMPs), including bonds, trust companies and kerbside creditors(6)
, the so-called 'shadow banking' (any financing activity outside the banking system(12)
). Only 55% of credit was bank lending as of February 2013(6)
and in 2012 Chinese banks began extended more loans to the private sector as opposed to SOEs.
(China's changing credit - The Economist.com)
Yet, despite focus having been on disappointing growth, there were two bright spots; consumption, while still marginal compared to other powerful economies, outpaced investment for the first time since 2011 and services, while comparatively small – below the 55–60% of GDP seen in most developed economies(7)
- have maintained the forefront over manufacturing in GDP contribution for the past three quarters – something not seen since the 1960s. The Chinese consumer has pushed their economy toward the more labour-intensive, service industry platform, resulting in higher wages, which in turn encourage spending in keeping with growing household incomes, further strengthening the service sector(4)
. Retail sales have increased by 13%(9)
, perhaps more if online purchasing is taken into account(9)
. The Chinese government continues to hold off on dropping interest rates, willing to allow the growth to slip as low as 7% before intervening, hoping to switch the economy to domestic consumption versus export-driven(4)
Can turning inward help China to ride out the global financial slowdown while still growing their economy? Not without changing the principles on which the “China miracle” was based. The pursuit of rapid and cost-effective production needs give way to quality over quantity. China's Gini coefficient (gap between rich and poor), once relatively small, exceeds the international warning level of 0.4, yet China has no proper unemployment insurance system(10)
. Taxation for services needs further simplification(4)
. Difficult, but necessary, decisions must be made with the treat of India creating their own cheap-labour “miracle” looming, but China seems ready to face the challenge.
1 – Das, Satyajit, China must not follow Japanese path of growth and stagnation, The Independant (June 11, 2013)
2 - Lynch, Russell, Chinese industry in shock slowdown as exports stall, The Independant (May 1, 2013)
3 – S.C., China's slowdown: The 91st day, The Econimist (April 22, 2013)
4 – China’s economy: Speed isn’t everything, From Print edition (April 18, 2013)
5 – Rancho eclipse, Economist.com (June 6, 2013)
6 – Chinese credit rises. China’s credit rating falls, From Print Edition (April 13, 2013)
7 - Industrial eclipse, S.C., The Econimist (April 15, 2013)
8 - THE CHINA FACTOR - Booming Economy Tests World's Vital Signs (Worldwatch Institute, June 17, 2013)
9 – Chiang,Langi and Standing,Jonathan, China's economy stumbles in May, growth seen sliding in Q2 (Reuters, June 9, 2013)
10 - Jinming, Zhang, The negative effects of China's development model, China.org.cn, June 16, 2012
11 – Morrison, Wayne M., China’s Economic Conditions, Congressional Research Service (June 26, 2012)
12 - `Steady Pickup' Seen in China Economic Growth – video, Bloomberg.com (May 28, 2013)
No, China’s economic growth is not sustainable. China is a known and admitted liar about its economic data and non-Chinese sources all point to economic slowdown or even a recession in the upcoming years. China’s economy is burdened by loans, debts and bonds. The urbanization policies in China are fraudulent. Finally, China faces stiff competition from competitors in its chief strength, manufacturing.
On the first point, China’s own premier, Li Kequiang, admitted that China’s figures are “man-made” and not to be trusted. This was confirmed in Wikileaks cables. (1) 2012 saw political change and motivation to lie about indicators of economic growth, such as electricity consumption. Even when electricity consumption was down overall in China, Chinese sources reported that it was at the same levels or even mildly increased to save political face. Other data suggests that Chinese concrete usage was below expectations along with its electricity usage and has seen a more than 10 percent decrease in glass production and its building materials sector is 7 percent less profitable than it was in 2011. (2)
China just recently had a major solar company default on its loans and bonds, SunTech.
This will be the first of many. China is taking on debt faster than its GDP is growing and has more debt than GDP and this is a recipe for disaster. Stan Druckenmiller, a venture capitalist with impeccable credentials who recently worked for Soros Corp, has this to say about the debt situation: “In essence, the frantic stimulus China put together at the end of 2008 sowed the seeds of slower growth in the future by crowding out more productive investments.
The system has enough leverage and misallocation of resources to warrant risks of a financial crisis…What we’ve seen in China since 2009 is similar to what happened in the US in 2005, in terms of credit growth outpacing economic growth.”
China’s manufacturing and building materials woes are exemplified perfectly in the decade-old policy of mass urbanization and the construction of gigantic “Mega Cities” reminiscent of Judge Dredd comic books that the 55 percent rural and poor population of China simply cannot reach nor afford to live in. (4) These cities became investment opportunities that some estimate could be 20 to 30 percent of the entire Chinese economy. They have constructed a housing bubble as the U.S. did and all one has to do is wait for it to pop! (5)
This policy of debt-financed, government promoted infrastructure construction to boost the GDP, create a phony investment opportunity for Chinese citizens and goose Chinese economic figures is perfectly represented by the New South China Mall. The New South China Mall is more than twice as large as the largest mall in the United States, the Mall of America, and is by floor space the very largest mall in the world. It has all the bells and whistles from IMAX to on-location rollercoasters. However, the poor people in the Dongguang province cannot get to the mail or spend the money they don’t have there and the place is largely abandoned and termed a ‘ghost mall’ by the locals. Victor Teo, a professor at the University of Hong Kong agrees with my assessment: "To me, many of these projects are a result of easy access to capital and a combination of wishful thinking and speculative behavior rather than rational business calculations.
" "This mall is not the only one that is like that. Elsewhere in China there is the phenomenon of 'Ghost Towns', that is to say infrastructure projects, both residential and commercial, with no takers."
2012 was a year in which China saw total direct foreign investment fall by 3.7 percent
and overall investment fall by 13 percent
. Other competitors in the manufacturing sector such as Indonesia, Taiwan and Vietnam are undercutting China and receiving money from Singapore and Japan that puts them in direct competition with China. Indonesia’s investment was up 27 percent
and Thailand’s was up 63 percent
. Other countries are simply doing it cheaper and better than China right now. (7) This nation is no longer the “World’s Factory Floor.” By 2015, rising Chinese labor costs will put their cost at par with U.S. businesses and others similar to the U.S. (8) The jobs that will not go to South-East Asia will just remain in countries like the U.S.
All of these signs point to a rough economic road ahead for China as they take on more and more debt to inflate a soon-to-burst “Ghost Town” housing bubble and globally cede ground in manufacturing.
1. ‘Lies, Damned Lies and Chinese Statistics’
2. ‘Chinese Data Is Looking Horrible, And The Government Is Lying About It’
3. ‘Stanley Druckenmiller On China's Future And Investing In The New Normal’ http://www.zerohedge.com/news/2013-0...ing-new-normal
4. ‘Rural Poverty in China’
5. ‘China Building Mega Cities But They Remain Empty Ghost Towns’http://www.news.com.au/business/chin...-1226611169281
6. ‘World’s Biggest Mall A China Ghost Town’
7. ‘China Loses Edge As World’s Factory Floor.”
8. ‘U.S. Manufacturing No More Expensive Than Outsourcing To China By 2015: Study’