What Will Be the Political Consequences Of A Slowing Chinese Economy? Slower growth means dashed expectations. Will the Chinese people demand changes?

By Paolo von Schirach

July 4, 2013

WASHINGTON – Is China in trouble? Hard to tell; but it looks as if  its gigantic economic engine is not working so well anymore. Given Beijing’s historic lack of transparency when it comes to publishing hard economic data, we do not really know what’s going on. But we do know a few things. The economy is slowing down. And this is bound to have an impact on a myriad of unwise commercial loans provided by banks and quasi-banks. They were doled out to almost anybody when the marching orders from the top mandated “economic stimulus at all costs”.

Slow growth, bad loans

Will there be huge losses in the Chinese financial sector? The answer is: probably yes. Even though the central government has ample reserves to plug all the holes, the huge number of bad loans is by itself evidence of an economy no longer at peak  performance. “What do you mean, by non performing economy? After all China is growing well above 7% a year”. (Compare that with America barely at 2% or to the Eurozone in recession). Well, first of all the 7.6% , or whatever the latest number may be, is an “official statistic”, and therefore inflated. The real rate growth is probably lower. 

China’s competitive advantage has been eroded

Taking that into account, and assuming that slow growth is a new trend, as opposed to just a temporary slow down, less  growth means that China’s magic is over. The export-led economic model has run its course. It worked extremely well for thirty years; but not anymore. How so? Well because export markets are saturated and therefore they can no longer  absorb increasing amount of Chinese goods. Besides, low labor costs, China’s key competitive advantage, are becoming less and less relevant, for essentially two reasons. The first one is that Chinese workers are demanding and getting higher wages. The second one –and probably the most significant in the long term– is that in this new age of robots and automation the cost of labor is becoming less and less relevant in determining the cost and therefore the price of  manufactured products. 

China as innovator?

In order to be a real competitor in tomorrow’s global economy China will have to improve quality. China needs to develop recognized world brands that global consumers will want on the basis of their superior engineering, design,  durability, after sale service and what not. In other words, China needs its BMWs, its IBMs and its BOEINGs. It needs  to develop superior brands that will be able to command high prices because of their recognized value. But getting there would require a brand new economic eco-system geared to promote innovation. And this is not what China is about today. China is mostly a gigantic workshop. China is not a laboratory manned by free wheeling scientists and independent entrepreneurs willing to dare, with the support of risk oriented venture capitalists.

Difficult days ahead  

Let me put all this together. The export-led model lost its momentum. China’s edge represented by low labor costs is disappearing. The financial systems will experience huge losses and will have to be consolidated through state interventions. And, finally, a huge amount of capital will have to be redirected from factories or infrastructure to fixing massive (and in some instances catastrophic) environmental damage caused by the care free “grow at all cost” model followed for thirty years.

That said, China slowing down to a more “normal” rate of growth may have unpredictable political consequences. The present regime derives most of its legitimacy from its “proven” ability to deliver impressive economic growth, year after year. If the Chinese people no longer believe this, this may create demands for change. And who knows what that may lead to.


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