By Paolo von Schirach
July 15, 2013
WASHINGTON – If you listen to Beijing Government officials, everything in China’s economy is moving along according to plan. And the plan is to rely less on growth led by fixed investments and exports, while boosting domestic consumption. Turning things around in the second largest world economy may take a while and, understandably, there may be some small shock waves here and there. But China’s leadership will eventually manage to steer the country in a new direction, based on sound, self-sustaining foundations.
Extraordinary growth may be over
Well, this may very well be the intent. But it is not at all clear that the Chinese Communist Party leadership is in total control, while there are indications that the economic fundamentals may be far weaker than the official statistics would suggest.
China’s incredible rise was built essentially on two strong pillars. The first one was construction, including an incredible modernization of all key infrastructure, (ports, airports, highways, high speed rail). The second one was export-led manufacturing made possible by a few factors: public policies favorable to investments in new plant and equipment, ultra-cheap labor provided by migrant workers coming from the impoverished country side, and the vastly improved infrastructure backbone mentioned above. Chinese factories could produce cheaply and deliver fast to their overseas customers.
Construction sector and exporters
The fact is that these two basic ingredients may not work as well as before. Construction turned into overbuilding largely led by speculators. Now, there seems to be over supply. So, expect far less construction and therefore less business for the many sectors that supplied the construction sector.
The export led boom worked extremely well in its early stages of China’s take-off, when it was all about penetrating and conquering new markets. But all this has been done. Therefore it would be foolish to expect the same levels of export growth that Chinese toy or small domestic appliances manufacturers experienced in the 1990s. Besides, China’s cheap labor advantage is slowly but surely evaporating.
Besides, and this is a key new issue, in order to keep let alone grow their export markets, going forward China’s manufacturers will have to compete on quality as opposed to just price. And this promises to be a lot more complicated. Creating and nurturing innovative enterprises with cutting edge technologies is a lot more complicated than mass producing cheap coffee makers for Wal-Mart.
Shadow banking
On top of all this, we now know –even though only vaguely– that there is a huge Chinese shadow banking system, escaping regulations and controls, that is over exposed to a massive amount of bad loans. How much money is involved, nobody really knows. But it looks as if the Government will have to intervene in order to prevent major financial shocks.
The environment has to be fixed
Last but not least there is the urgent need to fix the environment. 30 years of growth, no matter at what cost, have caused enormous damage. Official studies now estimate that people living in the Northern part of China, on average are losing 5 years of life on account of maladies caused by pollution. This is a lot more than a nuisance. It is a crisis. And it will have to be addressed swiftly. The logical corollary is that large amounts of capital will have to go into cleaning up the mess. Therefore it will not be available for other purposes.
The real facts still unknown
Mind you, this assessment is an approximation based on partial and perhaps inaccurate data. We do not know how many construction firms in China have gone bust. We do not know how many state-owned corporations survive only because of easy credit provided essentially for free by state-owned banks. We have no idea how large the shadow banking system that provided credit to medium and small sized private sector companies really is. We have no idea how long and how much it will take to fix China’s environment, water and air.
But, if history is any guidance, I suspect that the real problems are much bigger than the authorities are willing to admit.
That said, by comparison with other struggling world economies, China’s 7.5% rate of growth is still astonishingly high. But trajectories in the long run matter more than yearly snapshots. China is still growing, but its rate of growth is steadily falling.
All according to plan?
The notion that all this is according to plan, and that the Chinese consumer will soon pick up the slack and re-energize growth does not look credible. If the export and construction boom is over, millions of Chinese workers will become unemployed or under employed. Beyond that, millions of rural Chinese trapped in the country side no longer have an open avenue (factory jobs in big cities) leading to improved economic opportunity. New growth led by consumer spending must be predicated on rising disposable income levels, and that assumes a buoyant economy. A so-so economy will not do it.
Assuming lower growth, I am not quite sure where all this new cash fueling consumer spending will be coming from. If this is indeed so, having exhausted its special –and in the end temporary– economic advantages, China may be well on its way to becoming “normal” again.