The ever increasing speed and strength of China’s economical transformation has no historical precedent. As the dawn of the 21^st century begins to unfold, the global economic and political playing field begins to form; it has become clear that China and its economy will play a major role in affecting the development of the pan-European and American markets. The objectives of this article are to evaluate and predict the future of the Chinese economy while scrutinizing its strengths as well as its weaknesses. An assessment of the Chinese economy reveals that it is likely to experience a decline in growth in the short term future but will enjoy continued sustained economic prosperity in the long run as it, re-invents its real estate market; becomes less reliant on foreign commerce by focusing on domestic demands; altering relations with the U.S.; and addressing the issue of labour while providing sufficient job opportunities for the growing middle class.

Source: The Sierra Leone Telegraph

In order to better understand the direction China’s economy is headed it is important to understand where it has come from. Given China’s enormously high rates of savings and investments it is evident that their recent growth was driven by productivity rather than capital investment.

China commenced its industrialization process, following the erection of the People’s Republic of China at the end of 1949, According to Xiaodong Zhu, some of the most drastic changes ever to occur, where the 1978 reforms initiated by Deng Xiaoping, these changes included: the de-collectivization of agriculture, opening the country to foreign investment, and granting permission for entrepreneurs to start up private enterprises. An example of the effects of these reforms can be seen post 1978, as China’s economic growth accelerated to over 8% compared to the previous 3%. Although the privatization of several key industries, the lifting of price controls and the de-regulation of markets helped kick start the economy, in cannot be ignored that the continued dominance of state monopolies in sectors such as banking and petroleum remain pressing issues.

Source: Understanding China’s Growth: Past, Present, and Future; by Xiaodong Zhu

Housing

One current problem that the Chinese market faces is in its volatile real estate sector. The value of residential sales fell a full 10% during the beginning of the year. The reason for this can easily be explained using the laws of supply and demand. The rapid expansion of real estate in recent years has resulted in the mass construction of private property, average housing prices surged between 2005 and 2009 (graph below). However it is important to consider that a vast majority of the population live in poverty and the gap between the richest and poorest is ever growing, recent statistics revealed that 71.6% of the population live on less the 5$ a day. Since the majority of the people cannot even fathom affording houses like the ones currently being constructed many are left un-inhabited. Without decisive intervention by the government aimed at providing job opportunities to middle class, China’s economy will face severe problems. “This is clearly the beginning of a downturn, the third in eight years, but it is not a bubble bursting,” insists Michael Spencer of Deutsche Bank.

Even thought the current condition of the real estate market, as previously described, can be considered a weakness and therefore a future liability, it is ironically also an example of one of China’s main strengths. Unlike its counterpart, the U.S., whose economy faltered as a resulted of a poorly regulated real estate market and banking sector, China would have no such problems. China will un-likely suffer big financial hits like the US and other developed and even developing economies because of its single party, communist/authoritarian governmental structure. For example during said housing bubble in 2011, they were able to take quick and uncontested measures such as: monitoring capital flows to stop overseas speculative funds from jeopardizing the property market; requiring certain families to make a 40% down payment when buying second homes; raising interest rates multiple times and a nationwide real estate tax as a measure to curb speculative investing. By implementing these changes the Chinese economy was able to avoid taking major hits, on the other hand countries like the U.S. couldn’t even come to close to emulating such plans due to the democratic and slow paced nature of their political system (not to mention their generally greed driven economy at the time). For China however no such problem exists since the CCP’s (Chinese Communist Party) rule is un-questioned, they can plan for the long-term future resulting in stronger more reliable economic policy. In the words of Noam Chomsky “The threat of China is not military. The threat of China is they can’t be intimidated.”

America vs. China

Moving on to China’s ‘interesting’ relationship with the U.S.; It is important to note that China is the world’s largest exporter shipping $2.2trillion in goods around the globe, representing 12.1% of overall global exports. Of these, 16.7% of all Chinese exports are directed toward the U.S. making it China’s second largest trading partner right after Hong Kong. In a nutshell in order for America, the epitome of western consumer society, to continue to maintain such high living standards at an extremely low cost it will have to depend on China for cheap labour and goods. However this relationship is less that sustainable and is subject to change in the future. China’s hybrid economic model, allows them to liberalize the economy while continuing to have a commanding role over the population through the government. Not only does the Chinese government have un-deniable control over their own country they also have a great degree of leverage over the U.S.

Furthermore all these years of buying cheap from the Chinese has come with a price, in recent years China has kept the value of the Yuan artificially low so that the U.S. can continue to easily buy their goods, in order to maintain the bilaterally beneficial trade between themselves. The essence of how this is achieved breaks down to the following, creating demand for the dollar and a supply of Yuan. Therefore by printing Yuan and then buying dollars China is able to keep the value of the dollar high, and then they use the newly acquired dollars to purchase U.S. bonds allowing them to yield interest. Essentially China owns $1.2 trillion worth of U.S. bonds; this is of paramount importance because it allows China to hold major supremacy over the U.S. Since China is currently very dependent on exporting goods to countries like the U.S., should the U.S. ever stop going to China for its imports and look for alternatives, China will able to wield great leverage over them, because they could, for example, ‘dump’ their vast number of shares causing irreversible effects on the economy.

The Middle Class

One further pressing issue facing the future of the Chinese economy is their labour market. As the lower class becomes more aware of their unfair work conditions through globalization as well as a growing middle class, CNN approximates 800 million, China’s economy will not be able to indefinitely produce at such low costs. This means that China’s main customers, such as the U.S. will look to outsource and purchase from other Asian developing countries such as India, Thailand and Singapore etc. In consequence for China to avoid a total economic down fall they are going to have to take several measures. [4]Firstly China will have to become self sufficient not relying on other economies, by catering their production towards domestic needs rather than foreign ones. China will likely also need to develop its non-tradable sectors primarily on construction and services. Currently there are great barrier entries into the service industry due to a large oligopoly run by the state riddled with corruption. The Chinese government has already planned to take measures to ensure that their service sector continues to grow such as planned tax breaks for small to medium sized companies and ramping up spending on China’s railroads. Unfortunately the non-state sector has been slowly growing at 2.27% to aggregate productivity growth over the past 40 years, contributing close to nothing.

Conclusion

To conclude, in the near future China’s main focus will be on reviving the real estate market and catering towards domestic demand while providing job opportunities to the growing middle class in order to ensure economic stability. In the long run however the U.S.’s continued reliance on China and China’s powerful position will secure its role as a main player in the global economy. However due to the sheer size of the population and the enormous number of people living in poverty it is unlikely that China should topple the U.S.’s century old throne as the number one economy any time in the short term future. China’s tactic towards addressing the afore mentioned issues will either set China on a path towards massively increased growth or disappointingly slowdown towards continued stagnation.

by Karim Zaghloul