China: Boom today, bust tomorrow

ShutterBug SG

China: Boom today, bust tomorrow
Business week
10 Feb 07

China's stellar growth hides a multitude of sins. Things are in fact not so great after all - socially, environmentally or economically.

China is gradually awakening to the fact that headline numbers for growth of Gross Domestic Product do not necessarily result in sustained income gains or social welfare. As President Hu Jintao emphasized in December, growth must focus more on quality than quantity.

Annual growth of around 10% is much admired all over the world, particularly in developing countries of west and south Asia, Africa and Latin America, which are struggling to grow half as fast.

But whilst the gains are plain to see, triumphalism needs to be tempered.

The most obvious one is the environmental cost of growth for growth's sake. It is not just a case of stopping air and water pollution; there are myriad other future costs to be factored in, such as expenditure on reversing the damage as well as the public health spending required to treat diet-caused diseases as well as pollution-related ones.

And then there is the issue of depletion of non-renewable resources, especially groundwater and topsoil.

Making Deductions

How much of China's GDP growth should be deducted to account for the negative impacts not reflected in the data is anyone's guess - the government's Green National Accounting Study for 2004 put it at 3%, while more alarmist figures go as high as 5%.

But such environmental issues - and the social costs that come with them - are not the only ones to be looked at from a critical standpoint when assessing the relationship between GDP growth and real gains in living conditions.

Another one is the very rate of investment, which looks good on paper but does not necessarily add up to gains in welfare or consumption - the ultimate goals of all economic activity.

China's investment-to-GDP ratio is thought to be running at close to 40%, higher than any of its neighboring countries and economies - Japan, South Korea, Taiwan, Hong Kong - during their rapid growth periods. To achieve such a high rate, consumption and hence household incomes, particularly of the lower income groups which have little propensity to save, must be squeezed to achieve a high national savings rate.

Of course, high investment creates power plants, roads and factories. But what is the return on this? Judging by the low interest rates favored by the Chinese authorities, the answer is low.

It is often forgotten that the Soviet Union once had a very high investment rate, which enabled it to industrialize and then recover from wartime destruction. But it is now recognized that the money was inefficiently invested and savings were mainly achieved by squeezing the rural sector.

The American economist Paul Krugman once famously compared the Soviet Union to Singapore. Although his conclusion was disputed, he pointed to Singapore's then 40%-plus saving and investment rate as evidence of poor performance in terms of total factor productivity - the productivity of capital as well as labor.

People were forced to forego consumption to boost short term GDP growth at the cost of both welfare and long term performance.

Singapore's investment rate has been much higher than Hong Kong's for years but per capita income growth has been similar. Stronger manufacturing in Singapore accounts for some of the difference. But not all.

Private consumption in Singapore is only 42% of GDP while it reaches 58% in Hong Kong.

Corporate Fat Cats

Singapore also provides another warning for China. Corporate profits have been rising as a percentage of GDP but, given that much of this income accrues to foreign investors, the real gains to the workforce are much lower than the per capita GDP data would suggest.

While foreigners make good profits, an excess of forced local savings is invested overseas in low yielding government bonds.

In China's case the level of corporate profitability is unclear. But it is generally agreed that foreign companies make much better returns than local ones - especially when transfer pricing, which shifts exporters' profits to low-tax offshore centers, is considered. Meanwhile, Beijing is accumulating low-yielding foreign bonds.

That's no reason to criticize foreign direct investment - but it does underline the importance of efficient use of capital. People's hard-earned savings are not to be squandered, raising GDP now by borrowing against the future.

charlize SG

There are already books written with warnings about a possible crash in the Chinese economy.

Whether that will come true, only time will tell. Laughing

maggot SG

I read chinese papers that people borrow money on credit to buy shares and this is very dangerous indeed Shocked

ShutterBug SG

That's why I pointed out long ago, that people in China has the habit of burning their candles at both ends in whatever they do...

Therefore, I say the world need not necessarily worry about competition from China - in no time, they'll be too busy scooping water out of their sinking economic vessel.

I believe that China will only become a better place for business, after re-emerging from a serious economic downturn.

Right now it's like watching Flying Trapeze performance with no safety net below...

fymk SG

If China crashes, alot of other countries will crash with it especially USA. Most of the manufacturers have heavily invested into China in terms of industry and market. If USA crashes , the only group which have the highest possibly of still standing will probably be European Union due to their trade blocs. The rest will fall with uncle sam.

I don't think China will crash readily, not with 5000 years of history in regards to dynastic changes. History does repeat itself.

dreameryb SG

Until the West succeeds in subjugating China under the political ideologies it has been imperializing the rest of the world with, it will always try to find fault with China with criticisms and dire predictions that fall on the full gamut of intolerance, bias and stupidity.

spinsugar SG

Aye.. that's why I always take western articles on the topic with a pinch of salt.

Fingolfin_Noldor SG

Foreign Investment unfortunately, doesn’t provide much money to the tax systems of the state. It does provide jobs, but most of the profits go to a company else where.

chiabaliao SG

Very true.