Theme 4 and paper 3: An exemplar essay on the Chinese Economy

Essay: The state of the Chinese economy – an overview

Between 2011 and 2013 China poured 6.6 gigatons of cement – more than the amount used by the USA during the entire 20^th century. That single statistic encapsulates both the successes and failures of 21^st Century China.

On the one hand you have the unprecedented levels of supply side investment building up the capital stock and fueling growth. Yet on the other hand you have the excess that has lead to serious concerns.

One fundamental success of the modern Chinese story has been growth. Since 2009 alone its economy has more than doubled in size, and it has increased 11 times over since 1998 to grow to $11.01 trillion in 2015. It is claiming an increasing share of world output (as measured by GDP). Adjusted for purchasing power parity, China has overtaken the USA to account for a 17.65% share, the worlds largest. The nation has accounted for 1/3 of global growth this millennium.

China's centrality to the global economy consequently gives it huge influence around the world; it has a big voice in institutions like the UN (as a permanent member of the Security Council) and the World Bank, and also has significant leverage when brokering trade deals – access to Chinese markets and capital is increasingly attractive. China is currently negotiating 9 different bi-lateral trade deals with countries from the Maldives to Norway and existing deals with dozens of others. This is one example of the positive multiplier effect of growth, as these trade deals lay the foundations for further growth.

You can evaluate this by saying that this growth has come at a cost – China has some of the worst environmental problems in the world. According to the world bank 53 billion tonnes of untreated industrial and household sewage make there way into China’s waterways, 70% of which are affected. The situation has gotten so bad that China will face water scarcity by 2030 unless serious interventions are undertaken, with 300 million people already without access to safe water. Substances from cadmium to arsenic have been found in river water. Although anti-pollution laws exist, in many regions they are lightly enforced with businesses often given significant leeway due to their economic importance.

In response China has committed $625 billion to better managing the environment, but considering the range of issues it faces this may not be enough. To water scarcity, you can add; desertification, overgrazing, soil salinization, soil erosion a loss of biodiversity and air pollution. Many of these challenges have arisen due to increasingly intensified farming practices that are required to feed China’s ever-growing population., particularly the middle classes that are now demanding far more meat than the Chinese agricultural system was ever expected to produce. As animal farming is far more land and water intensive than crop farming, these problems are more likely to get worse than better.

Air pollution is a particularly salient issue in China. It is home to 16 of the worlds 20 most polluted cities and leads the world in smog-related respiratory and cardio-vascular disease deaths. 25.5 million tonnes of acid rain falls every year, thanks to the sulfur dioxide and black carbon that pours out of China’s thousands of coal fired power stations (provide 70% of total power) and steel/chemical plants.

More people own a car in China than ever before and that has been the major contribution in the last two decades, with exhaust emissions added to an already toxic mess. Beijing suffered major public relations damage in the run-up to the 2008 Olympics over concerns surrounding the Beijing smog, and air quality concerns could become a road-block to further events of this magnitude. The contribution to global warming is also of great concern, as is the burden of the pollution related disease on the economy.

As the Chinese economy ages, its workforce will become sicker and it does not need the extra burden of workers missing days and needing hospital care.

It is also leveraging this growth into broadening its soft power. It has the third most voting power in both the World Bank and the IMF – evidence of the dividends of this is the decision by the IMF to make the renminbi a part of the Special Drawing Rights basket of currencies, a major step in the renminbi's rise to global reserve currency status. Not satisfied with influencing existing institutions, China has founded the Asian Infrastructure Investment Bank, which many have touted as a rival to the World Bank. With the combined weight of 21 Asian nations behind it and free from US or UN influence, the bank has attracted western support from the likes of the UK and the USA.

The bank fits neatly into the Chinese Governments biggest project 'The New Silk Road' which is designed to increase trade with Eurasia and Africa. China has been investing billions in East Africa over the last 20 years, with $26 billion spent in 2013 alone, mostly in resource exploitation, but returns are limited by the poor capital stock of the region. The same Is true across much of central Asia. China is more familiar than any country of the power of supply side investment, so is happy to lend money and expertise, safe in the knowledge that they would share directly in the benefits of improved access and smoother supply chains, as well as closer ties with grateful governments. Perhaps the best indicator of China's soft power success was the USA's refusal to join the AAIB, perhaps out of wariness of China's increasing sway.

Another, perhaps under-appreciated success of modern China has been the major rise in living standards. Relative to the USA, China was on a par with India in the early 1990s with just 5% of US GDP per capita (PPP). It is now overtaking Brazil, the one-time darling of development economists, and is approaching the 30% mark, a significant improvement in such as short space of time. Through large scale urbanization and growth China has reduced the poverty rate (measured as living on less than $1.25 a day) from 85% in 1981 to 27% in 2004, emancipating over 600 million people, with millions more escaping poverty since.

This increased wealth is most apparent in the 300 million strong middle class that could double by 2021. A larger middle class means that China has begun to rebalance its economy away from the cheap unit labour cost exports of the past, into a powerful tertiary sector founded upon domestic demand. The future of China looks less like FoxConn and more like Baidu.

Whilst total poverty may have fallen, relative income inequality has in fact worsened. A rising tide may lift all boats, but is does not lift them equally. The One-Child policy reinforced existing gender inequality, with men still having a significant advantage over women through all stages of life. Rapid urbanization has also created a growing gap between rural and urban populations, with government investment on infrastructure and services focused on population centres. The differences between Shanghai and an interior farming region are now extremely acute, which in the long run could lead to social and political tension. China’s Gini coefficient has risen far and fast, from 0.3 in the 1980s to 0.53 2013. The continued health of the one party system could be called into question if growth falters and the middle and working classes see their living standards stop rising.

Finally, China in recent years has made big progress in diversifying its economy as it matured. The image of China as low quality manufacturing hub filled with sweatshops is now woefully outdated. Thanks to the agglomeration effects of the Special Economic Zones first created in the 80's, China has become a centre of innovation and economic complexity. It is at the forefront of mobile technology, with brands like Huawei and China Mobile recognised the world over. These corporations have huge international presence with Huawei alone investing $1.5 Billion in Africa over the last 20 years.

By becoming a more multi-faceted economy that was less dependent of exporting cheap manufactured goods to the West, China is better placed to absorb exogenous shocks. It was notable that China did not suffer as badly as many other major economies during the 2008 financial crisis (admittedly in part due to a strong fiscal stimulus plan).

While private companies may be thriving in the new China, state-owned enterprises are not doing as well. Like many SOEs, they struggle with x-inefficiency and without a profit motive they do not contribute to the innovation that would provide China with a competitive advantage in global trade. This is arguably seen in the well-earned reputation of SOE’s for having no respect for foreign intellectual property laws, as the SOE’s cannot develop their own ideas. Consequently, they hold back the economy, cornering parts of the economy the private sector could take further, as well as capturing the skilled workers in secure, well payed government jobs when their talents would be better exercised in a more competitive environment. It is also true that returns to investment are falling in China as the economy becomes steadily more leveraged. Areas of rapid growth are becoming fewer and further between (hence the expansion into East Africa) and household debt to GDP has more than doubled in ten years. The shock of the Shanghai stock crash of 2015 has lead to growing fears that Chinese economy is more fragile than previously thought. Its latest boom certainly bears the hallmarks of a crash waiting to happen; a large housing bubble and an overleveraged population.

In the short run, China appears to be a great success; combining rapid growth with poverty reduction, political stability and increased global standing. Yet in the long run its challenges are at risk of overwhelming it. The burden of an ageing, unbalanced population, the risk of the middle income trap, environmental issues and an over-leveraged economy is a potent cocktail of problems that threatens the long-term economic success and political stability.

Johnny Wallace