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China’s Economy: Is it as good as everyone thinks?

Home Sweet Home in Shanghai. Not quite the image of the city’s inhabitants/homes/development you are used to seeing.

Neither I nor anyone really doubts that China has a good economy. Everyone the world over has become familiar with China’s economic growth especially during the past decade. Just type “China” into google news and see how many stories pop up on a daily bases about China’s economy. Whether positive or negative in tone, all resoundingly proclaim the attributes of China’s economic expansion, even if the latter are rooting for its collapse. But just how good is it? Not as rosy a picture as some would have you think..

Since first coming to Shanghai in 2001 and 2002, I could see how much development had taken place in my absence before returning in 2009, and since that time it has continued, at least where housing and metro construction is concerned. The city looks truly amazing and completely transformed since the early 90’s when China finally dispensed with the idiocy of Mao and decided to engage with the global community economically. The great transformation epitomized by “The Head of the Dragon” (Shanghai), has been nothing short of breathtaking and I am sure that it is the image of vibrant new and shinny Shanghai that has helped foster the use of such terms as “miraculous” and “meteoric” to describe China’s rise in the Western and domestic press. Terms which I tend to avoid as I fail to see where they are truly warranted.


China has boasted 10% GDP growth for 2 decades while many developed nations hovered between 0 and 53%. To those looking across the globe, such figures were truly astounding. But if you take a closer look, I think you’ll agree that they are not quite so amazing and certainly not deserving of the lavish praise they have received.

For one, it’s easy to grow economically when you start from nothing, and China certainly started from nothing. Before “opening up”, as it is known here, China was the most unskilled country where GDP growth is concerned, perhaps in the history of the world. Besides endemic famine, political campaigns, civil war, and ridiculous slogans there was very little the Chinese soviet could produce. So they started at zero with a billion plus peasants to work in foreign factories. If the growth rate of China’s GDP was not running at 10%, I think that would be more cause to use catch phrases like “meteoric” would be more fitting as meteors actual crash and burn instead of rise.

Secondly, GDP, or “nominal GDP” the figure used by China and the press to bolster China’s economic importance, is not really a good economic indicator, especially in China. If you are paying attention to economic data coming out of China for the past 6 months or so, you are well aware that everything is not peachy keen in the Middle Kingdom. China’s stock markets are circling the bowl in the economic toilet, and manufacturing has sharply contracted. On top of that, of the billions and billions of dollars thrown into China’s economy after the recession of 2008, most were wasted on non-performing state industries and national corruption projects like China’s misguided high-speed rail. Still, GDP is continuing to rise. Companies are going bankrupt left and right, yet GDP continues to grow. How can that be?

Stockpiling Creates GDP

One reason for this apparent contradiction is “stock piling”. In just about every industry, Chinese factories ar producing products that no one is buying. Likewise, raw materials, like coal and copper, are also being stock-piled as a matter of course in the attempt to maintain China’s economic growth record. In fact, factories are being ordered to produce product which they cannot move by local officials eager to report high GDP figures farther up the chain of command. These same officials don’t want to see production lines or factories shut down as they are equally eager to avoid masses of unemployed disenfranchised peasants beating down their doors with torches and pitchforks. No, everything must remain “harmonious”, so things are still being made, they just aren’t being sold. If this continues long enough, then even if the international economy picks up, there’ll be such a glut in the marketplace that prices will crash, and the economy here in China will further suffer, including GDP.

Thus, GDP can be high while sales, stocks, and people’s incomes remain flat or indeed contract as they are already doing. One industrial indicator I believe that tells a far better tale where China’s economic acuity is concerned is car sales.

The Automobile Industry

Car sales are a much better indicator of a nation’s economic prospects for a number of reasons. Where individuals are concerned, growth in sales of cars means that the middle class is growing and a more vibrant consumer base is emerging. Things were looking good for China’s auto industry after the economic crisis of 2008. Back in 2009 China had a growth rate of over 36% in new car sales and actually overtook the US as the world’s largest auto market. Last year the growth rate dropped to just 2.5%! What a shock, and shockingly simple to explain. The rapid growth was simply produced by the government stimulus. Cars were heavily subsidized and tax breaks were passed onto car buyers as a part of the 2008 stimulus package. In 2011, that dried up, and so did the auto market. Once again, the US is the world’s largest market and the Chinese one is floundering. China today has just 83 cars per 1000 people and the US has 812. In short, China is not quite the market it was made out to be, and neither was the emerging consumer class it was supposed to foreshadow. Today, cars are still getting made of course, and promptly being added to China’s ever growing stock-pile of unsalable goods.

The Consumer Class

So what of the consumer class, especially in cities like Shanghai? News story after news story has mentioned the “incredible” urbanization that has taken place in China over the past decade or so. Chinese are in fact moving to the cities, and so the prediction goes, they will soon find high paying jobs buy apartments, and furnish them with appliances and other consumer goods. Not so.

For starters homes are extremely expensive things to purchase, especially in places like Shanghai. Normal 2 bedroom flats run an average of $276,000 US each while the average per capita income is a measly $13,000 US. Far out of reach for Shanghai’s resident population, including its more than 9 million recent immigrants. And even if the average person could afford to buy a home, I doubt if they’d ever be able to furnish it with all the consumer goods forecast as things such as TV’s, washing machines, and refrigerators actually cost more here than they do in the US thanks to the governments high import tariffs (yes, things made in China are imported into China). These hard facts of reality should firmly put the nails in the coffin of the persistent “1 Billion Customers” myth.

Urbanization with Chinese Characteristics

Another problem worth pointing out with China’s urbanization trend is that it’s not really “urbanization” as western economies experienced it. Sure, a large percentage of China’s population is now moving into the cities, but that doesn’t mean that they will stay there. China has the “hukou” system of rural and urban registration. If you are born in the countryside, than that is the only place you are allowed to claim benefits. Even for those who have spent their whole working lives in Shanghai paying into the city’s pension scheme, when they retire, they’ll have to move back to wherever they were born and registered to claim any benefits. This is an entirely different reality than that which the Western media persents. Therefore, the 9 million who moved to Shanghai in the past 20 years, 9 million of them will be leaving eventually, and while they are here, they’ll be paid so little and live so poor, that they, for the most part, will never become the urban consumers misguided commentators are so willing to predict. If anything, they’ll continue to exist as they do now, on the periphery of Shanghai society forced to do menial unskilled tasks, live in squalor (quite a few without basic necessities like the people living in tents down the street from me) and will more likely resemble the urban poor of Latin America than the middle class consumers of the US or Europe.

Migrant worker housing on the left and an unfinished development of the right. The workers that come to Shanghai to build its modern face will never be able to enjoy the fruits of their labor. This is as close as they’ll ever get…

So, if GDP stats are nothing more than a pipe dream, which seems to be the case where wages (Shanghai’s minimum wage is about $159 US per month btw) and consumerism are concerned, ten just what are the important indicators of China’s economic might?

Assessing China’s Economy

First, GDP by purchasing power per capita. On that scale, china comes in at the 92nd spot, about as close to the bottom as I is to the top of the IMF’s survey scale. Hanging out in the company like East Timor and Bosnia, it looks less than stellar or “miraculous” for that matter. Another key indicator, especially where average Chinese are concerned, is China’s ranking of GNI by purchasing power per capita. There too it comes in at a rank of 92 which is no less deserved of the boasting China and many Westerners grace China’s economic development. For the average Chinese citizen, they’d have just as good a life in Turkmenistan or Albania, and I’m being generous.

In 2010, China’s Millionaire Class jumped 31% while GDP per capita rate rose about 10%. In 2011 it rose a further 15% year on year! Wow, that’s a lot of millionaires. That’s quite a disparity in wealth and it means that for all the figures listed in the previous paragraph, the majority of people here have seen even less benefit than they should have.

Take Your Money and Run!

So the rich are getting richer, no surprise there, but what are they doing with their new-found wealth? The answer is: leaving. Most of the lucky few that have finally arrived at a middle class or better lifestyle are packing their bags for greener pastures and taking their wealth with them. Even buying one of the overly expensive homes here in the mainland offers little assurance that it will be yours or your offspring’s in the tears to come as homes aren’t actually bought here. Technically they are all owned by the state and leased to “owners” for 75 years. The reason they are getting out while they can is because of China’s political and legal system.  China’s modern history has been riddled with government lead movements to strip anyone above the class of peasant of their wealth. In short, there is no trust between Chinese citizens and their government, so they are getting while the getting is good.

Unfortunately, this means that China’s further economic development will suffer. Without a stable wealthy class willing to invest and risk their wealth in the creation of new business, a key ingredient for any developing economy, China will never realize its dream of economic development.

The Future?

So, just how good is China’s economy? At the moment I have to conclude that for the common citizen, it’s no better than any of the world’s  mediocre economic duds. It may fail and it may not. Certainly many things seem to be at best out of proportion with Chinese people’s economic reality, housing prices for instance, and the automobile industry appears to be clearly too close to the rocks for example, but it could rebound. It is possible China will continue to follow the road to development as the West did around 100 years ago, but it is not guaranteed by any stretch of logic. In the short-term, I expect things to keep chugging along, but I don’t really believe it will last. Unless China adopts a responsible form of government that harnesses and reigns in corruption, does a better job of sharing China’s wealth with the Chinese people, stops fooling itself with the notion that it can dictate production and establishes a code of law in line with international norms, the future may not be bright at all. “China’s Meteoric Fall” may be in the headlines gracing Western newspapers within the next decade.

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