China: Greatest breakthrough or greatest failure?

Half a century ago, China, along with the Soviet Union, was included in the "axis of evil" by the "civilized world." Thirty years ago, the world learned that business was possible in a communist system. Today, the "civilized world" looks at China holding its breath, seeing it as a new locomotive of the world economy. Does China intend to meet these expectations?

Before we start the conversation about the prospects of the Chinese economy, let's think back to the origins of its fantastic success in the last decade. It would be wrong to believe that the "Chinese miracle" happened suddenly, as if by magic, or rather, by a pledge of the wise Deng Xiaoping, who proposed to lift the "iron curtain" for foreign capitalists and investors. Investors are not attracted by empty prospects, regardless of the level of attractiveness of the offer. After World War II Communist China pursued an active policy of industrialization, and in the 1980s, when it declared a shift towards a policy of reforms and openness, the country developed a very strong industry. 

The policy of reforms and openness gave many public enterprises unprecedented rights. They were able to not only greatly expand their autonomy, but were also allowed to trade on foreign markets and attract foreign investors. When the latter appeared, the demand for labor dramatically increased and was immediately satisfied with a huge army of rural residents. A formal registration system, hukou, still existing in China, officially divides citizens into peasants and city dwellers. Peasants are not allowed into the city, and, consequently, a more comfortable life, through any means other than through employment, albeit temporary. Not surprisingly, starving peasants were willing to work in the worst conditions for a minimal fee.

Foreign investors were familiar with the situation as something similar happened after World War II throughout Asia, but has never reached such proportions as in China. Of course, this is an overly simplistic explanation, but it would require a volume of solid scientific monograph to examine the origins of the Chinese economic miracle in detail. In any case, even in a simplified interpretation it is clear that these factors became the drivers of rapid economic growth of the country in late 20th and early 21st century.

In the past 30 years, the Chinese economy demonstrated incredible growth, up to an average of 10 percent a year. The country is forcefully pushing itself into the ranks of global leaders, pushing other candidates aside. This was emphasized during the crisis of 2008-2009. Analysts began a dispute as to when - in 2016 or 2020 - China will push the USA from the pedestal, taking the first place. Against the backdrop of these disputes, first reports of a slowing of China's economic growth came out of the blue. When in later 2012 it was reported that China's economy showed growth of 7.8 percent - the minimum value in the last 13 years - the analysts started talking about the decline of the era of the Chinese miracle.

It was obvious long time ago that one day this rapid growth would stop. Everyone wanted it to happen as late as possible - and certainly not in the midst of the global crisis. No one wanted to listen to experts warning that the economic growth rates of China were misleading because they did not account for inflation, environmental damage associated with industrial development (based on outdated technology) and other factors. In particular, Dr. Frank Tian Xie from the School of Business at the University of South Carolina at Aiken argued that China's economy was growing only by 5-6 percent a year. His colleague Larry Lang from Hong Kong first stated that the real growth of China's economy in 2011 would not exceed 2.9 percent, but at the year-end adjusted his numbers and found a reduction of China's GDP by 10 percent.

Of course, we can assume that Tian Xie tried to belittle the achievements of China's economy for some personal reasons - it is quite possible, but then there are also objective reasons not related to the statistical balancing act. For example, a known factor that the economic success of China is based on cheap labor (which, contrary to popular belief, is not the decisive one), still plays an important role. In the last ten years it is increasingly losing its appeal, which is understandable. The more corporations move production to China, the larger is competition for labor, in the first place, qualified labor. Socio-economic demands are also growing, and Chinese peasants are no longer willing to work for a bowl of rice and a bunk bed in a dormitory. All this leads to an increase in average wages.

As a result, today the Chinese salary is almost equal to that in Mexica, and monsters of Silicon Valley are thinking about moving their plants to the neighbors. All else being equal, this would make delivery of gadgets into U.S. Walmart cheaper. It is not discussed very often, but today Mexico has become the world's largest exporter of plasma TVs, smartphones, Blackberry and refrigerators. China's Asian neighbors like Vietnam increasingly take away China's share of investors and producers.

However, despite the steady growth of income in China, the social stratification in the country is still significant. This is precisely the reason why China, a recognized "World Factory," cannot re-orient towards domestic demand. The goods produced must be sold, and they can only be sold in foreign markets. The country's economy is strongly tied to exports. The demand in the U.S. and Europe is going down, and China's economy is shrinking.

There are many other factors that allow analysts to predict stagnation of the Chinese economy. They include, for example, an increase in the social burden on the budget caused by the aging population, the decline in foreign investment due to the crisis, etc. In the end, experts have seen it all. This has already happened in Japan, the first of the "Asian tigers" that showed the world economic miracles and that is now dealing with the resulting hangover.

Is the Chinese economic miracle over? Some economists have questioned whether it existed in the first place and whether there were reasons to expect that China would become the leading world economy. China has not been able to catch up with the U.S. it its prime in terms of contribution to global GDP. In addition, the country has not even made it to the list of medium wealthy countries, which makes all speculations about its leadership mute. 

Other experts, for example, Goldman Sachs group, that once revealed to the world the four BRIC countries, have already written off the former leaders, and are now awaiting miracles from the new favorites. It is assumed that there will be a new four, MIST (Mexico, Indonesia, South Korea, and Turkey). Others argue that China will show itself, suggesting that its economy is about to gets its second wind.

However, why don't we ask the Chinese? They spoke quite clearly and definitely when at the 18th Congress of the ruling Communist Party of China (CPC) a transition towards the concept of "effective development" was declared. It implies double growth of GDP, focus on innovative development, and increasing openness of China's economy. But the main thing is a "strategic adjustment of the economic structure," which means increasing urbanization, increasing incomes and domestic demand.

Simply put, China is going to take care of itself. As for the global economy, the country's leaders have eloquently demonstrated their attitude by ignoring the last year's World Economic Forum in Davos. This then shocked and puzzled many analysts, because China attended every such meeting since 1979. It turns out, the explanation was quite simple: Beijing got everything it wanted from the world.

Of course, another change of the course does not mean that China is once again going to isolate itself from the world with the iron curtain, quite the contrary. China's business is focused on expansion abroad, actively manifesting itself not only in under-developed countries in Africa, but also in distressed Europe.

The country's achievements in the area of innovation are quite impressive as it is planning to build manned bases on the Moon and explore Mars. It is well known that the development of such advanced areas as space exploration directly affects the advances in science and industrial innovation, and this is one of the few things that China lacked to become a confident global leader. The leadership of the CPC is wise in setting such ambitious goals for the country. As evidenced by the last 30 years, these plans should be taken seriously as the Chinese showed that they know how to implement them.

Ilya Nikonov


Read the original in Russian

Author`s name Dmitry Sudakov