Current Affairs – 1

China’s Economy Juggernaut is Slowing Down — Making sense of it.

The Chinese leader, Deng Xioping, set his country on a path of radical economic reforms in December 1978. The bold steps began to bear fruit by early 1980. The reforms were path-breaking and unthinkable for an orthodox Communist country that had historically scorned capitalist ideas of growth, and ownership of wealth. As the companies from abroad were let in to start factories and enterprises in China, the economy rose by leaps and bounds. An anemic economy began to record annual GDP growth in double digits. From 2003 till 2007, economy grew at more than 10%.

China’s laborers are hard-working and adaptive to new skills. American and European companies opened manufacturing centers that employed hundreds and thousands of such cheap and highly productive workers to produce goods of relatively good quality at very competitive prices. From sewing machines to sports goods to under garments to children’s toys, China ruled the world as the most efficient manufacturing hub. Chinese goods flooded the markets in the U.S., Europe, Asia and Africa. Wealth poured into China from all corners of the world.

China left behind Italy, Britain, France, and Germany in terms of GDP. In the year 2010, China surpassed even Japan with which its traditional animosity is well-known. Today, China is the second wealthiest country in the world, second only to the United States.

China’s mind-boggling growth brought employment to its vast pool of rural youth, brought in humongous wealth, technology, top universities, military might, sports power, and everything else most nations strive for, but seldom achieve.

However, such a growth engine racing at break-neck speed also brought many problems. Pollution from factories, restless labor force demanding higher wages, environmental degradation due to urbanization, corruption by officials, speculator borrowings leading to bankruptcies, violation of Intellectual Property Rights, conspicuous consumption, and break-down of traditional Chinese values etc. began to sully the success story. The world began to see China as an emitter of alarming amounts of Carbon Dioxide, an abuser of human rights, a counterfeiter, a currency-manipulator, and a hegemonic power. Some of these were real black marks for the resurgent China trying to oust the United States from its position, others were just exaggerated propaganda unleashed by China-haters.

The real problem of nearly four decades of un-fettered, export-driven growth is unraveling now. The GDP growth rate is sliding inexorably from quarter to quarter, reaching just 6.6% in the last quarter. Data just released by the National Bureau of Statistics of the Chinese government shows a bleak picture. According to it, the Chinese economy grew by 6.2% in the second quarter of 2019, its slowest pace in 27 years. In the full year of 2018, the economy had grown by 6.6% — a very discouraging figure.

Manufacturing has slowed down due to the trade war with the United States. President Trump continues to pressure China on trade, and he is going to persist with the squeeze in the future. Chinese labour is no longer the cheapest, because the workers have become quite assertive, and are demanding better wage, working conditions. This has led to many factories producing textile products, sports goods, leatherwear etc. are shifting out of China to countries like Vietnam, the Philippines, Bangladesh, Myanmar etc.

Fortunately for China, as the data of National Bureau of Statistics shows, domestic consumption is picking up steadily. This can go some way to compensate for the loss of the American market. After all, China’s domestic market is quite large. It is difficult to understand how the GDP is slowing down when the domestic demand is increasing. Some western economic analysts have pointed out that the data generated by China is not very credible. Is the government manipulating the economic data?

[This is the danger of a government fudging its economic and job data to paint a better picture of its working. If outside agencies begin to doubt the integrity of the data, it spells great danger for the country. Investors from abroad will, then, hesitate to bring in their money. Sadly, similar doubts have been raised with regard to India too. The new Finance Minister will hopefully address it.]

What are the options left for China in the short term and in the long term? In the short term, it can lower bank rates to spur the manufacturing and housing sector. It can increase public spending to generate jobs and boost manufacturing. However, China must realize that excessive dependence on export can be risky at times. Wars, political uncertainty, competition etc. can happen unexpectedly. Selling goods and services outside the country then meets headwinds. If it is short spell, the adverse factors can be managed, but if the uncertainties continue, the country’s economy is sure to take a hit.

The Chinese government, therefore, has to steer its famed manufacturing base away from overseas markets. Given the size of China, it’s not a difficult goal.

[There is a lesson for India to be learnt. India didn’t suffer much during the global economic crisis of 2007-08 because Indian economy is not very much export-oriented. It’s not a good thing at all, because lower exports starves the country of the much-needed Forex. So, India must push its export drive, but not hard enough where the economy becomes addicted to markets overseas.]