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| Will China overcome the major obstacles to her continued economic success? |
 PRINTABLE VERSION |
China, after several years of self-imposed isolation from the world, has emerged as a global player. The only communist country at present with such an impressive economic growth makes economists think about its success. China has the goal of quadrupling its GDP and it is growing at the rate of 8 percent per year. 1979 was a pivotal year, having an open policy based on controlled trade and inward investment strategy. China’s sheer size of approximately 1.2 billion is its massive economic potential: the Chinese have cheap labor, which makes them produce at the minimum level of expense.
The question arises: what may be the obstacles to sustaining this economic growth? According to Wu Jinglian, a prominent Chinese economist, there are four obstacles: strong government intervention in distributing resources, a distorted pricing system, the tax burden on industries and selfish political motives. Another threat to Chinese economy is the under valued currency. They have fixed their currency at a low exchange rate to boost exports, which are the key ingredient of Chinese economy. There is international political pressure to appreciate the currency. If China appreciates its currency, its exports won’t be cheap anymore and this would be a major setback to the growing economy.
Major loans given by banks are under government direction, usually in state-owned industries. There is almost no payback of these loans and they are treated as non-performing bank loans. The banks’ liquidity has been maintained by the stock of foreign reserves. But at some point in time, if the escalation of non-performing loans continues, it will constrain the expansion of bank credit and affect the industrial sector. State-owned enterprises (SOE) are like white elephants for the Chinese government. They are poorly-managed, inefficient units with almost no returns on capital invested. They are protected from competition; the private sector in comparison is very efficient, producing more than SOEs. SOEs consume most of the banking loans and stocks, which creates a problem for private businesses: raising capital. There is another emerging problem of unemployment in the government sector: most of SOEs are being shut down or merged with private enterprises.
China’s campaign “Develop the West” was developed to reduce the income disparity between urban and rural areas. The strategy was to squeeze resources from the export sector, which had the negative impact of reducing its overall growth. China is still technologically handicapped in comparison to the US and Japan, and while its population may be its biggest asset, it can also cause its demise. Also, China is basically an imitative economy that replicates products at cheap cost, but the R&D (research and development) and innovative ideas come from other countries. This imitation cannot allow China to thrive for a long period of time. Unfavorable demographic trends, exploitative labor laws, centralized policies, the suppression of freedom of speech, intense press censorship, the weak rule of law, corruption, the constant threat of war with Taiwan and North Korea, human rights abuses and horrific environmental degradation may prove to be decelerators for the Chinese economy.
China can overcome these obstacles/ decelerators by good governance, promoting research and development, developing sound financial systems and strengthening the banking sector, promoting quality rather than quantity, and developing and implementing strict environmental standards. China needs to broaden her horizons so that she is not only thinking about her economic goals, but thinking about the world. India is her cut-throat competitor. In order to sustain her economic growth China needs to develop networks and trade zones with other countries.
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aneel SALMAN
aneel SALMAN Lecturer, Dept of Economics Forman Christian University, Pakistan. Currently a Fulbright Scholar, pursuing PhD in Economics at Rensselaer Polytechnic Institute (RPI) Troy, NY USA 12180-3590 Email: aneelsalman@yahoo.com
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