Is China's Economy Heading for a Crash
The Great Wall of China was established by the emperor Qin Shi Huang to prevent attacks from northern nomadic tribes.It could be use metaphorically as a symbol for the Chinese Marxist communist viewpoint of "Keeping out the barbarians" and their decadent western influence.
The opening up of China to the west by reformers led by Deng Xiaoping saw China emerged from a long period of suspicion and insularity into an economic and world power today.
Over the last two decades many multinational companies have been inveigle to invest heavily on the myth of China's economic growth and global ascendancy. But as the chain reaction of the global debt crisis in the west hit the shores of mainland China; signs of failure and cracks in the state-planned economy are beginning to show. Is China's economy heading for a crash?
The "Beijing Consensus"
The elite and ruling class of China are not too keen on "Democracy". They are afraid that too much political freedom would only led to more dissension.
The specter of more discord and the disintegration of the country into the days of warlordism and civil war of the 1920s,along with the loss of their newly acquired affluence made it imperative for the Chinese leaders to maintain authoritarian rule while giving some concession to "Democracy"
The China Model (Beijing Consensus) was formulated to address this issue and to serve as a guide to China's modernization and rapid economic progress.
It's salient features are :
>an authoritarian political structure headed by the CPC(Communist Party of China)
>State control of banks and finance with China's Central Bank maintaining an undervalued Yuan(China's currency) by artificially lowering the exchange rate.
>the encouragement of massive foreign investment to fuel an export-driven economy supported by cheap labor,while retaining the domestic market for State owned or privately owned industry of loyal cadres and their cronies.
HIDDEN WEAKNESS IN CHINA'S ECONOMY
China has been successful in making the transition from a communist collectivist to a capitalist economy. But cracks are appearing in the "great wall of China" which may led to a possible crisis in the Chinese economy.
Some of the problems facing China today are; a threatening real estate crash,drug addiction,an aging population, pollution and dwindling resources, unequal distribution of wealth,social inequality and government corruption.
The economic downturn will affect not only millions of lives in China but also have repercussion for the rest of the world.
China's real estate bubble
China's banking and financial sector is dominated by state-owned banks which are inefficiently manage.It gives out loans regularly mostly to local governments and unprofitable state-owned enterprises for political purposes.
Chinese companies with strong political connections,although engage in other industries often set up their own real estate divisions to take advantage of cheap credit and lenient bank terms to acquire and develop properties in speculative ventures.
With a significant number of non performing commercial and residential properties including an estimated 64 million vacant luxury apartments, Chinese property developers are now experiencing their own credit crunch as easy housing loans dry up due to tightening credit conditions.
A large percentage of bank portfolios now carry huge amount of noncollectable debts that were engaged in real property speculations. A real estate bubble burst greater than what happened in the U.S. looms in the not so distant future and will be a contributing factor in a Chinese economic crisis.
Jim Chanos,a hedge fund manager who discovered the accounting fraud by company officials in the "Enron scandal" warns that China's hyper stimulated economy is headed for a crash beginning with a fall in real property value.
He points out that fixed asset investments which make up 60% of China's GDP(gross domestic product) created a false demand for huge construction and infrastructure projects.
Many of these projects ended up as "ghost cities" complete with high rise office buildings,condominiums,mega malls,public utilities and services but with no people living in them.
....and the (ghost) cities continue to rise. It is estimated that China is building up to 20 modern cities a year on vast area of "free land" (lands reclassified and expropriated from farmers and rural dwellers) that may only end up as uninhabited and wasteful "white elephant" projects of the government.
China's Drug menace
Just like the drug problem in the U.S.,China's economic prosperity and rise in living standard have began to produce an alarming increase of drug dependents.
It is estimated that 40% of the heroin produced in Afghanistan and Pakistan with a corresponding percentage from the "Golden Triangle" countries now go to China which has become a major transit route for the illegal drug trade.
China also has clandestine laboratories manufacturing precursor chemicals needed for the production of methamphetamine (ice), cocaine (crack), heroin and MDMA (ecstasy). Destined not only for foreign markets but also domestic consumption.
China has over a million registered addicts. Unofficial estimate of drug users put it at 10 to 12 million.These are conservative figures and the true figures could be much higher.
Controlled by criminal organizations with official collusion, it has resulted in the spread of corruption in all levels of government officialdom. As the drug menace tear into the moral fabric of Chinese society,will history repeat itself the likes of the 18th century when China was the world's largest consumer of Opium?
China's aging population
People are a nation's most valuable resource.The demographic development of it's population gives important indication of its economic growth and prosperity.Since 1978,China has enforced the one-child policy with no major changes expected for another decade.
With the cultural and traditional preference for sons by Chinese,sex-selective abortion and killing of baby girls are occurring. In some remote areas of China there are also reports of force sterilization of women by the local governments.
This has created an abnormal imbalance of the population's sex ratio. It is estimated that in the rural and economically marginalized districts alone,there are in excess of over 30 million (approx. the population of California) unmarried men due to the lack of women.
The continued enforcement (there are exceptions) of the Chinese government's one-child policy has contributed to an aging population and a corresponding decrease of the young labor work force.
Pollution and wasteful use of natural resources
China has overtaken the U.S. in energy consumption due to the rapid pace of it's industrialization although Americans use five times more energy than the average Chinese. According to the International Energy Agency China's energy needs are expected to double within twenty years.
Because coal is abundant in China, 75% of her energy needs are supplied by inefficient coal fired, sulfur-belching power plants. Acid rain from China's heavily industrialized zones affects soil quality and threatens the food chain.With the yearly increase of motor vehicles that are introduced to it's roads and indoor cooking using coal burning stoves by the poorer populace,China is now the worlds biggest producer of carbon pollutants.
If the rate of it's pollution keep pace with it's industrial and manufacturing growth, by 2030 China's toxic emission would equal the entire world's carbon pollutant produce today.
China has some of the world's most polluted cities
Two thirds of Chinese cities don't even meet it's own air emission standards,and if the European Union standard is use,then only 1% of China's 560 million urban residents have safe air to breath. A World Bank report estimate that over 750,000 people die prematurely from respiratory diseases due to air pollution.
Because of indiscriminate dumping of industrial waste,40% of China's rivers are considered unsafe for human contact. 90% of China's urban groundwater is contaminated,about 300 million of the rural population rely on unsafe drinking water and by 2030,China would have exploited all of the country's available water supply.
As rural areas are quickly urbanize, farms and arable lands are being turn into industrial zones (special economic zone) and modern cities of skyscrapers and super highways.China's agricultural output could be reduced by 5 to 10% by 2030.
Since half of China's land is arid and semi-arid, any climate change or long periods of drought would spell disaster in a country that has over a billion people (1.3 billion). Food shortages and famine like those in China's past history that wipe out millions could happen again.
Social inequality and the distribution of wealth
Beyond the impressive statistics,charts and reports that show a growing economy and improve standard of living is another side of China's economic "success" story. Beneath the veneer of world class mega cities and luxury lifestyles is a hidden world of poverty,slave labor wages,displace and migrant workers that show the stark disparity of wealth distribution and social injustice.
> Nearly 500 million Chinese live on less than $2 a day, with another 150 million subsisting below the United Nation's poverty line of one US dollar a day
> 99% of China's poor live in or come from rural areas where over half of China's population lives but share less than 12% of the country's wealth
> Up to 200 million Chinese workers and peasants suffer from occupational ailments, according to data from the Chinese Ministry of Health.
> Only 50 million households comprises China's middle class
The wealthy and super rich
> China’s top 10 percent of the population control 45 percent of the country’s wealth. Majority of whom are members of the CPC ( Communist Party of China)
> China now has more billionaires (128 in 2011) than any other country except for the U.S. (412 in 2011). ~ Forbes
> China is the world’s second largest consumer market for luxury goods, behind Japan (after passing the U.S. in 2009) but is expected to be the first for the next decade.
When the Chinese leadership decided to reform the economic system into a consumer market economy, authority was decentralized to regional and district communist party officials.The central government sets the economic policies and general directions, but left it to the local government officials to decide how to plan and develop their own local economy as long as the targeted growth rate was achieved.This gave the local officials enormous leeway and influence. It created petty fiefdoms open to self aggrandisiment,corruption and abuse of power.
A difficult position for the ruling authorities
China's rapid growth and development hinges on an export driven economy. Recent pronouncements by Chinese leaders give tacit recognition that in the face of a growing economic slowdown in countries ( EU, U.S.) where Chinese products are being exported, the government must now turn to the domestic market and encourage local consumers.
"Riding on the back of a Tiger and finding it hard to get off"
In order to achieve this China must raise the living standards of the rural populace and other lower income sectors of society if it wants to encourage the further growth of the middle class. It is after all the middle class that supplies the buying power in a robust economy.
The emergence of a social class that has more economic independence,mobility and are better educated would give rise to demands for more political and social reforms. These would undermine the authority and possibly see the demise of the Chinese Communist Party which have ruled China when communism took over the country under an authoritarian one-party system since 1949.
China rose to prominence in the global economy at neck breaking speed by taking short cuts. Will China's political and economic system sustain it's economic growth or is China's economy heading for a crash?
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