Five Myths About China's Economy

This item is welcome and a reminder that China also has a long ways to go.  It is also about good news.  This China is following the path of the Oriental tigers and has another generation to complete the economic maturation process. 

 

The issues so apparent today yet abating in their own way will be well resolved in twenty years.  It will be a stable middle class country with a thriving economy and western style social services taken for granted.

 

The political system will sort itself out and become progressively more inclusive.  Taiwan’s progress is a great example in which founding parties have been voted in and out of office, yet looked just like China today thirty years ago.

 

Political and social progress is accepted by the population and is been patiently pressed.  Recall the Chinese leadership is proud of their millennia of progress and believe they understand patience.  The Chinese people themselves think the same way.  They also know that they are part of their country’s greatest generation.  They have set out to become fully modernized and this will mean a reshaped political system while assiduously avoiding revolutionary nastiness.

They have also shown the rest of the world that it is possible and are themselves helping make changes were obvious in other countries.

 

China should coast into the top of the S curve in about twenty years.  India will need an additional decade.  The rest of the undeveloped world has fully begun the process and is on the move and will fully emerge over the next twenty years.  I expect few stragglers

 

 Five myths about China's economy

By Arthur Kroeber

Sunday, April 11, 2010

http://www.washingtonpost.com/wp-dyn/content/article/2010/04/09/AR2010040903261.html

China's stunning economic rise is one of the biggest stories of this generation. In just three decades since beginning to embrace market economics, China has left its desperate poverty behind to become the world's top exporting nation. The transformation has occurred so quickly that myths and misperceptions abound about the challenges and opportunities that China poses to America and the rest of the world.

1. China will quickly overtake the United States as the world's most powerful economy.

According to a November poll by the Pew Research Center, 44 percent of Americans believe that China is already the world's top economic power, while 27 percent put the United States in that position. That perception is completely at odds with the facts. This year, China's economy is expected to produce about $5 trillion in goods and services. That would put it ahead of Japan as the world's second-biggest national economy, but it would still be barely one-third the size of the $14 trillion U.S. economy and well behind the European Union, if taken as a whole.

One reason China's economy is so big is simply that it has 1.3 billion people. But China's per capita gross domestic product is only one-seventh the U.S. level. And in household living standards, China lags even further. Each year, an average Chinese household consumes one-fourteenth the value of goods and services purchased by an average American household.

And despite its chronic losses in manufacturing jobs, the United States is still the world leader in that arena because its manufacturers excel at high-value products such as airplanes and high-tech equipment, while China still mainly produces low-cost clothing and consumer electronics. In terms of the value of goods, the United States produces more than 20 percent of global manufacturing, or about double China's share.

2. China's vast holdings of U.S. Treasury bonds mean it can hold Washington hostage in economic negotiations.

China has the biggest holdings of U.S. Treasury bonds of any country -- around $1 trillion. Many people think this means China is "America's banker" and that, like a bank, it can withdraw its line of credit by selling off its Treasuries whenever Washington does something Chinese leaders don't like.

But China's Treasury holdings are not like regular loans that a bank extends to a company. They are more like deposits: safe, liquid and carrying a very low interest rate. Like a depositor, China has little ability to tell its bank how to run its business. It can only vote with its feet, by taking its deposits elsewhere -- but its deposits are so huge, there is no other "bank" in the world that can take them. The European and Japanese bond markets are not big enough to absorb that much Chinese cash, nor can China buy enough oil fields, ore mines or real estate to soak up its money. And it can't simply invest all its dollars at home, because doing so could lead to rampant inflation. So like it or not, Washington and Beijing are stuck with each other -- and neither has the power to hold the other hostage.

3. Letting its currency grow in value is the most important thing China can do to reduce its trade surplus.

Some American companies, unions and politicians complain that by keeping a fixed exchange rate between the yuan and the dollar, China is unfairly making its goods cheaper on the world market, thus driving its trade surplus at the expense of its trading partners. Certainly, the exchange rate is important, but it's a mistake to think that letting the yuan rise in value would magically make China's trade surplus disappear. In the late 1980s, Japan allowed the yen to double in value, but its trade surplus didn't budge. Conversely, in 2009 China kept the value of the yuan fixed against the dollar, and its trade surplus fell by a third.

Secretary Treasury Timothy Geithner was in Beijing on Thursday and discussed the currency issue with Chinese economic officials. Most observers -- including China's top economic policymakers -- agree that the yuan should rise in value. But for that move to offer any benefits, it must be accompanied by other policy shifts. By far the most important thing China can do to reduce its trade surplus is to stimulate domestic demand (including demand for imports), something it has started to do through a massive infrastructure spending program. There's some evidence that Chinese households are also beginning to spend more freely as wages rise and people feel optimistic about the future.

4. China's hunger for resources is sucking the world dry and making major contributions to global warming.

It's true that China is now the biggest producer of carbon dioxide and other greenhouse gases that contribute to global warming. And it's true that China uses more energy to produce a dollar of its GDP than most other countries, including the United States. But on a per-person basis, China's use of resources is still modest compared with that of rich countries. For instance, despite its rapid increase in car use, China consumes about 8 million barrels of oil a day. The United States consumes about 20 million barrels a day. Put another way, China, with nearly a quarter of the world's population, accounts for less than one-tenth of the world's oil consumption. The United States, with only 5 percent of world population, accounts for nearly a quarter of global oil consumption. Whose appetite is really the bigger problem?

Moreover, unlike the United States, China has recognized that it cannot let its fossil-fuel appetite grow forever and is working hard to improve efficiency. Chinese fuel-economy standards for new cars are higher than America's, for instance, and on average, coal-fired power plants are more efficient in China than in the United States.

5. China's economy has grown mainly through the cruel exploitation of cheap labor.

Every time a developing economy starts growing fast, richer countries accuse it of "cheating" by keeping its wages and exchange rate artificially low. But this isn't cheating; it's a natural stage of development that comes to an end in every country, as it will in China. China has grown in much the same way as other economies we now view as mature and responsible success stories -- including Japan, South Korea and Taiwan. Those nations invested heavily in infrastructure and education, and quickly moved their workers from low-productivity jobs in rural areas to more productive jobs in cities. When rural labor was abundant, wages were low, but they rose rapidly after those surplus workers joined the urban labor force.

China is hitting that spot now: The number of young people of workforce entry age (15 to 24) is projected to fall by one-third over the next 12 years. With young workers more scarce, wages have nowhere to go but up. This is already happening: Last month, Guangdong province (China's main export hub) raised its minimum wage by 20 percent.

China still has plenty of workers moving from the countryside to the cities, but the age of ultra-cheap Chinese labor will soon be gone.

arthur.kroeber@dragonomics.net

Arthur Kroeber is the managing director of GaveKal-Dragonomics, an economic research firm in Beijing.

From the archives: For recent Outlook coverage of China, see Steven Mufson and John Pomfret's "The New Red Scare" (Feb. 28) and Yasheng Huang's "Why Google should stay in China" (March 28).