CHINA's Growth Story-The Way Forward....

THE BIG QUESTION: Will the economic miracle run out of steam?

China’s growth story so far has been spectacular to say the least. According to data released on 16^th of August, the world’s no. 1 exporter has surpassed Japan to become the 2^nd largest economy; just behind the U.S. -Japan had managed to keep its second spot in terms of economic muscle for the last 43 years, so dethroning Japan was a significant milestone. But “wait” before you think everything’s fine with the dragon economy-it is slowly, but surely losing its steam.

There’s no denying the fact that it had recorded a massive 11.9% GDP growth in the first quarter of 2010. But Q2 figures haven’t been that encouraging-10.3% is the growth rate, a sharp fall of about 1.5%. There are several economic threats that are haunting the Chinese economy.

A major contributor to the slowdown has been the “Real estate bubble” that has been building up. Excessive investment and speculative purchases is driving prices in the real estate sectors to unsustainably high levels. The government has phased out $586-billion stimulus spending, tightening curbs on lending and checking spiraling property prices, and thereby cooling growth in the property sector. Curbs on spending would directly and proportionally affect growth in the coming time.

Second factor that seems to plaguing the Chinese economy is the apparent upsurge in workers who have begun pushing for higher wages and better working conditions. According to estimates by Deutsche Bank –“the minimum wage increase is to be around 20 per cent in most provinces and cities”. Another report by World Bank mentioned that the average rural wages rose 16.4 per cent in the first quarter of the 2010 from a year earlier.

The third problem that China faces is rising raw material prices. China's export growth remains strong, though rising costs for raw materials have eroded the country's cost advantage. It would be worthwhile to note here that during the first half of 2010, the total value of imports and exports, accounted for nearly 37 percent of the Chinese GDP.

Other factors include the steep fall in Industrial Production. It experienced a surprisingly sharp slowdown to a growth rate of 13.7%, down from 16.5% in May 2010. Some economists are also worried that stagflation -- inflation coupled with lower growth -- could emerge, although it seems highly unlikely.

It is imperative for China to raise the bar when it comes to the quality of economic development. In 2009, China’s urban rural divide widened to its highest since 1978. The fact of the matter remains that China is still a developing nation over 40 million below the poverty line. Overtaking Japan in terms of GDP is not going to change the basic truth. China’s per capita income is over 10 times lower than Japan’s and its population is 10 times bigger. It is a rapidly ageing country and its one child policy shows signs of becoming a burden.

China’s growth is not sustainable. It has polluted rivers, severe air pollution & large scale deforestation. By 2020, China is expected to have 400 million tonnes of rubbish, which is equal to the entire waste generated on the planet in 1997.

Despite all this, the Chinese are optimistic about their economy. The government has said that a slowdown is good in the long-term as policymakers try to reduce the country's heavy reliance on exports and investment to drive growth. The government sees this phrase as mid course correction period rather than a slowdown of the economy. The focus is now being shifted to domestic markets to compensate for slowing of export markets. China has more than one million-millionaires today. Relatively strong job creation in the recent times has helped support robust consumer demand which is strengthening China’s inward growth.

A long-term estimate by the World Bank research suggests that China's annual economic growth rate will fall to an average of 7 per cent in 2016-2020 - about the level the government has said is its target for sustainable growth.

So, to sum it all, China faces a lot of economic challenges in the form of above mentioned problems. However through effective policy formulation, they can slowly get back on the track of growth-growth which is both sustainable and inclusive.

-Tejas Singh