Attention Investors: What’s Really Happening in China

“The Financial World According to Inya” Column,
by Inya Ivkovic, MA

According to the International Monetary Fund (IMF), in about 40 years, China’s share of the global economy could triple, exceeding what is currently the U.S. share of 22%. Taking the lead is not something new for China. Back in the 1800s, just before the Industrial Revolution in Europe and before the Americas rose in the world, China’s share in the global economy was a whopping 30%. What subsequently led to China’s fall in global rankings would bring down many a Goliath, such as brutal Japanese subjugation during both world wars and even more social and literal savagery under the rule of Chairman Mao.

And yet, today’s China is playing such pivotal role in the world’s new order, which is a testimony to the country’s historic resilience. For example, only 15 years ago, the manufacturing sector in China was not even one-fifth the size of that of the U.S. Today, it is about two-thirds and continues increasing. Furthermore, IMF statistics reported a fairly dramatic increase in China’s gross domestic income (GDI), which, on an annualized basis, averaged $3,180 in 2008, compared to $350.00 in 1990. What this meant to China is that, out of a billion Chinese people, one-third got “promoted” into middle class in less than two decades.

This is not to forget that China is still a communist country, just as it has been for 60 years now. However, today’s leaders are more focused on market and private-sector reforms than on socialist rhetoric. As a result, China’s economy has become almost miraculous, particularly by Western standards. But achieving miracles appears easier than sustaining them. The biggest worry for Chinese leaders now is how to keep on creating massive numbers of new jobs, so that the remaining two-thirds of its population could also be elevated to the middle class.

What is driving China’s income growth? First, the country has organized a mass migration of workers from rural parts of the country to the big cities by building factory after factory. However, the Great Recession has cost China quite a chunk of jobs; 30 million to be precise. To add more problems, about 20 million university and trade school graduates have started looking for work this year, resulting in 50 million urbanites on unemployment lines.

Getting the economy back on track is not China’s only problem. China’s industrial miracle was predominantly fuelled by thermal coal, or the so-called “dirty” coal. Every year, China consumes about 2.6 billion tons of coal, which has produced an airborne, toxic soup of gaseous emissions and unfortunately “caught” wind all the way to the west North American coast.

And, while the world is pressuring China to clean up its act, literally, Chinese citizens are also angry. They are angry with corrupt government officials who have allowed the cities to pollute the farmland and drinking water. Long gone are the days of the Tiananmen Square massacre, when ruthless military action was enough to squash a student uprising. If a billion Chinese were to raise their voices against failings of the local officials and the Beijing government, there would be no military solution to this and the Beijing powers would be wise to understand that.

In the aftermath of the Great Recession, China must also rebuild its own consumption levels to offset as much as possible the loss of export to consumers in the West, particularly to the U.S. That is easier said than done. The Chinese are inherent savers, which was brought on by generations and generations of poverty. Additionally, there are no social programs in China to protect its citizens when they become ill, lose their jobs or are simply too old to work any more. Scarred like this, no wonder the Chinese are reluctant to visit malls more often.

While China’s exports declined by 25% in the past year or so, the country’s economy still managed to grow. But that was largely attributable to the government’s stimulus spending. Eventually, the stimulus taps will dry up. But, unlike the U.S., China has enormous financial staying power. Just to put things in perspective, China’s foreign reserves currently stand at $2.0 trillion, while the U.S. national dept is approaching $12.0 trillion! Racing towards the global leadership torch, China’s huge home advantage just might make the final difference.