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Obstacles
in the way
Will China drive the world economy in the twenty first
century? or will it become the main player in the Pacific Region (as described
in Longitude No. of July 2103)?
We will attempt to answer these questions on the basis
of both research not generally available to the general audience and recent
economic data. We will place emphasis on the constraints on growth and development
and attempt quantitative estimates.
After a slowdown in 2011-2013, which was deemed to be
an aftermath of the global economic recession, China appears to be on a path
towards a strong recovery: in 2013 GDP grew by 7.7 per cent (and as much as by
9.1 per cent in the last quarter), industrial production is once more expanding
by ten per center p.a. China badly needs a fast growing manufacturing sector to
absorb the bulging labor force transferring from the rural sector to urban
areas. Although these data are based on official World Bank statistics, many
statisticians have doubt about the quality and hence the reliability of the raw
material China provides to international organizations for their world wide
comparisons. Most likely, the GDP and the industrial production data are slightly
overestimated, whereas the unemployment data are grossly underestimated. Most
economists, even Chinese, argue that total-factor productivity (TFP) average
annual growth – 3% in1978–94 and 2.7% in 1995–2009 – explains much of China’s
rapid economic growth . However, according to Harry Wu’s calculations (thus
computations by a well respected American naturalized scientist of Chinese
descent) , average TFP growth was only 0.3% a year and negative in 1984–2001 . As
underlined by Chinese economist, Yuhan
Zhang, these numbers suggest that China’s growth in the past three
decades was generally characterized by a poor TFP, with underlying
inefficiencies in the growth pattern. The road towards more consumption-driven
growth will be bumpy. With the stimulus package that has poured a huge portion
of the country’s GDP in financial resources into the State sectors, the
momentum of investment will continue for several years. In the meantime, China
has the fiscal resources to spur another round of massive investment in the
seven industries considered strategic by the Government , although in light of
current inflation and local debt a new stimulus package is not expected to be
soon introduced. Foreign Direct Investments FDI, as a minor part of the story,
is also expected to grow as a consequence of openness of interior city
clusters, continued global economic recovery, very low interest rates in
developed economies, as well as renminbi appreciation. As such, investment
growth will remain high and its share of GDP will be reluctant to pick up
sharply until rebalancing measures become more effective in the medium term.
China is diversifying its export markets, yet most of
its exports are manufactured products. In the next two to three years, exports
may rebound strongly and current-account surpluses will continue. After the
mid-2010s, exports might face more challenges as a result of smaller supply of
young skilled labor (emigrating from the countryside to the urban areas) and China’s move towards higher
value-added and technology-intensive industries in central and western areas. Imports
are likely to rise faster than exports, reflecting strong demand and the higher
price of oil, commodities, and capital goods.
Increasing private consumption and leveraging its
share to 50% will also be a challenge. In 2012 and in 2013, private consumption
grew faster than GDP, supported by solid employment and wage growth and
increased government social expenditures on pensions and healthcare. But the
Chinese stimulus program and ongoing massive investment in the emerging ‘strategic’
industries have already led to overcapacity and huge nonperforming loans, which
will ultimately be paid off by Chinese households. Starting this year 2014, Chinese
private consumption will likely be hampered. In the past two decades, China’s
consumer confidence index and consumer expectation index have had an overall
downward trend. Future improvement depends on systemic reform.
More significant than these quantitative projection is
the assessment of Amy Chua, a well known Professor of law and globalization at
Yale University and author not only of academic literature by also of three
world wide best sellers on China
and the world economy. Chua is of Chinese descent and has widely and deeply
studied the immense country. In her view, China lacks the institutional basis
for long term development. In a discussion with us, she raised a very well
thought out point: ‘If a Caucasian wants to acquire the Chinese nationality,
no one in Beijing can give any advice on how to go about it, on the
legislation, on the procedure, briefly on the process’. In very drastic
terms , she added: ‘How can we think
that after a thousand years of stagnation, a large and over populated country
can become a world leader? At most, the prospects are to be a regional leader,
unless the constraints on development prevent even that goal’.
The Chinese leaders are aware that the country has had
an enormous economic growth in the last three decades, but with a high price for
its own people and long term sustainable development. Hu Jintao delivered his concerns about the
pollution in the country at the Communist party's 18th Congress. He spoke about
the situation of ‘health hazards’ and waste disposal such as treatment and alternative
sources of energy. Hu Jintao indicated ‘We should launch a revolution in
energy production and consumption, impose a ceiling on total energy
consumption, save energy and reduce its consumption. Energy consumption and
carbon dioxide emissions per unit of GDP as well as the discharge of major
pollutants should decrease sharply. We should leave more space for nature to
achieve self-renewal. We should keep more farmland for farmers, and leave a
beautiful homeland with green fields, clean water and a blue sky to our future
generations’. Air and water pollution and scarcity of raw materials are not
the only constraints on the development of the country. Other major constraints
are lack of natural resources (especially water), social issues, language problems,
and human rights policy dilemmas.
The main issues of today’s China are lack of raw
materials and especially the pollution of water basins. They adversely affect
China due to the large industrial production base needed to maintain employment
at socially and politically acceptable levels. As pointed out by Greenpeace, in
China, hundreds of millions of people are without access to clean drinking
water and water labeled as ‘drinking’ is severely contaminated with hazardous
chemicals. Water pollution not only affects personal consumption; the
wastewater pollution within China has affected the environment, society, and
agriculture. David Stanway, a Reuter reporter, has created a web site which shows
how in parts of China, in the not too distant future, increases in flood and
drought will exacerbate rural poverty, have a negative impact on rice crops and
cause a rise in food prices and costs of living. The depletion of water
resources of the area also provokes damages to the climate. On the eve of a
global climate change conference in Stockholm, the UN climate body organization
proved that shrinking glaciers in central Asia and the Himalayas would affect
downstream water resources in river catchments, which include China. The Chinese
journalist Niu Shuping documents how street-level air pollution blanketed many
northern cities last winter and spilled over into online appeals for Beijing to
clean water supplies, especially after rotting corpses of thousands of pigs
were found in a river that supplies water to Shanghai. To understand that
phenomenon, it is necessary to specify that in the Chinese territory there are
more than 40% of the planet’s water resource. Thus,
why is China undergoing a
water crisis? As mentioned
earlier, the real problem is not the lack of water but the inability to use it
properly. This situation is the result of two determinants: a) the increasing
demand for water and b) pollution of the soil. In recent years, the demand for
water has increased since for decades in the last millennium, Chinese
population was fed almost exclusively on rice and other grasses. Now the diet
has changed and includes meat (and as a consequence protein) with positive
implication on health and life expectancy. The need for water has increased
because protein food requires higher intakes of fluids to the body. Another determinant
for the huge and growing demand for water is given by the large amount of water
that is necessary for factories. In fact, in China, more than 70% of the
electricity comes from coal, which explains the environmental degradation of
the country because coal is the most polluting source of energy. Thermal power plants
need large amounts of liquid for cooling. The coal industry uses as much as 20% of water
consumption in China, while agriculture takes another 62%. The Asian
Development Bank (ADB) studied water resources in China over the last 50 years;
ADB estimates water availability per capita in China has decreased 60% in the
last five decades and may suffer a further loss of 10% by 2025. The Chinese
National Committee on Water Resources Research has determined that 90% of the
groundwater is contaminated with industrial waste. In 2010, the study said that
more than half of the groundwater tested in 183 industrial cities can be
considered undrinkable. Also, the water transport systems are so inefficient
that according to a 2002 study, an average of 21.5% of water was lost because
of leakage or evaporation in 408 city.
This poor management of water has caused the drying up
of the Yellow River with highly negative economic and environmental
consequences. In addition, although badly required because of the soil aridity,
various irrigation projects have often been inadequately appraised under the
technical and economic aspects. According to the World Bank and ADB , several
of them have been a useless waste of water and money. In 1997, to ensure a
continuous, albeit modest, supply of water from the Yellow River, for the first
time, the Government imposed limitations on the amount of river water that each
Province could use and appointed a committee for the protection of the river as
well to verify that a minimum flow of 50 cubic meters per second arrive at the
sea.
On the other hand, the Chinese soil is full of rare
metals (in 2009, 95% of world consumption of these materials came from its
mines). However, the extraction and the treatment of rare minerals can only be
done through the use of acids and chemicals that cause the Chinese soil to
become barren. This large use of industries in China explains why there is a
shortage of raw materials.
The severe shortage of raw materials and supplies
explains China’s interest in Africa and in its yet to be exploited reserves. In
2012, trade between China and Africa reached nearly $ 200 billion, about 20%
more than in 2011. Due to the large amount of raw materials that it uses to
keep industrial production thriving, China has adopted a policy of long-term
supply. Beijing is interested in Brazilian steel, Argentine iron, Chilean
copper, nickel and mineral resources of Cuba, Canada and Australia. For
example, the Chilean group Codelco (12% of world production of copper) has
signed an agreement of $ 2 billion with the Chinese company Minemetals for
55,000 tons of copper annually
One of the major social problems,
and constraint on growth, is the aging of the population. This phenomenon
creates serious financial difficulties in areas such as health care and
pensions. There are two main determinants that have contributed to aging of the
population; the first is the one-child policy, and the second is the
progressive increase in life expectancy. A social policy constraint is the
dualism city-countryside. Many people migrate to cities illegally increasing the
phenomenon of black market employment. ‘Legal’ newcomers to urban areas, mainly
students, live in dorms on-site but there is only one toilet for 55 workers and
one shower for 90
workers. In order to earn minimum wage, workers are forced to work overtime
meaning they are often standing up for 12 hours with short meal breaks and
return to dorm rooms without enough hot water.
A key limit to development (and even to National
cohesion) is the linguistic diversity within the country's borders. The Chinese
language, better known as ‘mandarin’, has been the lingua franca for centuries as most widely used by
the bureaucracy through the Empire, first, and the People's Republic of China,
later; however, all users of the varieties of spoken Chinese have always utilized
a conventional common written language
that, from the beginning of the twentieth century, has been called "Chinese
vernacular". Consequently, the Chinese make a clear distinction between
writing (文 wén) and spoken (语 / 语 Yǔ). The spoken
languages belong to at least three main ‘families’: the original Honan group of
languages, the Uralian languages (spanning from Korean to Hungarian, Turkish
and Finn) , the Indo-Chinese languages (Khmer, Vietnamese). The differences are
much more deeply rooted than those between the European languages, almost all of
Indo-European stock. In a recent visit to China of one of us, the ‘National’
guide and the ‘Shanghai’ guide spoke to one another in Italian because they
could read the same ideograms but could not understand each other in their
respective ‘vernaculars’. In a well known novel by André Malraux, it is
recalled that in the 1930s, in Shanghai, Chinese communist intellectuals used
French as their communication vehicle because most of them had studied in Paris
and read Marx and Lenin in French translations. When Chiang-Kai-Check armies were
approaching Shanghai and there was a need for a Communist newspaper, they
gathered to draw an ideogram to mean ‘Communism’ in the maze of ‘vernaculars’;
eventually, they agreed on merging the ideogram meaning ‘work’ with that
meaning ‘sky’ (in Chinese, it means also ‘heaven’)- i.e. work leading to
heaven.
In this article, we
have reviewed the main constraints on China’s development. A huge country, an
immense but ageing population, lack of effective and efficient institutions,
the lack of a common spoken language, a severe shortage of natural resources,
especially water.
We do not dare to make
a long term quantitative forecast. Oscar Wilde used to say that ‘projections
are difficult when they concern the future’. They are especially hard if the
basic data are questionable. For the reasons explained in this article, China
is compelled to a policy spurring growth in order to avoid social and political
troubles originating from an expanding population with not even a common spoken
language. However, it is unlikely that the country can maintain a 7% p.a. GDP
growth rate. More likely, in the next five-ten years, the policy makers should
target a gradual slowdown to a 5% p.a. growth rate. Otherwise, China may wake
up under a cold shower.
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