4/17/2006 - Can the Chinese economy be sustained? A closer look at the issues that threaten China’s continued growth

Note: MMA President Jay C. Moon, CEcD, recently participated in a two-week tour of China with the Society of International Business Fellows. Following is an editorial describing his impressions of the Chinese economy as a result of that trip and China’s impact on manufacturing in the U.S. and in Mississippi. The rapidly developing nation of China, more than any other country today, has captured the interest of the world. Seemingly overnight, this country with a 1.3 billion population has taken an economy that was largely stagnant and turned it into a manufacturing powerhouse. Developed economies around the world, including the United States, have been severely challenged by China’s seemingly endless supply of cheap labor. Since 1980, China’s economy has grown by more than 9 percent per year. The country now manufactures 75 percent of the worlds toys, 58 percent of the clothes and 29 percent of the mobile phones. More than $1 billion in foreign domestic investment arrives each week. By 2008, China will be the world’s third-largest exporter, and by the decade’s end its economy will be larger than that of either France or the United Kingdom. Similarly to Japan’s meteoric rise to global prominence in the 1970s and 1980s, China looms over the world as a seemingly unstoppable economic juggernaut poised to eclipse the more developed economies. However, beneath this impressive drive to modernization are huge issues with which this nation must contend. I recently returned from a two-week visit to the major cities of Chinese political and commercial activity — Hong Kong, Beijing and Shanghai. Based upon my observations and the briefings I received from governmental leaders, journalists and academic researchers, a picture is emerging of a China as an economic force perched precariously on a bubble of deep, potentially ruinous problems that can and will severely affect its ability to sustain and maintain its current position in the world’s economy. China has begun a slow transition from thousands of state-owned and operated businesses to the privatization of their manufacturing base. This move has dispossessed hundreds of thousands of Chinese from jobs formerly offered through inefficient state run operations. As private sector operations acquire more of this business and higher levels of technology are introduced, even more Chinese will lose their jobs. Currently, the unofficial unemployment rate is estimated to be 12 percent. Equally problematical is China’s one child per family rule. Restricting family size to one child is slowing the flow of young Chinese into the job market. As their society ages, there are few social safety nets that will support their people similar to our Social Security or Medicaid systems. It is projected that by 2010 the Chinese government must fill a $110 billion pension system gap. China’s rapid industrialization also comes with large environmental costs. Annually, 80 percent, or 13 billion tons, of untreated waste water are dumped directly into China’s water systems. Each day 300 million Chinese drink contaminated water, and overcrowding in the major cities has increased air pollution to health-threatening levels. China’s financial system, largely composed of state-owned banks, while improving, could be severely challenged with any weakening of the economy. Wage rates (a nationwide average of $35 per week), while still low by U.S. standards, are increasing, and some businesses have actually relocated to even lower wage markets such as Vietnam. Finally, the Chinese Communist Party is widely viewed as completely corrupt. As it struggles to maintain its hold on power, deal with massive social issues and maintain a growing economy, the party must come to grips with mounting human rights issues, open access to information (there are 100 million Internet account holders in China), transparency in their financial systems, protection of intellectual property rights and an effective legal system. This is a tall order for even the most developed of nations. Is China formidable as an ascendant economic power? That is certainly the case. However, can it fix what it needs to fix and maintain current levels of growth? Many dont believe it can. As the world continues to watch developments in China, American manufacturers can be assured that the Chinese economic growth rates in the long run are not sustainable. Through innovation, sound management and the effective use of technology, U.S. manufacturing will survive and flourish in the 21st century.

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