MACROECONOMICS AND ECONOMIC POLICY IN CHINA

MACROECONOMICS AND ECONOMIC POLICY IN CHINA

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China is essentially a developing country with some characteristics of a developed one and is simultaneously experiencing industrial and information age revolutions. While the majority of the population toil on peasant farmstead, information age research centers are opening up and factories are producing advanced electronics. Some economists break down the Chinese economy into three mains sectors: 1) the rural, peasant economy; 2) the low-tech cheap labor economy; and 3) and information-based sector. Each operates under its separate laws

Every thing in China is big and has big numbers. Even when numbers are small on a percentage basis they can be huge in real terms. If the unemployment rate for example is 10 percent. That works out to 130 million, more than the population of Japan. If 25 percent of the population has a car that works out to 330 million people, more than the population of the United States. The economy of the greater Beijing area covers as many people as the economy of Spain.

One thing that investors find so attractive is that many domestic markets---for cars, computers and designer products---are still in their infancy and thus capable of vigorous growth in the future. Consumer spending only accounts for 35 percent of China’s economy, about half the proportion in the United States, offering a lot of potential for growth.

Two major impacts that China has had on the global economy has been the spread of the authoritarian model and the dominance of the “Wal-mart economy.” The Chinese model for growth in China has been to subsidize manufacturing and exports at almost any cost with low-interest loans, export subsidies and other incentives to keep factories humming and give them an advantage over foreign competitors.

China contributed 27 percent to global growth in 2008 and more than 30 percent in 2010. It impacts the global economy by: 1) as a purchaser of large amount of raw materials and agricultural products, boosting the economies in producing countries; 2) as a supplier of cheap labor for companies around the globe; and 3) as a supplier of cheap goods which brings prices down for consumers around the world. Prices around the world have being driven down by Chinese factories. Instead of using cheap labor to increase profit margins, the Chinese use cheap labor to drove down prices

Many things that occur in China, run counter to and defy traditional beliefs in the West, especially when it comes to economics. Clear property rights, rule of law and floating currency---all traditionally regarded as lynch pins to having strong economy and maintaining growth---are largely absent in China and yet the economy grows and grows and grows.

In February 2008, the World Bank named it first Chinese---a Taiwanese defector named Justin Lin Yifu---as it’s chief economist. The founding director the Center for Economic Research at Beijing University, Lin is an expert on agriculture and developing economies. He received a PhD from the University of Chicago.

Websites and Resources

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Good Websites and Sources: China Macroeconomics Information Network macrochina.com.cn ; Paper on Macroeconomic Policy, a Case Study 2006 PDF File University of Tokyo ; Macroeconomics, Inequality and Poverty networkideas.org ; 2008 Library of Congress Report on Sovereign Wealth Funds pdf file fas.org/sgp/crs ; Wikipedia article on China Investment Corporation Wikipedia ; New Bureau of Asia Report in Understanding China’s Sovereign Wealth Funds pdf file nbr.org/publications

Good Websites and Sources on Economics in China: Wikipedia article on the Economy of China Wikipedia ; Asian Development Bank adb.org/PRC ; World Bank China worldbank.org ; International Monetary Fund (IMF) on China imf.org/external/country/CHN ; China Economic Information Office cei.gov.cn ; ; U.S. Commerce Department’s Office of China Economic Area (OCEA) export.gov/china ; Statistics: China’s National Bureau of Statistics stats.gov.cn/english ; Chinability Blog chinability.com/ ; Nationmaster nationmaster.com ; Money Chinese Coinage Website www.charm.ru ; Chinese Money in the 20th Century PaulNoll.com ; Chinese Banknotes chinatoday.com

Economic News The Economist on China economist.com ; China Economic Net en.ce.cn ; China Economic Review chinaeconomicreview.com ; Far East Economic Review feer.com ; Economic and Business News Related to China jlmpacificepoch.com ; China Daily Coverage of Economic Issues chinadaily.com.cn ; Financial Times China ft.com/world/asiapacific/china ; China Perspective thechinaperspective.com ; China Economics Blog china-economics-blog.blogspot.com ; Economic Policy: OECD Economic Survey of China, 2005 PDF file oecd.org/dataoecd ; Book: Frontiers of Economics in China, A Collection of Papers http://www.springer.com/economics/journal/11459 ; McKeever Institute’s Economoc Policy Analysis mkeever.com ; Council of Foreign Relations www.cfr.org

Links in this Website: BASIC ECONOMIC INFORMATION ON CHINA Factsanddetails.com/China ; MACROECONOMICS AND ECONOMIC POLICY IN CHINA Factsanddetails.com/China ; THE YUAN, FOREIGN RESERVES AND SOVEREIGN WEALTH FUNDS IN CHINA Factsanddetails.com/China ; CHINESE REGIONAL ECONOMICS Factsanddetails.com/China ; EARLY ECONOMIC HISTORY IN CHINA Factsanddetails.com/China ; DENG XIAOPING'S ECONOMIC REFORMS Factsanddetails.com/China ; ECONOMIC HISTORY AFTER DENG XIAOPING Factsanddetails.com/China ; GLOBAL ECONOMIC CRISIS OF 2008 AND 2009 IN CHINA Factsanddetails.com/China ; BUREAUCRACY, WELFARE AND TAXES IN CHINA Factsanddetails.com/China ; LOCAL GOVERNMENT IN CHINA with a section on TVEs Factsanddetails.com/China

Economics in a Communist State

China has managed to combine Communist ideology and free-for-all capitalism in its rawest form to create whet the government calls a “socialist market” through using Chinese traditions to justify its authoritarian hold of the government and control of free market forces.

Land and property belonged to the state. Private enterprise was discouraged Economic statistics were often padded so that it appeared the economy was doing much better than it actually was.

Under Communist ideology trading and making profits was vilified as nefarious criminal "speculation,” international trade was seen as imperialistic, business was monopolistic, and competition was gaining unfair advantage.

The government owned the land and ran factories and made almost all economic decisions, often in the form of Five Year Plans. Everyone had a job and access to health care and education. But there were no supermarkets, no private banks, no car dealerships and no real estate agents. People put their names on waiting lists for houses, refrigerators and televisions. There was no system of prices to guide investors to make prudent investments and decisions.

The centralized. state-run economy forced workers to work in single production units and gave a priority to the heavy industry and the military at the expense of consumer goods. Critics accused it of maximizing the problems associated with modern industrial societies such as pollution without producing many of the benefits such as a wide variety of consumer good available to everyone.

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Government Economic Policy in China

China’s formula for success for the past two decades has been cheap labor, holding down the value of the yuan, picking and supporting top-performing companies, and favoring exports for growth. China’s high growth rates are driven by hard work in conjunction with closed financial systems, Japanese-style protectionism, high household savings rates, a government carefully funneling money to in sectors of the economy that help spur exports and foreign investment. Many economists feel that anything less than 8 percent growth is like a recession in China because of the need to create jobs and support the growing labor market. Eight percent growth is regarded as the minimum for maintaining social stability.

Politics and economics are often inextricably intertwined in China. David Marshall, a Hong Kong-based analyst with Fitch Ratings, told AFP, “In China it’s virtually impossible to separate commercial interests from political decisions.” There is “extremely close linkage in terms of ownership and personnel between the Chinese large state-owned companies, including the state-owned big banks, and the Chinese government. Essentially they are all run by individual senior members of the Communist Party.”

The model for growth in China has been to subsidize manufacturing and exports at almost any cost with low-interest loans, export subsidies and other incentives to keep factories humming and give them an advantage over foreign competitors.

The state continues to control the prices of raw materials and grains and set acceptable price ranges for consumer goods and services. Even in the expanding free market the government can clamp down business that are engaging in unfair trading practices. Even so as the economy has expanded the government has lost its ability to control it.

The biggest obstacle to growth and prosperity is social unrest. Economic decisions made by the government are often made with political and social concerns in mind rather the bottom line. One of the primary concerns of China’s economic policies has been to employ as many people as possible even isn’t necessarily the most profitable and productive thing to do. High unemployment rates could lead to social unrest and that is what the Beijing government fears most.

The Prime Minister often serves as China’s top economic official. On policy decisions there is often a struggle between economists and bankers who have some training in the West and old guard Communists who are adverse to making an radical changes. The financial systems is dominated by trouble ste-owned banks. Sometimes the political objectives conflict with economic aims.

Economic policy for the coming year is often decided at the planing meeting of top Communist Party and Cabinet officials held in December.

The People’s Bank of China in China’s central bank. It has two primary missions: to maintain domestic price stability and to ensure stable foreign exchange. The Communist leadership is not shy about using traditional capitalist tools to boost growth. China employed the stimulus strategy after the Asian financial crisis in 1997-98, the dot.com bust in 2001 and the global economic crisis in 2008-2009.

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Important People in the Chinese Economy

The important figures in China’s financial world in 2010 were Xie Xurin, China’s finance minister, Zhou Xiaochuan, the head of China’s central bank, and Zhu Changhong,, the chief investment officers overseeing China $2.7 trillion if currency holdings.

Vice Premier Wang Qishan was one of the main framers of economic policy under Hu Jintao. Time magazine selected him as one of the world’s most influential people in 2009. In the magazine’s profile, former U.S. Treasury Secretary Henry M. Paulson wrote, “He is the man China’s leaders look to for an understanding of the markets and the global economy. As a result, China has been supportive of U.S. actions to stabilize our capital markets and has not given in to those who advocate reversing economic reforms to insulate China from the world.”

Victor Shih, the Northwestern University political scientist, keeps track of the factions and alliances among elite decision-makers in China’s financial sector. His book, “Factions and Finance in China,” offers a narrative that gets inside the post-1978 struggles among China’s political elite. [Source: Evan Osnos, The New Yorker, October 19, 2010]

Justin Yifu Lin

Justin Yifu Lin is an increasingly influential Chinese economist. Evan Osnos of The New Yorker wrote: “Lin is the first Chinese citizen to fill the post of chief economist at the World Bank, a position formerly held by Joseph Stiglitz, Larry Summers, and other influential Western scholars. Lin’s stature reflects a growing sense around the world that China’s success---however fragile, idiosyncratic, or imbalanced it might be---might offer lessons to poor countries. At bottom,China’s economic approach is defined by carefully controlled reform, a strategy once described by the late Communist Party patriarch Chen Yun as “crossing the river by feeling for the stones.” (It is wrongly credited to Deng Xiaoping most of the time.)

Lin is a global ambassador, of sorts, for Chinese economics. He also discusses his remarkable background---notably his decision at the age of twenty-six to walk away from his Army post in his native Taiwan and swim across the Taiwan Strait to a new life on the mainland. He left behind his wife, who was pregnant, and a three-year-old son. In China, he chose to “evaporate,” as he told me, by adopting a new name and passing himself off to classmates as a Singaporean. What drove that decision? To help answer the question, Lin recently gave us a copy of a letter in Chinese that he wrote to a cousin in 1980, a year after his departure from Taiwan, seeking to explain his motivations and asking for help in supporting his wife. (He and his family eventually reunited and resettled in Beijing.) To this day, he is unable to travel to Taiwan because of an outstanding warrant for his arrest on the charge of “defecting to the enemy.” But in 1980, barely four years after the end of the Cultural Revolution, Lin already showed an optimism that he still harbors today, despite the growing concerns of other Chinese economists: “I strongly believe that China’s future is bright,” he wrote in the letter. “One can be proud to be Chinese, standing in the world with one’s head held high and chest out.”

Chinese Communist Party, Democracy and Business

While the Chinese Communist Party has largely retained its rigid Leninist structure it has largely abandoned Marxist economic in favor of the “socialist market economy.” Adapting Deng's saying, one Communist official said, "Capitalist have their plans and socialists have their markets. It does not matter if it is a white cat or black cat."

China may prove that the assumption that democracy and market economics go hand and hand is wrong. Economist Milton Friedman told the New York Times that he has "very mixed prospects" about China's economic future. "Never in the history of the world has a totalitarian state successfully converted itself into a free market economy," he said.

Dutch journalist Willen van Kemendade wrote in his book China, Hong Kong, Taiwan, Inc., “If things go way the Communist Party wants it, “China will continue to enjoy high economic growth and will become more modern and prosperous, but politically it will most probably remain as conservative, secretive and repressive as ever...High economic growth under authoritarian regimes has proved that democracy is not a basic condition for this, just as it is not a prerequisite for a market economy."

The jury is still out of the impact of economic growth and democracy. Growth of private enterprises and the decline of state jobs has meant that the government has less control over people's lives. They can no longer threaten to take away jobs or reduce grain rations. But still the government threaten people in other ways.

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Leninist China Faces Capitalist Crisis

With a Marxist take on how China responded to the global economic crisis after the collapse of Lehman Brothers in 2008, Larry Elliot wrote in The Guardian, “China's growth has been dominated by investment and exports. Consumption has accounted for a declining share of national output, in contrast to the west, which means as the Marxist writer Chris Harman notes in a forthcoming book Zombie Capitalism that the colossal increase in production cannot be absorbed domestically. Instead, the surplus goes into still higher levels of investment or is channeled into overseas markets.” [Source: Larry Elliot, The Guardian, August 17, 2009]

Hu Jintao's government is petrified by the possibility that recession will lead to social unrest. As Jonathan Fenby put it for Trusted Sources, a research group that specializes in emerging markets: “China's policy responses to the current economic downturn are being powerfully shaped by political factors, given the regime's need to maintain its claim to legitimacy through growth.”

In political terms, the policy is working. Opinion polls showed that people in China are far more positive about the prospects for the economy than people in the west. Economically, though, there is a cost. Chucking money at the economy will lead to an even bigger problem of over-investment, an explosion in bad loans and a tendency for a good chunk of the increase in the money supply to leak out into speculation. Over-capacity and falling profit rates will mean that many inefficient companies kept alive by the injection of cheap money will have real problems in servicing their debts.

This approach to crisis management is nothing new. China has responded in the way that Alan Greenspan did after the dotcom crash: it has solved the problems of one bubble by creating another. China's fiscal boost is being spent on domestic infrastructure projects rather than on the military spending and the tax cuts favored by George Bush, but by copying what Washington did between 2001 and 2003 Beijing is running similar risks. The reports of a spate of fake mortgages to buy flats on bank credit have clear echoes of the sort of malpractice associated with the subprime scandal in the US.

Fenby warns that China's path out of the crisis “looks longer and more complex than the headlines suggest” and Chinese policy makers are certainly worried by rising property prices, a doubling in value of the Shanghai stockmarket and the need to mop up some of the excess liquidity sloshing around the economy. In June, the China Banking Regulatory Commission warned of “grim credit and market risk” as a result of a fall in corporate earnings and excess capacity.

It is encouraging news that the Chinese leadership is aware that there could be big trouble ahead. Being aware of a potential problem and doing something about it are, however, quite different. Tackling China's underlying economic problems will be tough, unpopular and time-consuming...But if Beijing ducks the economic challenge for political reasons, the consequences threaten to be severe. Albert Edwards, analyst with Society Generale says China is now an accident waiting to happen. “If the US in 2007 was a slow motion train wreck with carriage after carriage coming off the rails in turn, China will at some point soon be pile-driving straight into the buffers.”

Capitalism and Democracy in China

It was originally thought by some in the West that an emerging class of entrepreneurs and businessmen would push for democracy in China but by absorbing many of them into the system and the Communist Party and establishing links between the state and business so that it is difficulty to tell where the public sector leaves off and the private sector begins the Communist Party has been able to subdue any challenge the business community may have presented to its grip on power.

To get ahead businessmen generally need access to state bank loans and contacts with officials that control land, government contacts and bureaucratic authorizations they need. The same is true with students who want a successful career. Bruce Dickson, a China scholar at George Washington University and author of Wealth Into Power The Communist Party’s Embrace of China’s Private Sector, told the New York Times, “The party seems happy with that. They are not looking for die-hard ideologues. They want to co-opt people into the their system, And they’ve far more successful than people realize.”

Books: Wealth Into Power: The Communist Party’s Embrace of China’s Private Sector by Bruce Dickson, a China scholar at George Washington University; The China Fantasy: Why Capitalism Will Not Bring Democracy to China by James Mann.

Social Control Versus Economic Openness

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Barbara Demick and David Pierson wrote in the Los Angeles Times, “The Communist Party has long wrestled with how to weigh the competing dictates of economic openness and social control...When there’s been a clash of those interests, Beijing almost always has come down on the side of control.”

Kenneth Lieberthal, a former Clinton administration official and senior fellow at the Brookings Institute, told the Los Angeles Times, “The Chinese are very mindful of the potential political repercussions of openness---they make no bones about it---and on the margins, their desire to maintain social stability will trump any other issue.”

State-Capitalism and the Myth of Free Trade

In response to arguments by Stefan Halper in his book The Beijing Consensus: How China’s Authoritarian Model Will Dominate the Twenty-First Century and Ian Bremmer in his book Uprising: Will Emerging Markets Shape or Skae the World Economy that China unfairly uses “state-driven capitalism” as opposed to playing by the rules of free markets to an a competitive edge, John Cassidy persuasively argues in a New Yorker article that China is far from the first to do this.

In an article entitled Enter the Dragon in the December 12, 2010 issue of The New Yorker Cassidy wrote: “From Lord Palmerston to Secretary of State Hillary Clinton, Western officials have long demanded that countries open their domestic markets to foreign competition. But Britain and the United States embraced free trade as an ideal only after they had built up manufacturing industries that could dominate those of foreign rivals? In 1721, the [British] government of Robert Walpole placed a range of tariffs on all manufactured imports, erecting a protective wall around businesses that created the Industrial Revolution. A century later, while the heirs of Adam Smith were expounding the theoretical virtues of free trade, Britain retained some of the highest import tariffs in the world: more than fifty percent on many manufactured goods. [Source: John Cassidy, The New Yorker, December 13, 2010]

“Those levies stayed high until the eighteen-sixties, when the country’s competitive advantage in textiles, steel and other industries was firmly established. As the late economic historia Paul bairoch stressed, the idea that Britain rose to economic dominance through free trade is nonsense...The same is true of the United States. During the War of 1812, which was precipitated in part by trade disputes, [Congress] doubled import duties on manufactured goods, to twenty-five per cent. A few years later, the levies were raised to an average of forty per cent. Then Abraham Lincoln raised them again, to roughly fifty percent. [Ibid]

Ha-Joon Chang, an economist at the University of Cambridge, has observed that Lincoln, revered as the Great Emancipator, “might have equally be labeled the great protector” of American manufacturing.” Cassidy wrote: “During the half century after Lincoln’s presidency, the business-backed republican part was in power for most of the time, and tariffs on manufactured goods remained at forty to fifty per cent, the highest levels anywhere. It was during these years that the U.S. economy grew to rival the economies of Britain and Germany in industries such as iron and steel and chemicals---all of which benefitted from protection.” [Ibid]

Many have given credit to Japan, followed by South Korea and Taiwan, for pioneering the model of protecting industries and agriculture at home while developing an exports to spur raid economic growth. But as Ha-Joon Chang points out in Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (2008), “Policies that many believe, as I myself used, to have been invented by Japanese policy-makers in the 1950s...were actually early British inventions.”

Cassidy goes on to talk about how protectionism still exists in the U.S. in many industries, most notably in the form of agriculture subsidies. He also shows some of the recent fruits of these American protectionist policies; to again use the most notable example, the internet was a product of the Pentagon’s Defense Advanced Research Projects Agency (DARPA).

Cassidy ends the article by saying: “Unfortunately, in policy circles---and among much of the general public---the old mantras about the free market and private enterprises continue to dominate. In seeking to broaden access to private health insurance, the Obama administration was accused of plotting a takeover of the entire health-care industry. In cutting taxes and boosting federal spending to avert a depression, it was accused of embracing socialism. Even supposedly serious economists lend support to these views, arguing that the dysfunctional health-care industry is best left to its own devices, or that the eight-hundred-billion dollar stimulus program has had virtually no impact on jobs and on G.D.P. This is what comes of forgetting the critical role that states have played in nurturing, protecting, and financing their industries, as well as in taxing and taming them. The greatest danger that Western prosperity now faces isn’t posed by any Beijng consensus; it’s posed by the myth of the free market.”

Infrastructure and the Economy in China

Spending on infrastructure has been increasing at rate of around 25 percent a year in recent years. Some see the huge projects as white elephants. Others see them as key to elevating China to the status of a developed country. There is an old Chinese saying that goes: “If you want to be rich, you must first build roads.”

A lot of money is spent on infrastructure in China. In an effort to keep economic growth rates high a massive $1.2 trillion public works program was announced in the late 1990s that included the building of new bridges, roads, dams, railroads, power plants, port facilities and airports all around the country. A fifth of all construction spending in China depends on public works projects. No other country spends more and devotes as much resources to infrastructure projects as China. The only thing that is comparable was the building of the interstate highway system in the United States in the 1950s.

Infrastructure bottlenecks slow the economy. Ships wait for weeks to unload in overcrowded. ( See Water Shortages, Power Outages. One study found that China needs to spend $132 billion annually from 2006 to 2010 on upgrading and maintaining its infrastructure to maintain projected economic growth rates.

China's Economic Model Is Under Pressure

David Pierson wrote in the Los Angeles Times, “Hardly anyone disputes that China's current economic model is under pressure. Its government-backed spending binge isn't sustainable. And China is feeling the effects of a slowdown in Europe and the U.S., the two largest customers for its exports. Longer term, its days as the world's low-cost factory floor are threatened by cheaper competitors and a shrinking labor force. [Source: David Pierson, Los Angeles Times, November 28, 2011]

The global economy would benefit if China could rebalance its economy so that its 1.3 billion citizens started spending more. But they can't because China has structured its economy to favor big businesses over consumers.Beijing does this by keeping its currency, the yuan, artificially weak. That benefits exporters by making Chinese goods cheap. But a weak yuan fuels inflation at home and makes imported goods expensive. Authorities also keep interest rates low so that state-owned companies get cheap loans. But that means depositors earn puny returns.

It all adds up to less money in the pockets of consumers, said Peking University economist Michael Pettis. "The repression of consumption is why I never bought the bulls' story," Pettis said. "China has to go through an important restructuring of sources of growth that will have very big implications."

China's breakneck pace of expansion will inevitably moderate. The question is whether that slowdown will be carefully engineered by China's government -- a scenario Roubini called "mission impossible" -- or a harder, more painful landing. Some say all the hand-wringing is overwrought and that China short-sellers such as Chanos, founder of the New York investment firm Kynikos Associates, have everything to gain by espousing gloom and doom. "Chanos is a company analyst with no understanding of economics who treats China as if it were a company. It's not; it's a country," said Arthur Kroeber, managing director of Beijing research firm GaveKal-Dragonomics, in an emailed response to questions.

Bill Bishop, a closely followed independent tech analyst in Beijing, said that "the pendulum has swung too far" in favor of the bears. "I think the fears are overblown. People in the U.S. are scared of China, and some people hope it drops," said Bishop, co-founder of financial news service CBS Market Watch. He described himself as belonging to the"China-will-muddle-through camp."

That faction says China's leaders will do what it takes to avoid calamity. Others aren't so sure. "The reasonable bulls and bears among us agree on most of the facts," Northwestern's Shih said. "But at the end of the day, we disagree on the Chinese government's ability to make tough changes."

Limits of the Chinese Economic Model

In May 2012, Edward Wong wrote in the New York Times: “After the economies of Western nations imploded in late 2008, Chinese leaders began boasting of their nation’s supremacy. Talk spread, not only in China but also across the West, of the advantages of the so-called China model---a vaguely defined combination of authoritarian politics and state-driven capitalism---that was to be the guiding light for this century. [Source: Edward Wong, New York Times, May 11, 2012]

But now, with the recent political upheavals, and a growing number of influential voices demanding a resurrection of freer economic policies, it appears that the sense of triumphalism was, at best, premature, and perhaps seriously misguided. Chinese leaders are grappling with a range of uncertainties, from the once-a-decade leadership transition this year that has been marred by a seismic political scandal, to a slowdown of growth in an economy in which deeply entrenched state-owned enterprises and their political patrons have hobbled market forces and private entrepreneurship. [Ibid]

“Many economic problems that we face are actually political problems in disguise, such as the nature of the economy, the nature of the ownership system in the country and groups of vested interests,” said Zhang Ming, a political scientist at Renmin University in Beijing. “The problems are so serious that they have to be solved now and can no longer be put off.” [Ibid]

“China released data that showed its economy was continuing to weaken. Many economists have been urging the government to loosen controls over the financial system, to support lending to private businesses while reining in state-owned enterprises, to allow more movement in exchange rates and interest rates, and to improve social benefits. Such changes would curb the state’s role, lessen corruption and encourage competition. But making them would involve a titanic power struggle. Executives of Chinese conglomerates, army generals, Politburo members, local officials and the “princeling” children of Communist Party elders have little incentive to refashion a system that fills their coffers. [Ibid]

“Bo Xilai’s policies helped expose another fault line in the China model: the priority placed on economic growth through investment projects carried out by state-owned enterprises, with generous loans from state banks. This is the framework propping up the Chinese economy. Flush with infrastructure projects, Chongqing, with a population of 31 million, had an economic growth rate of 16.4 percent last year, the highest of any municipality. But the municipal government and local state-owned companies have accumulated $160 billion in debt, according to an estimate by Victor Shih, who studies China’s political economy. Many of those loans might never be repaid. [Ibid]

“Policy makers pushing for a different model across China, one that relies more on consumer spending and encourages private enterprise, insist that long-stalled structural overhauls must be restarted. Some see an opening in the coming leadership transition. But the biggest hurdle may be the fact that both departing and incoming leaders have close ties to state-owned enterprises, which are keen to preserve the status quo. [Ibid]

End of Labor Force Growth in China

If China ends up with too many old people and too few young workers it could slow economic growth. In the worst case the government and families will have to tap into savings to take care of the elderly, reducing funds for investments and driving up interest rates. As the working-age population shrinks, labor cost will rise. China’s aging population could undermine the advantages of low-cost labor by the middle of the 21st century. In 2007 China had six people in the workforce for every retiree but this ratio while fall to 2:1 by 2050.

Nicholas Eberstad wrote in Far Eastern Economic Review, “China's explosive economic growth between 1979 and 2008 was historically unprecedented in pace, duration, and scale. A repeat performance over the coming generation is most unlikely for one simple reason: the demographic inputs that facilitated this amazing first act are no longer available. [Source: Nicholas Eberstad, Far Eastern Economic Review, December 2009. Eberstadt holds the Henry Wendt Chair in political economy at the American Enterprise Institute in Washington, D.C., and is senior adviser to the National Bureau of Asian Research]

Over the 1980-2005 generation, China's working-age population---defined here as the 15- to 64-year-old group---grew by about 2 percent per annum. Yet over the coming generation, China's prospective manpower growth rate is zero. By the “medium variant” projections of the United Nations Population Division (UNPD), the 15- to 64-year-old group will be roughly 25 million persons smaller in 2035 than it is today, and by 2035 it would be dropping at a tempo of about 0.7 percent per year. In fact, by the U.S. Census Bureau's reckonings, China's conventionally defined manpower will peak by 2016 and will thereafter commence an accelerating decline. Though these forecasts concern events far in the future, they are more than mere conjecture; virtually everyone who will be part of China's 15- to 64-year-old-group in the year 2024 is alive today. If current childbearing trajectories continue, by the UNPD's reckoning, each new generation will be at least 20 percent smaller than the one before it. [Ibid]

These numbers alone would augur ill for the continuation of rapid economic growth in China, but the situation is even more unfavorable when one considers the shifts in the composition of China's working-age population. In modern societies, it is the youngest cohorts of the labor force who have the best health, the highest levels of education, the most up-to-date technical skills---and thus the greatest potential to contribute to productivity. In China, however, this cohort has been shrinking for a generation, and stands to shrink still further, in both relative and absolute terms. In 1985, 15- to 29-year-olds accounted for 47 percent of China's working age population. Today that proportion is down to about 34 percent of the workforce. By Census Bureau projections, 20 years from now it will have fallen to just barely 26 percent of China's conventionally defined labor force. [Ibid]

The only reason China's working age population will not shrink more rapidly over the next few decades is because of an enormous coming wave of laborers in the 50- to 64-year-old age range. This group looks to swell by over 100 million between 2009 and 2029, growing from 22 percent of the working population to roughly 32 percent. The educational profile of this group is far more elementary than is generally appreciated: according to official Chinese census data, 47 percent of 50- to 64-year-olds have not completed primary schooling. [Ibid]

With this coming “age wave,” the structure of China's labor force will be inverted. A generation ago, there were nearly three times as many younger workers as older workers. Today there are half again as many younger workers as older ones. Two decades from now, the Census Bureau projects 120 older prospective workers for every 100 younger ones (at which point the situation may then stabilize, depending upon fertility trends). It's not exactly an ideal transformation in the labor force structure if one is aiming to maintain rapid rates of economic growth. [Ibid]

The situation might be easier for economic planners to cope with if China were still a nation with an abundance of underemployed labor. But policy makers in Beijing can no longer count on these once huge reserves. Instead, leading Chinese economists---among them Professor Cai Fang, director of the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences---argue that the Chinese economy has already reached a turning point where those seemingly unlimited reserves of rural labor have actually been tapped out, and any future increase in demand for labor will only be supplied by increasing wages. [Ibid]

Shrinking Labor Population and Rising Elderly Population

China’s once cheap and plentiful pool of workers is becoming more scarce and expensive; the labor force declined by 3.45 million in 2012 and is expected to decrease by 10 million per year starting in 2025. The shrinking pool of workers will be forced to support an expanding population of senior citizens -- 200 million in 2013 -- that is expected to arrive at 360 million (more than the current U.S. population) in 2030. Meanwhile, over the next two decades, pension liabilities may reach more than $10 trillion.

From 2010 to 2030 China's working-age population—those ages 15 to 64—is expected to lose 67 million workers—more than the entire population of France—according to United Nations projections. Over that period, the elderly population is projected to soar from a tenth to a quarter of the population, according to U.N. data. China's population, the world's largest, rose to 1.34 billion in 2010, according to census data. It had been projected to peak at around 1.4 billion in 10 years but decline for the next 30. [Source: Laurie Burkitt, Wall Street Journal, November 15, 2013 <=>]

The Chinese birthrate has plunged to 1.18 births per woman, considered too low for the population to replenish itself. Many analysts say the one-child policy has shrunk China's labor pool, hurting economic growth. For the first time in decades the working age population fell in 2012, and China could be the first country in the world to get old before it gets rich. China's working-age population fell by about 3.45 million to 937 million in 2012. The drop added to concerns about how the country will provide for its 194 million elderly citizens, who now make up 14.3 percent of the population, a nearly three-fold increase from 1982. [Source: AFP, November 16, 2013]

Laurie Burkitt wrote in the Wall Street Journal, “Wang Feng, a demographer at Fudan University in Shanghai, and other population experts have argued for several years that the government was running out of time to change course. Birthrates had already fallen, in some cities to levels below that needed to replace the current population. If left unchecked, they said, the labor force would shrink, pressuring wages and inflation, and fewer workers would be taking care of a growing elderly population, potentially creating a pension shortfall. <=>

“Companies manufacturing or operating in China have already seen their profits diminish as the supply of labor—seen as China's most competitive advantage in attracting foreign companies to its turf—tightens, pushing up wages. The predicament has caused experts to wonder if the world's No. 2 economy would grow old before it gets rich. Japan's long slump beginning in the 1990s occurred after a similar dip in demographics, though Japan was far wealthier at the time than China is currently and was able to absorb the slowdown in growth. Population experts said the latest move, while positive, fails to fully steer China away from the demographic crisis. "The entire policy should have been abolished," said Liang Zhongtang, a demographer from the Shanghai Academy of Social Sciences. <=>

Image Sources: Posters: Landsberger Posters http://www.iisg.nl/~landsberger/; 3) bank note pictures, China Today

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2008 Jeffrey Hays

Last updated April 2014

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