The future is a hot topic in China; bookstores are full of tomes asserting the 21st century as China’s century: Liu Mingfu’s The China Dream (2010) and Chan Koon-chung’s The Gilded Era: China 2013 (2009) are but two of the most recent books that describe how China is destined to become the number one country in the world. In the future some analysts predict China will create economic instability in terms of distorting trade, fostering financial imbalances and competing for scarce natural resources.

Some think that Shanghai will replace New York as a the world’s financial hub in the not too distant future. Many are hoping that increased consumption and spending in China and other emerging economies will not only spur growth at home but will also help improve conditions in the developing world and help stagnating developed countries.

China is expected to flood the world with high-quality products as well as cheap ones. Already it is a major chip maker and is quickly learning the ropes in the automobile manufacturing business. In recent years the government has been pushing its entrepreneurs to become more creative under the catch phrase “a nation of innovation.” Among other things it is encouraging fashion designers and video game creators to dream up new products.

China still lacks managerial talent, marketing skills, well-known brands and efficient organizational structure. There are also worries that Chinese companies could suffer the same fate as the Korean chaebols by placing too much emphasis on market share and not enough on profitability.

There are growing sentiments of economic nationalism and calls for the abandonment of market economics and a return to old fashion communism prompted by: 1) worries that strategic industries and businesses in China will be taken over by foreign multinational corporations or sold to foreigners; 2) demands by bureaucrats who fear losing their jobs or prestige or who have already lost them; and 3) concerns over the widening gap between rich and poor. Communist planners don’t like capitalism because it defies orderly predictions.

Some have suggested that what China needs is a New Deal that will spread the wealth better to all of China’s provinces; that will improve access to education and the equality of opportunity; and that will create a social safety net.

Five-Year Plan for 2011-2015 for the Chinese Economy

In the Five Year Plan introduced in March 2011, The government has stipulated in its new five-year economic blueprint that it wants consumption to play a bigger role in growth, by increasing people's purchasing power and further developing services and social security.

Willy Lam reported in China Brief, “the target for GDP growth from 2011 to 2015 has been lowered to 7 percent so as to facilitate “qualitative,” not quantitative, economic expansion. More efforts will be made to replace exports with domestic consumption as a key locomotive of growth. [Source: Willy Lam, China Brief, March 10, 2011]

Above all, the World Factory is set to morph into the Global Hub of Innovation. Yet much of Beijing’s game plan for moving up the value and technological chain depends on governmental policies and outlays---not the endeavors of the private sector. For instance, government departments and state-held conglomerates are set to invest $1.5 trillion in seven key industrial areas: green technology; biotechnology; alternative energy; high-end equipment manufacturing; IT; advanced materials; and alternative-fuel vehicles. There will also be closer integration between civilian and military research and development Just as in the socio-political arena, Beijing’s industrial and technology strategies seem geared toward boosting the powers of the party-and-state apparatus rather than encouraging the creativity and initiative of individual citizens.

Lewisian Turning Point and Rebranding China

Many economists feel that China may be reaching the “Lewisian turning point” named after the late Nobel-Prize-winning economist Arthur Lewis who described how developing countries eventually exhaust their pool of cheap labor and have to evolve into a more developed economy. The old game has started collapsing, says Xu Xiaonian, a professor of economics at the China Europe International Business School in Shanghai, referring to China’s inefficient export-oriented economic model, which can be prone to overheat. We are now in a transition period. We need to find new ways to do things.

Jeffrey Wasserstrom wrote on Yale Global Online, “President Hu Jintao and his comrades strive to convince China’s citizens that they can simultaneously raise living standards, maintain stability and garner international respect. The emphasis abroad, meanwhile, has been on convincing residents of foreign countries, including people of Chinese ancestry, that the People’s Republic of China 2.0, though still run by a Communist Party, has been utterly transformed. [Source:Jeffrey Wasserstrom, Yale Global Online, October 10 2010]

The biggest successes of this re-branding drive have depended on Beijing’s ability to ride the tide and take advantage of distinctively global aspects of the current era. Without far-flung supply chains and fast-flowing foreign investment---including that of ethnic Chinese in Taiwan and other locales---China could not have surged past Japan to become the world’s second largest economy. And without satellite television and the internet, the visually stunning opening ceremony of the Beijing Olympic Games and strong showing by Chinese athletes could not have had the dramatic impact they did in 2008, helping dispel at last the lingering visions of China as a technologically backward “sick man” of Asia.

Jeffrey Wasserstrom is a professor of history and department chair at University of California Irvine and the author, most recently, of “China in the 21st Century: What Everyone Needs to Know,” published this year by Oxford University Press.

Cracks Appear in China's Economic Model

"Clearly China is becoming a larger percentage of the world economy and its growth rate is higher than the developed world," said Fraser Howie, co-author of "Red Capitalism: the Fragile Financial Foundation of China's Extraordinary Rise". "It is becoming stronger as a result of that but I would argue that much of that strength is misleading," he told AFP. [Source: Boris Cambreleng, AFP, July 23, 2011]

"The problem is not really what took place in 2009 and (China's) initial response to the global financial crisis, the problem is that in 2010 and continuing on into this year, it became the new normal," Patrick Chovanec, associate professor at Beijing's Tsinghua University, told AFP. "It became the new growth model, but it is not a sustainable growth model," he added.

David Barboza wrote in the New York Times, “Since the financial crisis, China has been the world’s leading growth engine. But for much of 2010 and 2011 China has been trying to rein in overly aggressive bank lending as way to tame soaring inflation and property prices. Those tightening measures have not only weakened growth in China, analysts say, but have also begun to expose a host of other problems in the nation’s financial system. While few analysts expect China’s growth to slow to below 8 percent in the next year, they still paint a troubling picture. The Chinese stock market has been in a slump for much of the last two years, the property market looks weaker and inflation is running at a 34-month high.” [Source: David Barboza, New York Times June 20, 2011]

But Michael Pettis, professor at Peking University's Guanghua School of Management, believes that "China's growth has become so unbalanced that it is going to be extremely difficult for it to change to a new growth model". Month after month, economic indicators show that investment and exports still continue to rise faster than consumption. "It will prove very difficult for China to grow without maintaining high levels of investment, but these high levels will guarantee an unsustainable increase in debt," Pettis said.

Vincent Chan, the head of China research at Credit Suisse, told the New York Times that the nation’s economy might avoid a “hard landing” but that growth over the next year was likely to be less robust. “The market consensus is for a soft landing and two or three quarters of slowing down, then a growth rebound,” Mr. Chan said in a telephone interview Monday. But, he said, “we’re saying that after that, the growth may not re-accelerate and the indebtedness may be more serious.” [Source: David Barboza, New York Times June 20, 2011]

Is China's Economy a Bubble

“There is some research out there looking at housing and asset prices in China, and there are indications that the property market is somewhat overvalued in China,” Brian Lucey, associate professor of finance at Trinity College Dublin, told the Irish Times. “The question is whether that could be a major problem, and that I don’t know. It could be that it doesn’t go to the heart of the economy and could be absorbed by the broader economy.” [Source: Clifford Coonan Irish Times, January 22, 2011]

“They are coming up against the limits of freedom to manoeuvre in controlling the political economy. I would be confident these boys are smart enough, but there are significant risks. If the Chinese economy slows down in a wrenching manner, you are going to have a significant slowdown in the world economy. “China has to act in a responsible manner, and that involves loosening the exchange rate, and the longer they delay doing that the more wrenching the slowdown. It will have to happen gradually, but if they don’t move swiftly it will only get worse. They really need to get moving,” says Lucey.

Mao Yushi is one of China’s best-known economists and a director of the Tian Ze Economic Research Centre. “We have a lot of problems now, for example the real-estate bubble,” he wrote on his blog. “Much of the increase in GDP is actually because of this bubble. When one building sells at an incredibly expensive price, beyond the normal market price, it is a distortion, which inflates the bubble in the real-estate market. This bubble relates for sure to a series of macroeconomic policies, including the savings made from having the renminbi [or yuan] currency at a low exchange for a long time.”

Andy Xie, an independent economist who was formerly Morgan Stanley’s star Asia-Pacific economist, does not see a bubble bursting. “I thought the current bubble, fuelled by rapid monetary expansion and expectations of a stronger yuan since the beginning of 2007, would go the same way. Recent developments have changed my mind. This bubble may not end suddenly, but with a slow leak,” he wrote.

The government isn’t relaxing the credit restrictions on second and third mortgages, and liquidity is also tightening, leading to a slower fall in prices. “The economy will hold up. Exports, consumption and infrastructure should sustain a 7 per cent to 8 per cent growth rate for the next decade. That seems low compared with recent years, but it will be much better for lifting wages, household living standards and corporate profits,” he says.

The government, understandably, is keen to dampen talk of a bubble developing. A report by an economic-analysis team under the state council, China’s cabinet, said that inflation was stable and that more stable growth was easing fears of a bubble.

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Worries About a Future Recession in China

David Pierson wrote in the Los Angeles Times, “But the big concern inside and outside of China is a so-called hard landing. If Europe and the U.S. fall back into recession and demand for Chinese-made goods declines, Beijing won't be able to juice its economy like it did the last time around. The best solution for China, analysts said, is to turn its own citizens into shoppers whose buying power can drive the economy forward. [Source: David Pierson, Los Angeles Times, August 16, 2011]

Analysts doubt that China, faced with a new debt crisis in the developed world, will be able to implement the same measures it did in the 2008 international financial crisis. "Can China do the same again this time? Well, yes, it could -- more cheap money flooding the system to build unproductive things," Fraser Howie, co-author of "Red Capitalism: the Fragile Financial Foundation of China's Extraordinary Rise,"told AFP."But ultimately that is a waste of resources and the model will eventually fail."

"It's a lesson on the limits of stimulus. The more you do it, the less and less you'll get out of it," Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing, told the Los Angeles Times. "You've already tapped all the good investments out there. A second time, you'd just be shoveling money out the door.... It will just compound their problems."

The fear among some experts is that the bubble will eventually burst, leading to a wave of nonperforming loans at the big state-owned Chinese banks, which have been the main financiers of the nation’s phenomenal growth dating to the economic reforms in the 1980s.

Many analyst believe that China can avoid the bubble economy and collapse that Japan experienced because: 1) household and corporate debts is much lower in China than they were in Japan in the 1980s; 2) China is an earlier stage of economic development and can grow faster, longer before overheating; and 3) the government is already taking measures to reign in property prices.

“China Will Face Crisis Within 5 Years?

In January 2011, Bloomberg reported, “Global investors are bracing for the end of China’s relentless economic growth, with 45 percent saying they expect a financial crisis there within five years. An additional 40 percent anticipate a Chinese crisis after 2016, according to a quarterly poll of 1,000 Bloomberg customers who are investors, traders or analysts. Only 7 percent are confident China will indefinitely escape turmoil. [Source: David J. Lynch, Bloomberg, Business Week January 26, 2011]

Fifty-three percent of poll respondents say they believe China is a bubble, while 42 percent disagree. China’s neighbors are the most concerned: 60 percent of Asia-based respondents identified a bubble in the world’s second-largest economy. Worries center on the danger that investment, which surged almost 24 percent in 2010, may be producing empty apartment blocks and unneeded factories.

“There is no doubt that China is in the midst of a speculative credit-driven bubble that cannot be sustained,” says Stanislav Panis, a currency strategist at TRIM Broker in Bratislava, Slovakia, and a participant in the Bloomberg Global Poll. Panis likens the expected fallout to the aftermath of the U.S. subprime-mortgage meltdown.

Any Chinese financial emergency would reverberate around the world. If China stumbles, the global economy will feel the impact, says Suresh Raghavan, chief investment officer for Raghavan Financial Inc. in Houston. “If China is successful at lowering growth rates to 7 percent, it will still feel like a recession for a lot of people around the world,” he says.

Pessimism About the Future and Chances for Social Unrest in China

China Geeks reported in 2011: “The economy may be growing, but so are prices, and salaries generally aren’t. Local government’ budgets are so dependent now on profits from land deals that, combined with the wave of infrastructure being developed, more people than ever are being forced out of their homes, and many of them are unhappy about the terms of compensation. [Source: China Geeks, May 27 2011]

Against this economic backdrop, the social situation has also worsened. The internet has brought increased freedom of speech, but with it, news of corruption and malfeasance has spread quickly, as has frustration with the increasingly obvious and draconian censorship1. Perhaps there’s no more evil happening than there was five years ago, but now when something happens, news of it is across the country within thirty seconds because someone there has a camera, a smartphone, and a Weibo account. People are growing jaded and, increasingly, angry.

China’s Megatrends: The Eight Pillars of a New Society

Book: John and Doris Naisbitt, China’s Megatrends: The Eight Pillars of a New Society (New York: Harper Business, 2010).

In their book, China’s Megatrends: The Eight Pillars of a New Society , futurologist John Naisbitt and his wife Doris argue---at length---that westerners can’t understand China because they are blinded by their own values, which are inappropriate for seeing what is actually happening in China. Their solution is to see China from the inside-out by listening closely to Chinese voices and the positive stories that they tell. [Source: William A. Callahan, China Beat, November 15, 2010, William A. Callahan is Professor of International Politics at the University of Manchester and author of China: The Pessoptimist Nation (Oxford University Press, 2010)]

In 2007, the Naisbitt’s founded the Naisbitt China Institute in Tianjin. Since neither Naisbitt speaks Chinese, they hired dozens of students and instructed them to comb provincial newspapers for the facts of the dramatic changes taking place in China. Using this pile of “objective facts” to understand China in a new way, the Naisbitts come to this exciting conclusion: “China in 2009 was creating an entirely new social and economic system---and a political model, which may well prove that “the end of history” was just another pause along history’s path.”

China’s Megatrends describes this new model of governance in terms of eight pillars that hold up China’s new society: 1) Emancipation of the Mind, 2) Balancing Top-down and Bottom-up, 3) Framing the Forest and Letting the Trees Grow, 4) Crossing the River by Feeling for Stones, 5) Artistic and Intellectual Ferment, 6) Joining the World, 7) Freedom and Fairness, and 8) From Olympic Gold Medals to Nobel Prizes.

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Yomiuri Shimbun, The Guardian, 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 November 2011

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