Dr. Ashwani Mahajan
Markets around the world today are shadowed by Chinese goods. Electronic goods, from laptops, televisions, cell phone to pen drives, toys, clocks, etc., most of the items are `Made in China’. Chinese companies are securing contracts around the globe on a large scale for bridge construction, telephone exchanges, electricity generation and other types of infrastructure. In the last two decades, the Chinese economy is moving ahead on fast track. Sometimes China’s growth rate has been reportedly exceeded 14 percent, however on an average China’s GDP has grown at the rate more than 10 percent in the last one decade. This fast track growth itself is turning out to be major problem for the Chinese economy and making policy makers worrisome. The Chinese economy in the past used to be centrally planned economy, driven by public sector enterprises. In the last about two decades it has shifted rapidly to market forces. Despite Chinese government’s effective control over the economy, the market has been the driving force of Chinese economy in the last couple of decades.
Some days back International Monetary Fund (IMF) reduced the estimates of Chinese GDP growth rate to 8 percent. For India too, IMF has reduced its estimates to 6.1 percent. Whereas the rate of growth has been rallying between zero to 3 percent in the developed countries, economies like India, China, Brazil etc., growing between 7 to 10 percent, are not only raising the global production, but are also increasing their clout internationally. Chinese economy today stands at second position in the world in terms of economic power, only after USA; US intelligence agency has rated Indian economy at third position in the world in terms of GDP using purchasing power parity. It is believed that if Chinese economy continues to grow at present rate, it may surpass that of US economy by 2025.
However, China has been passing through economic recession for the last more than one year. According to the official estimates released in China, Chinese growth rate in GDP has been 7.6 percent in the second quarter of 2012 (April to June 2012). Fact that is more interesting is that Chinese growth rate has been receding consecutively in the last 6 quarters. As a result, however IMF has reduced the estimates of Chinese GDP growth to 8 percent, Chinese government has reduced its estimates even further to 7.5 percent. Market-based capitalist economy is an economy, where to maintain a grip on the market and sustain demand whether external or domestic, it is imperative to create additional capacity and supply new types of products. However, if demand disrupts due to any reason, problem of excess capacity will crop up. China is grappling with a lack of overseas demand due to global recession.
Global Recession and China
USA is yet to overcome from the impact of recession, which raised its ugly head in 2007-08, European Union has dipped into worst ever economic crisis. Greece is under severe sovereign crisis, whereas Italy, Portugal, Spain etc. are fast getting into economic problems. Unity of European Union is under threat and EU can disintegrate in no time. There has been a severe pressure on governments of these countries to reduce government expenditure. Income of people has been going down, causing down trend in demand. Chinese economy, which primarily depends upon foreign demand, has been facing decline in their export demand. Chinese policy makers see a silver line in this demand recession, as it may ease inflationary pressure, which may help raising domestic demand. Increase in domestic demand way help fighting the problem stemming from economic slowdown in European Union. However, there are other issues also, which would be difficult to address by Chinese policy makers. One of such issues is declining foreign investment into China. Though China continues to be the most attractive distinction for foreign investment, but foreign investment declined by 3 percent last year. Restrictions to own a second home in China, has also influenced foreign investment in real estate.
Further, economists generally do not believe the data given by Chinese government. They take this data with caution and try to use other proxy indicators to gauge to truth. Some economists believe that rate of growth of Chinese economy may still be lower than the official revelations. They base their estimates on electricity production, rail transport and building activities data. In May 2012, Chinese exports were down by 11 percent and imports too were down by 6 percent.
Other Causes of Slowdown
Not merely because of reduction in foreign demand, Chinese economy suffers from weaknesses, inherent in the structure of Chinese economy. Chinese development so far, has been based on infrastructure investment. Chinese economy could develop itself as an export based economy, only based on heavy investment in the infrastructure sector. Today Chinese high ways are second in the world only after USA. However, this has slowed down significantly; as these activities cannot go on indefinitely.
Chinese industrial development so far depended upon large-scale migration of labour from rural areas, which could be absorbed in industry. Approximately 15 to 20 crore rural people have migrated to urban areas in the last two decades. This helped industrial development ensuring the supply of labour. According to an estimate, now merely 1.5 crore people are left unemployed in rural area, who can migrate to urban areas. However, after they are exhausted, new employment in industries would be difficult. In addition ‘one child norm’ adopted by Chinese government has led to reduction in new addition to labour force and number of senior citizens is on rise. Today number of people above 60 years is 12 crores and this number is constantly rising.
Due to consumerism in China, Chinese households have been borrowing heavily; even Chinese companies are under heavy debt. Under these circumstances, it would be hard to increase a demand in the Chinese economy by raising the quantum of credit in the system. It is interesting to note that in the last one year, despite the easing monetary policy in China, borrowings/credit has not increased in any significant manner.
Only last year China reached the level of per capita income at 5,000 US$. This has resulted in raising the cost of living and thus cost of production. There are many countries, where per capita income is very low and they can give tough competition to the Chinese economy, riding on the strategy of export based economy.
So far, Chinese model has been that of excessively controlled economy model. Chinese policy makers believed that they could raise the growth rate at their wish through this controlled economy model. Nevertheless, recent experience has disproved this belief and Chinese economy affected by global upheavals, has started receding in fact.
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