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2 Problem not China's markets - it's
China's model By Scott B
MacDonald
NEW YORK - In late February, the
global stock-market meltdown started in Shanghai.
The New York Times noted on March 4, "Less than a
week ago, it might have seemed preposterous to
suggest that a 9% fall in the Shanghai Stock
Exchange could jolt markets across the world,
triggering declines in everything from
European stocks to American
corporate bonds."
Yet there it was - a bad
day in Shanghai shaking up global markets.
Although the great revolutionary helmsman, Mao
Zedong, had hoped China would shake the world, he
would have been very surprised it was the Shanghai
Stock Exchange, and not the Red Guards, that did
so.
While considerable attention is given
to the rough-and-tumble nature of China's stock
markets, more concern should be devoted to the
growing need for Asia's largest country to change
its economic model. Without changes, China
increasingly runs the risk of a major crisis that
will encompass a harsh economic downturn as well
as socio-political upheaval. Such a turn of events
would have repercussions everywhere, considering
China's importance in the global economy.
By any standard China has been remarkably
successful - its long-term economic expansion
pulled more than 200 million people out of poverty
over the past 30 years. Per capita income is
approaching US$2,000 a year, and the population is
moving into the automobile age. It is also a
member of the World Trade Organization, and most
Fortune 500 companies are actively engaged in the
China market.
Like it or not, it is
difficult to ignore China, considering its
substantial role as the world's workshop. China
boasts of low wages and high-quality work
conducted by a well-disciplined, educated and
non-union workforce. This has proved to be a
powerful combination and allowed China to carve
out considerable market share in businesses
including textiles, car parts, and industrial
machinery.
China's economic model is
oriented toward absorbing migrant rural labor into
capital-intensive, export-geared manufacturing
industries. Along these lines, there has been a
steady shift of population from the countryside to
the city. This creates a floating workforce of
anywhere between 60 million and 100 million
people.
It has made a reserve labor pool
that keeps wages low while maintaining a major
competitive advantage for China in international
markets. Chinese economic policymakers have built
on this cheap-labor system with tax rebates,
systematic underpricing of energy resources, and
the undervalued exchange rate. And the foreign
investment has come - by one calculation, about
$700 billion has entered China over the past two
decades, setting up factories, creating
distribution networks, and training local
workforces.
China's success has not come
without controversy. As its cheap-labor export
model gained momentum and captured market share
starting in the 1980s, other countries lost out,
ranging from the US, Japan and the European Union
to Mexico, Malaysia and Thailand. China currently
has one of the largest trade surpluses with the
United States and is identified by many US
businesses and workers as a stealer of jobs, armed
with unfair trade practices. In particular,
complaints highlight the turning of a blind eye to
massive copyright infringements worth billions of
dollars in lost revenues for US companies and an
intentionally undervalued currency-exchange rate.
The last has become a major point of
contention between China and its major trade
partners. The US-China Economic and Security
Review Commission noted in 2005: "China's
undervalued currency encourages undervalued
Chinese exports to the US and discourages US
exports because US exports are artificially
overvalued. As a result, undervalued Chinese
exports have been highly disruptive to the US and
to other countries as well, as evidenced by
trade-remedy statistics."
This has echoes
in the Democratic-controlled US Congress, where
more protectionist legislation is being
considered. Democratic Congressmen Sander Levin,
chairman of the House of Representatives Ways and
Means Committee's Trade Subcommittee, stated in
March: "Our trading relationship with China is
unbalanced and unsustainable."
China's
rising economic power has also made its presence
more evident in the far reaches of the planet.
This includes a natural-resource-driven foreign
policy that is putting China in bed with unsavory
regimes in Africa such as Sudan and Zimbabwe, and
industrial pollution that is seeping across
national borders. Consequently, China's success is
also leading to problems in how it interacts with
the rest of the world, especially as it is
regarded less as a "developing" country and as one
of the rising economic powers.
Why
change is needed Although external pressure
is an important factor in why the Chinese economic
model needs to change, domestic reasons are more
significant. In particular, China's model has
resulted in profit and taxes growing faster than
wages, which has concentrated economic power in
the hands of companies and the government.
The losers in this exchange have been the
workers - wages have declined as a portion of
gross domestic product in recent years. According
to the World Bank, the share of wages in the
Chinese economy declined to 41% of GDP in 2005
from 53% in 1998. In comparison, wages account for
57% of GDP in the US. In addition, while savings
are high, consumer demand is constrained by
concerns about poor insurance and costly health
care.
Failure to make changes increases
the probability of a major economic and political
meltdown over the next few years. For all of its
success, China's economic development remains
fragile. Asia's largest country is going to have
problems with adequate water supplies, energy, the
environment, and income disparities. In addition,
the banking system remains opaque and has extended
considerable credit to fuel the building boom
leading up to the 2008 Summer Olympics. All of
these are underlying weaknesses, but if there is a
major slowdown in growth, the workers are likely
to be the ones who take the brunt of a downturn.
One possible flashpoint is in how China
reins in the current economic and investment boom.
Real annual GDP growth in the 2004-06 period has
been more than 10%, and investment has flowed into
construction, real-estate markets and industrial
inventory. Easy bank credit has also meant many
first-time borrowers putting their money into the
stock market. One observer noted: "Mortgage
applicants often conspire with real-estate agents
to secure home loans before shifting funds to a
third-party bank account."
That loan often
goes into stocks. According to Yin Jianfeng, a
researcher at the Chinese Academy of Social
Sciences' Institute
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