Is the Chinese Growth Miracle Over ?

Too Much Export Dependence and Too Less Internal Consumption

The first reason why many experts including Paul Krugman believe that the Chinese economic miracle is over is because of the overreliance on exports that underpins the Chinese growth model. Especially when one considers the fact that China exports to the US and the Europe that are now in recession, the scenario is one where the falling exports to these regions means that China cannot sustain its growth story. Added to this is the fact that the export-based model of growth fails to account for cyclical business trends which means that as there are ups during periods of high growth, there are downs as well during recessions.

In other words, overreliance on exports is costing China as the business cycles in the West are now in downturn mode, which means that China cannot derive significant revenues from the West.

The other aspect about China is that it has low internal consumption, which means that the goods and services that it makes are essentially for exports and when exports falter, it cannot replace them with internal consumption. This means that in the present scenario, China is saddled with excess inventory and over production of goods and services that has nowhere to go. As many experts have pointed out, this has resulted in the buildup of excess capacity and with low demand, the costs entailed with regards to servicing these aspects is now going up.

Unreliable Statistics

The second reason why many western analysts believe that China might be in for a hard landing is the unreliability of the statistics put out by the government in China. To take one example, the latest figures for GDP (Gross Domestic Product) growth in China show that it has registered an increase of 7.2%. However, the rate of increase of consumption of electricity has grown by only 2.4%, which casts a doubt about the official growth figures. The point here is that any economy cannot grow at these rates when the consumption of the electricity which is necessary for production has grown by so less a figure. Apart from this, the other aspect is that the size of the Shadow banking industry in China has never been estimated accurately and reliably and this means that when the inevitable crisis strikes, the western analysts can only guess at what has caused the crisis because of paucity of data. Further, the Chinese growth statistics cannot be tested independently by Western analysts as the political system of authoritarianism maintains opacity about the actual figures pertaining to economic growth and consumption patterns.

Inflation and Unemployment

The third reason that is sending alarm bells tolling in the west is the high rate of inflation coupled with an equally high unemployment. As mentioned earlier, the Chinese growth model suffers from too low internal consumption and this has meant that in the aftermath of the 2008 crisis, the Chinese government engaged in a massive stimulus program aimed at kick starting the economy. The after effects of this are that there is too much liquidity that has resulted in high inflation. However, at the same time, the level of unemployment is also high because of the buildup of excess capacity. As the Chinese government is terrified about the social aspects of high unemployment, which are social unrest and social strife, it is in a balancing act of ensuring employment by stimulus programs that are manifesting in high inflation. As any economist would tell you, the combination of high inflation and high unemployment is a situation that is ripe for disaster.

Concluding Thoughts

Finally, whether China cools down or lapses into slow growth, the fact remains that it has to grow at least 5% every year as without that growth, the country risks falling into an abyss like the other developing markets like India and Brazil where popular anger and social unrest have become common because of the bursting of the economic bubble.

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