The Chinese Economy on a Rotten Foundation (Part I)

Qingxi Zhang
Professor of Economics
National Taiwan University
Taiwan, ROC

For the most part I have been too preoccupied with the looming problems of Taiwan's economy to give any regard to that of China's. Recently I have become more and more interested in the Chinese economy, as I have seen its large impact on Taiwan.

I have reviewed many documents about the problems of the Chinese economy and through my research I have found that the current problem is very serious. At any given moment the Chinese economy could potentially collapse. However, several respected experts of the Chinese economy have rejected this view.

Some say that if the Chinese economy were to collapse, it would have collapsed a long time ago. Since China has been able to avoid this so far, it actually proves that the society has come to adapt. Therefore the problems, which would have plagued any other society, no longer pose a great threat to the economy.

Others say that the Chinese government is centralized and has tight control on the local governments. This prevents China from economic turmoil. In addition, some refer to the fact that the Chinese government owns all the land, and if problems were to become severe enough, they could always sell the land as a last resort.

Many studies have been conducted to compare the economic transformation of the Soviet Union and China. They show that China has been successful in the transition into a communist society in comparison to the USSR. Some optimistic views believe that China will become the factory for the entire world and will become a world power.

On the other hand, there are people who believe that the Chinese economy will someday fall. As time has passed, more and more people share this view. Regardless of the differences between the two arguments, they agree that there is an impending economic problem in China.

1) The Chinese Economy on the Surface

Ever since the Chinese leader Deng Xiaoping started the reforms in 1978, China has experienced twenty years of economic growth. In between, the economy was able to endure events such as the Tiananmen Square student movement and the 1997 Asian Financial Crisis. Even after several industrial Asian nations suffered negative growth in 2001, China still experienced a steady 7%-8% in growth. In 2002 China saw a round of foreign investments when the country formally joined the World Trade Organization (WTO). Many that have recently visited China found that the country is in a state of widespread new construction and overall development of the country has been very progressive.

In October 2002, China's Department of State, office of economic study issued an internal report. In the report, it disclosed that China was economically healthy and was in a period of optimal stability. It is projected that within the next ten to fifteen years, as long as there is no big change in the international economic environment and no major policy mishaps, China would be able to maintain a constant growth rate of 7%-8%. By 2015, China would surpass Japan in its combined economic strength, and take second place as a world power. The average income would equal that of mid level European countries.

Speeches that discussed the economic growth from various Chinese leaders were filled with confidence. Many foreign investors, who have benefited from special treatment by the government, believe that China is an investor's paradise. China's economic growth has made a positive impression on many people.

Despite what it appears to be on the surface, there are still problems underneath the progressive growth. They are found in the areas of economic growth, foreign investment, trade, finance, banking, state ownership, unemployment, income distribution and social factors.

2) The secrets of the "progressive growth"

In 2001, the Taiwan economy encountered its first negative growth since the 1960s, as unemployment rates hit a record low. Singapore, with the healthiest economy in Asia, experienced a negative growth as well. Economies around the world also experienced negative growth during the same year. Only China at that time kept a 7.3% growth rate.

There were two problems in this growth rate. First, it contradicts other economic measurements and as a result people began questioning its validity. Second, could the totalitarian regime be using the high growth rate, like the former Soviet Union, to hide its impending collapse? Even if the 7%-8% growth rate were indeed correct, it is minimal in comparison to other Asian countries. Japan kept an 8% plus growth rate throughout the 50s and the 60s. At the same period of time, Taiwan kept a 10% growth rate. South Korea has also kept a 9% growth for past thirty years. In addition, the average income in China is still lower compared to the income of those countries at that time.

One of the experts on the matter is Professor Thomas Rawski from Pittsburgh University.

The reform has spurred a high growth rate from 1978 to 1997 and there is no doubt about this. But the growth rate of 1998 is one that is hard to believe. The reason is simple: for a fast developing country like China, it is impossible to grow at such a high rate (GDP has accumulated 24.7% in growth between 1997 and 2000) and at same time drop energy consumption (Energy consumption had negative growth of 12.8%). The growth rate for transportation, such as the airlines, highways, and trains are lower than GDP growth rate. Also consumer prices have fallen and the unemployment rate has continued to rise.

When calculating average income for this period, the statistic bureau of China did not include reports from the local provinces. In 2001, with the exception of the Yunnan province, all the local provinces reported growth rates higher than that of the national average. Upon further investigation, the bureau of statistics found 62,000 false reports between the months of May and October (Rawski 2002).

In addition, there are also others who question China's growth rate. These include: Lawrence Klein, winner of the Nobel economics prize, Lester Thurow of MIT, Lehman Brothers of the Economists Magazine, the Moody's credit agency, etc. (GaoShang 2002).

Lester Thurow pointed out that 80% of China consists of rural areas that have virtually no growth. Since cities only occupy 20% of the country, the urban areas must grow substantially in order to achieve national growth of 7%. Keep in mind that in 2001 Hong Kong and the Chinese financial center experienced virtually no growth. How could other cities experience such a fast growth rate? Arthur Waldron reminds us that Rongji Zhu once stated in public, "If the government had not initiated a large amount of capital borrowing, the Chinese economy would have already collapsed in 1998." Is it possible to reach a 7% growth rate based upon government borrowing?

In addition, China has a large quantity of unsold merchandise. According to studies conducted from 1980 to 1993, unsold merchandise accounted for 7% of the GDP (Sachs, Woo, Yang, 1999). On average, a country rarely exceeds 3%. In comparison to Taiwan, the unsold merchandise made up 1% of the GDP throughout the past fifty years. With a conservative estimate, China's unsold merchandise count is currently at least 4%. Respectively, 4 points would then be deducted and reduce the growth rate to 3%. According to internal documents, the state owned enterprises hold several billion in yuan of unsold merchandise (QuShan 2002).

Foreign experts are not the only ones presently who question the economic growth. China's own experts are puzzled by this phenomenon, as well. Punai Dong, deputy director of the economic committee of the People's Political Consultative Conference, mentioned eight major problems of the Chinese economy: (1) the economy is growing at a fast speed, but the price of the commodities continues drop and the unemployment rate is constantly rising; (2) housing prices still hold an upward trend, causing the gap between the rich urban areas and poor rural areas to widen; (3) Bank deposits increase, but some corporations are short on capital; (4) governmental officials received salary increases, while the deficit, especially severe in some areas, is on the rise; (5) Since September of 2001, the overall deficit trend continues to be strong; (6) as the coastal cities boom, a gap in growth of many inland cities is developing; (7) Natural resources are progressively becoming short in supply and waste disposal is becoming a progressively bigger issue; and (8) environmental pollution continues to increase.

According to Rawski's estimate, during the years of 1998 and 1999, China's growth rate fell between 2% and -2%, 2-3% in the year 2000, and 3-4% in 2001. The estimates from other economic officials vary insignificantly. Governmental officials and scholars of China have tried to provide an explanation on this issue, but it is difficult to discern the validity of their responses.

(To be continued)