The recent shocks at Shanghai Stock Exchange were only minor corrections in what appears as an unsustainable race toward accelerating growth. Although minor, they call for an appraisal of the development potential and the emerging contradictions of such a large country, which Europe and Italy still have to learn how to deal with. Is China as weak giant? Is it a great business opportunity but also a threat to Western prosperity? Does unstoppable growth hide financial vulnerability?
Today, China already counts as the third economic powerhouse of the world, behind the US and the EU, and it is estimated that China’s GD, when measured with the method of purchasing power parities, will overtake the United States’. High household savings (dictated by the dearth of state-funded social security) and high unpaid dividends (profit margins have doubled in the corporate sector over the last five years) make possible the financing of huge inflows of foreign investment, which have reached 40% of GDP. These in turn have speedily expanded industrial capacity, and are a major factor in the attainment of two-digit growth rates for domestic demand and exports. Each year 20 million new jobs must be created, in order to absorb rural migration, lay-offs from inefficient state-owned firms, and the entry of young people in the labor market.
What’s the other side of the Chinese coin? A vast but unspecified amount of bad loans toward large numbers of substantially bankrupt firms: major real estate bubble and stock market bubbles have dangerously inflated investors’ assets, who have slavishly followed Deng Xiao Ping’s famous dictum: “To get rich is glorious”. Also, the Chinese social security system is on the verge of collapse, amid low public transfers and an aging population, which point to the future boom of private pensions supplied by trasnational insurance companies (such as Generali).
The staggering growth of the richer Eastern coastal areas has created a yawning gap between urban and rural incomes (on average, they are 8:1), while forced industrialization (energy, steel, heavy chemicals) and real-estate speculation expropriates landholdings held by paupers. These outcasts fight back with extensive rioting, which the corrupt local bureaucracy mercilessly puts down by employing military police. Chinese law acknowledges the tenancy of land, not its property, thus tenants still cannot dispose of their landholdings.
The number of Chinese living in extreme poverty (less than two dollars a day) has dropped by 200 million over the last two decades, but rural poverty still remains a huge problem. Truancy rates in junior high schools reach 30-40% in rural areas. Infant mortality rates are at US levels in Shanghai (0.8%), but are as high as 6% in the rural province of Guizhou.
R&D spending is growing by 20% per year in China, as opposed to 4% in the US. Since 2004, the United States exhibit trade deficits with China in many technology sectors. Since 1978, China has been the recipient of $500 billion in direct investment, ten times the amount received by Japan in over half a century. Firms with non-domestic capital (including many of the Chinese Diaspora) generate as much as 55% of Chinese exports (and up to 80% in medium-high technology manufacturing). Starting from ICT industries, Chinese manufacturing is expanding into a wide spectrum of high-innovation sectors, such as mobile telephony, missiles and aerospace. In 2004, China graduated 600,000 graduates in computer science. The corresponding figures were 350.000 for India and just 70,000 for the US.
by Fabrizio Onida,
Full Professor of International Economics and President of CESPRI,
Bocconi's research center on innovation and transnazionalization.