It is no secret that China is the most highly developed country of all time, but the question is will all of China's earlier successes come back and blow up in their faces?
Why is Chinese economy in so much trouble right now? This shouldn't come as a surprise if you have been watching China over the last several decades you can understand how the current problems fallout from their earlier success. In "China's Political Economy" David mentions "China's national leaders make a huge difference in the country's economic fortunes as their preferences for different developmental strategies and policies have shaped China's trajectory. And leaders use their power to press their preferences. Every leadership change in China, including subtle shifts of power from one leader or faction to another influences public policy (Zweig. 231 - 247). The reforms started to bear fruits in the 1970s. At that time Chinese per capita was only a few hundred dollars a year, and almost everyone is impoverished. People would ride bicycles rather than drive cars, and even starvation was still a possibility. So then China begins to introduce more private property, more capitalistic incentives and it also privatized some of its agriculture. And this allowed more manufacturing, more exporting. Overall, China starts moving towards being a more modern economy. And once these reforms were underway China was growing at an astonishing rate. "China's economic boom that began in the late 1970s has led to a spectacular growth in national wealth and improvement in the standards of living for the large majority of the population. But particularly in this century, it has also led to the appearance of multiple and deep inequalities in the country. Several of the chapters in this book touch on this problem of inequality in the contemporary People's Republic" Says Lanqing in The Birth of China 's Opening-up Policy.
For the last about 35 years, China has been going around 10% a year. That is amazing considering the number one country (United States) only grows at approximately 2% a year. Having 10% per growth per year means that the increase doubles every seven years. If you go back and revisit China, it's as if every 7-10 years you get to see an entirely new country. Economists believe that China has grown at a pace that no other country can match; even a year to year, parts of the neighborhood in the city can transform before your eyes. You witness a growth that took centuries for other countries happening in few decades. You see human hope, faith, progress and a deep underlying optimism about what is possible. In the political economic reform era "The second wave of reforms emerged in 1984-1985. Fourteen more coastal cities were opened to foreign trade. Scientific institutions and universities were encouraged to work with enterprises and keep the profits. Universities were allowed to link directly with universities overseas. Foreign trade controls were decentralized to city governments. According to David in his journal (Internationalizing China) efforts were made in the cities to invigorate state-owned enterprises, which were responsible for most industrial output in China. Central planning was curtailed; as long as firms fulfilled their yearly targets which stipulated what goods they had to sell to the state and at what prices. Chinese economy during these years of rapid growth had some very notable features on its levels of savings and investments, and they built lots of infrastructures. And those were all very positive; it's wonderful how good the infrastructure is in China. But here's the thing, for a long time China has been investing almost half of its GDP every year and to do that on a consistent basis is very hard. In the early years of China's economic growth, the required investments were pretty simple and precise. They mostly needed transport infrastructure and invest in real estates. The Chinese government did an excellent job at all of those things. It's a big reason why China's growth has been so strong. Decision making is a big challenge in China. There is no checklist of the things that need to be done and the prioritization of resource allocation. China has been great at that. Now, a lot of that low hanging fruit is gone, a lot of the infrastructure that China needs has already been built, due to this, their economy needs more complex investments like better healthcare, better retail services, they need more startups. And in these areas, there's not a simple checklist way to get it done. That brings us to our "third wave of reform opened all of coastal China to the global economy. This "Coastal Development Strategy," including the establishment of over 6,000 foreign trade companies (FTC), really marks the beginning of China's export-led economic growth, which continues today. China's rural industry-which had expanded significantly after 1984-became a driver of China's export boom" stated in China's political economy, 195.
It's not just a question of the one resource at the problem; you need more trial and error, more experimentation, more of a market discovery process to figure out which of the profitable investment us and which are the unprofitable investments. And it's hard to plan and manage those the same way the Chinese did that with all of their infrastructures. Here's another problem with the Chinese economic model, if your economy grows 10% a year for so long, businessman and also your government they start to their isn't much risk. At 10% growth there so much forward impenitence, it is possible to have poor business planning and execution, leading to many debts but still have your business running and make revenue. So what happens is the underlying economy starts to lose some of its disciplines, people start to get sloppy, people don't have control, and some may overextend. They think they can make any investment or any decision and somehow it will pay off because of the 10% growth from the economy.
"In any case, changes in the global economy have compelled China's leaders to think seriously about shifting the country's engine of growth from exports to domestic consumption. China's savings rate is between 30 and 40 percent-very high in comparison the United States, where for several decades, personal savings higher before tumbling to below zero in the run-up to the financial meltdown in 2008-2009" says the China's economic. 113.
A turning point for the Chinese economy comes in 2009 when there are a significant recession and so many other parts of the world. At the time a lot of observers thought, well there's going to be a considerable recession in China too, but there wasn't. The Chinese government took some extraordinary steps to avoid and or to postpone that recession. So the Chinese government spent a lot more on infrastructure, were less support was called for. The Chinese government, the state on banking in the state-owned companies, acted in concert to encourage borrowing which boosted investments and kept the economy running at a higher level but the only downside was that rose to a point where it was too high to where it was that relative to the rate of return. Toto Chinese that of all time is well over 200% of GDP possibly as high as 300% of GDP and maybe that can work when you underline growing point is that a rate of 10%. As your underlying growth fall, it's harder and harder for that debt to be sustainable. The question is how much is China growing today? The Chinese government in 2015 made it clear that China was still growing at about 7% a year. Not many external observers believe this because they are looking at other pieces of data no one is sure what the real rate economic growth is. But what we know is the right is sharply lower in China is answering the great recession. Five issues can be considered when tracking the recession. The real estate bubble, the stock market bubble, the excess level of meaning the support that, the excess capacity with Chinese businesses and finally the risk of capital flight. The first of these is the real estate bubble, China's property prices became too high in many Chinese cities and Chinese overbuilt. "The pace of land expropriation for development within China has become so intense that the PRC is now looking overseas for food and farmland. Growing gaps between rich and poor people, among regions, and between the cities and the countryside have reached dangerous levels. A lack of social welfare policies means that most citizens fear medical bills that could bankrupt their families, while workers fear retirement. Finally, according to Lardy in integrating China into the Global Economy, a property bubble has priced new apartments out of the reach of China's rapidly growing middle class, which could undermine some support for the CCP.
The Chinese stock market bubble is another potential problem, for a while, the Chinese stock prices rose but later faced a rapid fall. Many people bought stock on margin. The ratio of costs to corporate earnings has been extremely high, and probably those stock prices will continue rapidly. And that would consumers spending lower the confidence, and it also will be a problem for some banks. The third issue is municipal debt; no one knows precisely how big a problem this is. We do know that Chinese municipal governments were not supposed to be able to borrow money, they were supposed to run on balanced budgets, but in turn, they ended up borrowing money from other sources. And they were encouraged by the central government to do this to keep up that expenditure on all the info structure. "The economies of developing countries are dominated by the primary and extractive sectors-agriculture, raw materials, and natural resources. Most laborers work in these sectors, where returns on investment are low. According to Fan Yongming, Economic modernization expands industry, services, transportation, and utilities; it transfers labor from low-skilled to high-skilled jobs; and it directs investment into science, technology, and education. While the shift from agriculture to industry forms the first stage of development, the growth of the service sector, such as banking or insurance, often heralds the next step in the modernization of the economy.
The problem with that is they borrowed more than they could pay. This forces the central government to bail out the municipal governments. Another big problem in the Chinese Government is called the excess capacity, that into many sectors you have too many firms, and you have too much overconfidence and too much stimulation of investment. And a lot of those companies are probably not profitable. Some of those companies I just being kept afloat by cheap credit from Chinese state on banks or they might be Chinese state-owned companies themselves which have political privileges of various kinds. A lot of those companies right now they're not making productive investments and the kinds of things that Chinese consumers want. If you look the index for producer prices in China, that's one measure of this excess capacity. That index has been falling now for over three years running, and it's been falling every month. That's a sign that too many producers goods have been built for what can be sustained profitably. So the biggest potential problem would be the capital flight, there is a risk that capital with and China foreign capital but especially the Domestic capital six to leave the country out of fear of China's economic problems. If too much of this capital leave the country that makes the problem is much worse, as we saw with the Asian financial crisis of 1997. The big danger in China is simply that capital flight accelerates, but in the meantime think about the problems that to the Chinese government was trying to manage all this. There are a lot of firms which are no longer profitable, but the government ca...
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