JOIN USWhat ails the Chinese economy?
Nations everywhere are struggling with their economies. China is no exception. However, China has bigger worries now. Behind the glitter of its new status as the second largest economy since 2010 (with $14 trillion in GDP in 2019), the sobriquet of ‘manufacturing hub’ of the world, the skyscrapers and fast-paced urbanisation, having the world’s largest foreign exchange reserves ($3.2 trillion, down from $4.2 trillion a few years ago), 28,000 km of high-speed railways, or even the high-pitched sales on Singles’ Day, China’s economy is sliding down to nearly half its growth rates of the previous decade.
The International Monetary Fund estimates China’s growth rate in 2020 at about 5.8%, well below the peak Chinese official figures of nearly 14% in the early 1990s and over 10% even as recently as 2010. GDP growth rate has been an obsession with China’s leadership, given its direct impact on employment. For instance, it was estimated that for every 1% decline in GDP, 8 million people lose jobs.
Firstly, the long-awaited fourth plenum of the Communist Party, held under “increasing risks and challenges at home and abroad” in October 2019, nearly two years behind schedule, had emphasised on the “dominant role of the public sector,” to the chagrin of the private sector which constitutes more than half the GDP of the country. Previously, under the third plenum in 2013, privatisation had become the watchword but soon, the state-owned enterprises were singled out by the 19th party congress, which also vowed to make them global entities. The private sector – although effectively under Communist Party control under the rubric of “socialist market economy” – has been complaining of lack of credit availability, which is allocated mostly to the state-owned enterprises.
Secondly, under the 12th and 13th Five Year Plans, China began restructuring its economy from export orientation – due to western (and even Indian) criticism on unfair trade deficits, lack of market access, currency undervaluation, etc – to domestic consumption; from the smoke-belching manufacturing sector to the service sector, and in 2015 from demand side to supply side structural reform. However, this is only work in progress, with less than half of the GDP coming from domestic consumption, although the service sector has risen. Domestic consumption has been offset by rising household debt, and cumulative debt (including the largest component of local governments debt) is estimated by the IMF to be over 72% of GDP.
Thirdly, more Chinese are living in urban areas today, up from less than a quarter of the population when reforms began in 1978 to over 60% in 2019. Urbanisation resulted in the real estate boom and in the “ghost cities” – with over 180 million housing units remaining unsold across China.
Fourth, as wages rose over time, the rate of migration from rural areas began to rise substantially. However, the household responsibility system, evolved since the 1950s to restrain movements of people, has now become problematic. While reforms are being announced and this hukou system is to be cancelled in cities with less than three million, progress has been tardy.
Fifth, economic growth also brought in income inequalities between rural and urban households, with Gini Coefficient indicators of above 0.5 becoming alarming recently and with consequences for social stability. Over 53% of rising “mass incidents” – protests across the country -- are related to economic distress caused by the restructuring of the economy in China today.
Sixth, as it fights the slowdown, China is also facing another structural headache – the ageing of the population. While currently the average age in China is 36 – compared to 26 in India – those over 65 years of age are increasing in numbers. While the contentious ‘one child’ policy has been relaxed in bigger cities like Shanghai, it still poses a major demographic crisis for China.
(Srikanth Kondapalli has been Peking behind the Bamboo Curtain for 30 years @SrikanthKondap8)