Will China’s Growth Ever End?

Beijing may be the most inhospitable place on earth right now due to extremely high concentrations of pollution particles.  Residents of the capital city have been advised to remain indoors if at all possible and wait for weather systems and winds to carry the pollution away from the city early this week.  Yet, Beijing’s pollution is proof of just how successfully China has grown.  Success in manufacturing over the past decades transformed Chinese cities into centers of industry and therefore attracted millions of residents, swelling the urban population.  Urban growth accompanied ever-growing demands for energy, which the regime met by building coal-burning power plants as fast as possible.  Coal plants are one of the two major contributors to Beijing’s air troubles.  The other major contributor is automobile exhaust.  As cities developed and industry grew, a new middle class rose and quickly caught the car bug.  Just as with power plants, Beijing (and every other Chinese city) has been building roads as fast as possible to meet the pressure created by millions of car owners.  As unfortunate as it is for Beijing residents, the current filth in the air is proof of China’s success.

China entered 2012 with predictions that the country may soon face recession.  Chinese imports were not as in demand as in past years and domestic consumer demand was insufficient in making up the difference (Beijing has done everything possible to get Chinese consumers to buy domestic products, but those with disposable income still disproportionally choose foreign products whenever possible).  The first, second, and third quarter of 2012 all had the same basic data points – demand down, supply stable.  The result – much of China’s export driven manufacturing experienced a poor year, especially in the south.

Yet, 2013 brings good news to the People’s Republic – exports for the end of the year far exceeded expectations and consumer demand increased.  This good news immediately changed perceptions on China’s economy.  Yet, what many are overlooking is what the data from 2012 told us about the long-term viability of the Chinese model.

China’s economic health is essential for world trade and the economies of every developed country around the world.  Too many in the political realm treat China as a continuing economic powerhouse for the foreseeable future.  China’s economy has many strengths, but it is based on a model with a very specific shelf life that the leadership of the country has already pushed beyond its limits.  From the earliest days of reform, Beijing positioned its economy for export-driven growth.  It made sense in 1980 – China offered a location for manufacturing in the heart of a growing economic region, it did not have overly complex regulations limiting firms, and it had a population that was hard working and cheap.  The model started with simple manufacturing – textiles and such – and over time expanded to more complex industries, finally arriving at high tech products.  The problem is that China’s success made its workforces more expensive, created a middle class that wanted more industrial regulation, and did not provide the opportunities for many Chinese firms to transition from export markets to domestic ones.  Added to this economic formula is the country’s state owned enterprise system – a system that remains powerful and shelters firms from real market forces.

China’s current model for growth will come to an end.  The state owned enterprise system needs to be dismantled – allowing those firms with the ability to thrive and those without to wither away.  Domestic consumption is the key to the future and this has to be a priority.  China has far too many pressing issues to retain the current economic system for much longer – demographics will soon cause pressure, urban development has created massive municipal debt, the legal system remains insufficient to govern this complex society, and real investment needs to be made to diminish the difference between rich and poor (to name but a few).

China can meet these challenges.  Its political system, for all its faults, is trending towards more openness.  The new leader, Xi Jinping, seems to be signaling fundamental economic reform.  China’s growth cannot sustain forever – it is time for its leaders (and the rest of the world) to prepare for that time now.

Please note that the views expressed in this piece do not represent the official policy or position of the National Defense University, the Department of Defense, or the U.S. government.

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