Has The Chinese Economic Bubble Burst

The world's second largest, Chinese economy's dream run seems to be coming to a halt. After registering an average GDP growth rate of 15% for the last decade, it has now fallen to 9.3% and 9.6% in April and May this year resp. 

The World Bank has lowered its growth rate forecast for China for 2012 to 8.2% and for 2013 to 8.6%. Another bank the Credit Suisse has predicted even a lower growth rate of 7.7% for2012 and 8.2% for 2013.

The Chinese economy is basically foreign trade oriented and is geared towards exports. Thus in 2007 and 2008, China managed

 trade surpluses of 8 to 9 percent of its GDP which is considered a fantastic achievment. However in this 'model', China did not encourage domestic consumption. The household consupmtions fell to 35 percent of GDP which is considered relatively low, when compared to nearly 70% figure for another major economy like that of USA.

The creation of an huge export oriented industry has meant the dumping of goods by the Chinese in international markets. With the collapse of many Western economies, the Chinese exports have seen a significant fall and trade surpluses are now below 2 percent.

Data from China is usually seen with some sense of disbelief. However the data for electricity consumption during April, 2012 showed a fall of 3.7% and the manufacturing sector showed its slowest growth since late 2011. This has resulted in a slowdown in Chinese economy, and already projected growth rates have been revised downwards.

The success of Chinese economy was attributed to the utilization of  state capital under an authoritarian regime. This Chinese model was being touted all over the world as a route to economic success. However the Chinese economy was basically  running on foreign trade and specific assets were being created for manufacturing goods for international markets.

For an economy used to double digit growth for nearly three decades, to now face single digit growth rates is going to pose immense adjustment challenges. The transition is going to be anything but smooth. Will it lead

to political and social unrest is an oft asked question. To many China watchers, it seems very clear that the ongoing Chinese deceleration is signal that its economic bubble has started loosing air. The economy is no longer going to be seeen as a miracle economy.

Everyone knows that China is more capitalist than communist. The prosperity is limited to select members of the Chinese Communist party. They have so far refused to share their wealth with the vast Chinese masses, whose per capita income is around $5,000 only. The Chinese government's debts are a whooping 70 to 80 percent of its GDP.

The Chinese economy attained very high growth rates on the back of cheap labour, with very little health and pension benefits. China has purposefully neglected its environment to gain an artificial competitive advantage, which has resulted in tremendous ecological degradation, which has to be now addressed at high cost. With export markets falling, labor costs rising, and high  state expeditures being made to keep up the image of a economic super power, the Chinese miracle economic model seems to have already started collapsing.

Not surprisngly, there is a growing demand for liberalisation of the Chinese economy from state controls, privatising of many of its state entreprises, free floating of its currency,  increase in its domestic consumption to reduce its dependency on exports, which in the past have registered growth rates of 20 percent every year,but has also led to a highly skewed economy.

The challenge for China is not so much economical as it is political. Will the Chinese leadership share power with its people? Will there ever be free and fair elections in China? Will the few politically well connected families who have cornered major wealth give up their controls on trade and business?

The Chinese economy may also go the Japanese way, from an economic miracle to a economic laggard. Will the Chinese prove to be smarter than the Japanese.

Article Written By vks1000

Am a retired professional who is now into education of International Business and management topics. I enjoy writing and like reading on politics,economics,management and films. I take life as it comes and try to keep myself busy with a variety of activities.

Posted on 17-07-2012 46 0

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