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China’s Artificial Growth

September 30, 2011

For the past decade, China has been the envy of the world.  The country has been industrializing at a rate unmatched in human history.  Tall skyscrapers appeared overnight, roads constructed to stretch for thousands of miles, and foreign investments can’t seem to stop pouring in.  With a GDP growth of over 10% in 2010 (CIA World Factbook), there seems to be nothing that could slow this country down; nothing except the country itself.

China’s growth has been largely artificial. The country is growing, yes, but much of that growth is rooted in construction, which attributes to 60% of its GDP (Chanos 10). Construction projects provide jobs for millions of workers and raises the nation’s GDP per capita. Unfortunately, much of China’s urban expansion is impulsive.  The country’s infrastructure is growing faster than its actual economy. There are more roads than there are cars to drive on them and more homes than people can afford.

The greatest example of China’s unsustainable growth is the city of Ordos.  Tucked away in the northern region of Inner Mongolia and situated away from its burgeoning eastern seaboard, Ordos was intended to be the American equivalent of a middle-upper class suburb.  The city was built to house over a million people.  It has a beautiful museum and cultural center, brand new apartment complexes and colonial homes, and even beautiful municipal monuments.  One would expect such a city to become overpopulated in a short time, but that didn’t happen.  Instead, Ordos has become a complete ghost town, with only a few thousand inhabitants.  Although China’s rising middle class is growing quickly, they’re not growing quick enough. Ordos’s homes simply cost too much.  Furthermore, unlike the United States where nearly every individual owns a vehicle- thus softening the tyranny of distance- China’s population is still dominantly dependent on public transportation. America’s urban sprawl and suburbanization did not occur over night and its expansion coincided with the country’s automobile growth, which made the process more sustainable compared to China.  To make matters worse, in 2009, China dumped 14% of its GDP into a stimulus package targeted at infrastructure development (Economist 09) and they’re not seeing any return on that investment.   Their current urban supply is far ahead of its demand, and a housing bubble crash is now on the horizon, due to subprime loans.

                                                                             (Photos by Time)

                                                             (Photo by archdaily

Another point that demonstrates China’s artificial growth is its intentional undervaluation of the RMB currency, which allows them to discount their exports to the world.  Although this currency manipulation is good for outside consumers and domestic producers, it hurts global manufacturers outside of the People’s Republic.  Essentially, by undervaluing their RMB, China is able to bring in more business and employs more workers, leading to GDP growth. But since this process is artificial, it undergoes constant international pressure.  The only reason why China has been able to get away with this is because of America’s current economic gloom.  The Chinese own almost a trillion dollars of U.S. Treasury bonds and this process keeps American interest rates low.  If the United States forces China to fix its currency or impose tariffs on their goods, it could lead to a trade war, potentially hurting both countries.  Sooner or later, however, China will have to raise their currency.  The country’s inflation is too high and a weak RMB is hurting their food and raw material imports from around the world.

Lastly, the country is also struggling with managing its growing pains.  The primary reason why so many foreign transnationals do business in China is because of the cheap labor.  Unfortunately, with a rising middle class, increase education, and the cost of living on the rise, workers are now starting to demand fair compensation.  Labor issues have become commonplace in the People’s Republic and the communist party is in peril as a consequence of it.  As the party once said, “As long as people are making money, they won’t care about politics.”  But as we all know, Chinese workers aren’t really making any real money, and they expect that to change.  To satisfy the civilian masses, the government would essentially have to implement greater regulatory demands on transnationals, but in doing so, it could lead to a significant business exodus.  Transnationals would likely start looking for labor elsewhere, like Vietnam or another Southeast Asian country.  The government will not be able to satisfy both groups, something’s got to give and when it does, expect their GDP growth to drop.

On the surface, China might seem like an unstoppable economic train, poise to ascend over the rest of the world and overtake America as the world’s number one economy.  However, beneath its façade, the country is struggling just like everyone else.  Inflation, undervalued currency, labor disputes, and unsustainable impulsive expansion will eventually slow down this juggernaut.  It may not happen today and it may not happen tomorrow, but it will happen eventually. –Ping Zhou

 

 

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2 Comments leave one →
  1. Danielle St. Germaine permalink
    October 12, 2011 4:48 pm

    I was listening to NPR about a month ago (september 2011) and the topic of discussion focused on the prevalence of Chinese businessmen investing in real estate. A lot of youth is investing in real estate in China, but more prevelantly, they are purchasing land in the United States. I was pretty suprised by this given China’s continous growth. This is, at present, beneficial for the US because so many towns are in recession and a lot of properties have fallen to the wayside from neglect. Naturally it is more beneficial for business districts to employ as much property to the cause than have it lie vacant. It makes sense to build construction here because our economy seems to be able to support the investment. However, it is still sad to see the failure of Ordos. As a result the ties that bind the US and China seem to be tightening and now more than ever it seems that both of our financial futures are becoming mutually exclusive… On a microscale the same thing has happened to resorts in Hawaii…

  2. October 12, 2011 9:38 pm

    Indeed. As of right now, the U.S. and China are deeply dependent on one-another, but I expect this relationship to soften in preceding decades. This hypothesis is based fundamentally on China’s eventual growth in the tertiary sector of the global economy, due to rapid education improvement that is connected to industrialization. Currently, the two countries need each other, for the U.S. has the technological gadgets China’s rising middle class and entrepreneurs desire and China has the cheap products Americans need. Once China catches up, the economic dependency will likely decrease and global competition will increase. But for now, yes, they need each other probably more than either countries is willing to admit. Thanks for reading, Danni.

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