Change in China
The story of China has been one of remarkable success since the 90s as foreign firms rushed to exploit the cheap labour force and take advantage of the mass privatisation ushered in under the paramount leadership of Xiaoping Deng.
This lead to a surge in the demand for energy and other commodities, with consequences including depletion of natural resources, pollution and an expansion of the PPF.
In turn, this triggered a surge in rural-urban migration, with millions of farmers moving to the cities in search of a greater standard of living, which many have found, as the Chinese Urban middle class grew from 0 to 87 million from 95-05, with this figure being projected to reach 854 million by 2030, which is expected to account for 93% of the urban population. This rapidly expanding middle class has led to:
Competition for status symbols
New services from abroad being demanded
Increasing social tension
Larger potential market
Stock market investment from inexperienced domestic citizens
Greater flow of investment
Increased retail demand
The complexion of China’s main trade has also changed dramatically accordingly:
Food and drink
High end retail
China’s rapid growth from the 90s continued as the millennium drew to a close with the nation taking up the fallen Soviet Union’s mantle as the dominant Communist nation in the world. Through much of the 00s, growth was rising continually, up to a staggering 14.2% in 2007. Even the GFC of 2008 only managed to pull this figure down to 9.2% in 2009. However, even after recovering to 10.6% in 2010, growth has been steadily decaying, slumping to 7.4% in 2014.
Of course, this can be explained away by statistical measurement – growth rate is after all a year on year percentage figure, so this may not indicate that the value increases in China’s GDP have been rising slower at all.
There have long been problems with statistical collection in China, dating from many years back right up to the present day with many economists said to be “profoundly uneasy” about China’s GDP figures. Part of this comes from provincial Party members massaging figures upwards to enhance their own standing. In fact, every single Chinese province was recorded to be growing at a rate above that of the national average, which is clearly nonsensical. Even the current Premier, Li Keqiang has privately admitted that the Chinese GDP statistics were "man-made" and "for reference only".
Nevertheless, some of the statistical problems are genuine. The sheer size of China, not only as a country, but as an economy makes it very hard to accurately record anything. The recent nature of China’s rapid expansion has also prompted difficulties, with statisticians struggling to document the entire economy – a 2004 statistical adjustment added an extra 16.8% to the GDP figure. Small errors at the village and provincial level also get multiplied as they pass through the system, further distorting any final figure.
The IMF estimated in 2014 that China had managed to end the US’s 142 year stint as the largest economy in the world, with an economy estimated at $17.6tn, just above the US figure of $17.4tn. These figures were calculated using PPP, which threw the Chinese figure upwards from just $10.3tn. With a population of 1.36bn, it is only logical that China takes the top spot on the table.
Also, if you look at per capita spending power - the value of all goods and services produced within a nation in a given year divided by the average population for the same year - then, even adjusted for PPP, China ($11,868) is still lagging a long way behind not only the United States ($53,001) but also the likes of Turkmenistan ($12,863) and Suriname ($16,080).
But Chinese growth figures have far outstripped those of the US, with the IMF forecasting growth of 7.4% in China for 2014 and 7.1% in 2015, compared to US growth of 2.2% this year and 3.1% next year. This indicates that it is only a matter of time until China does, unarguably, become the largest economy in the world.
Yet this Chinese dominance may be relatively short lived, as long term financial estimates from the IMF show that India will surpass both China and the US by 2100.
Before the “Black Monday” of August 24th 2015, there were numerous warning signs that the Chinese market was in danger:
The Central Bank cut interest rates from 4.85% to 4.6%
The Central Bank bought up shares
The Yuan was devalued by the Central Bank
This cheap and easy funding inflated the market
Economic growth had been reported to slow
Exports fell by 5.5% in a year
Imports fell by 14.3% in the same year
Added into this mix is the relative youth of the Chinese stock market, which was only fully established in 1990, making it immature and subject to far more volatile movements than other world markets.
This volatility is due in part to the makeup of stock owners – the shares are owned almost entirely by domestic citizens, who have no experience in investing or playing the market. These “mom and pop” investors are a key factor in explaining the large and swift changes in the Chinese stock market.
When the Central Bank did not announce further policy change to prop up the stock market on the Friday before Black Monday, panic began to ripple through the market. This was then amplified by the sheer volatility of the Chinese market, as wave after wave of sales ensued, which caused the prices to plummet.
Blip or Bust?
However, it seems as if this is merely a correction of the over-inflated stock market, which had been pumped up by the ease of access to cheap funds for investment, as permitted by the Central Bank and encouraged by the Chinese leadership.
In a reaction to the stock market crash, the Central Bank did release the anticipated measures to prop up the market, and this did help to stabilise the situation, but this only sets China up for another crash in the near future. It is not a long term solution and it is certainly not sustainable, even for China.
More generally speaking, the slowdown in the rate of the growth of the economy seems to be setting in, with the governing body lowering the target rate from 10% to 8%, to adjust to the new situation.
Unquestionably, China has the possibility to become the largest economy in the world, with such a huge population and growing trade with Russia, as Russia looks to break its long standing history of trade with the West, a huge provider of oil and gas, which China gobbles up to fuel its own economic growth. The swift and effective nature of the reaction of the Chinese leadership also indicates that the economy is in good hands.
The recent market crisis may mark a significant turning point in China’s economic history, as its explosive growth begins to tail off as it maximises its scarce resources. Instead the country could expect to see growth rates decline toward that of the global average. Nevertheless, China will likely become the largest economy outright in the near future, becoming the dominant global force, determining the tune of the rest of the world’s economy. As Churchill once said “It is not the end. It is not the beginning of the end. It is, perhaps, the end of the beginning.”