the Chinese economy (i): background

size by GDP

According to the CIA World Factbook, the US is the largest economic power on the globe, with 2013 GDP (calculated using the Purchasing Power Parity method) estimated at $16.7 trillion.

The EU is a close second, with GDP of $15.8 trillion.

China is in the #3 spot, with GDP of $13.4 trillion.

Together, the trio make up about half the world’s GDP.  (A quarter century of stagnation has left former co-#1, Japan, a mere shadow of its former self, with GDP of $4.7 trillion.)

China’s economic strategy

Since turning away from central planning toward a market economy under Deng Xiaoping, China has faced two related issues:

–creating enough new jobs to absorb new entrants to the workforce, thereby avoiding political instability, while at the same time,

–reining in the inefficient, loss making, often corrupt state-owned industrial sector, which accounted for three-quarters of all employment in the late 1970s.

Two other constraints:  China had to do this without an effective central bank and with a cadre of state and local government officials who thought (many still do) that the fastest and most lucrative road to the top was to create more labor intensive, inefficient (and corrupt) local analogues of big state-owned enterprises.

China has achieved spectacular economic growth by embracing capitalism.  To some degree, the remaining state-owned sector, which now accounts for just over one quarter of the economy, has also shaped up.  But while doing this, China has tended to lurch between periods of substantial credit restriction to try to force state-owned enterprises to become more efficient or die, followed by excessive expansion when layoffs become too severe.

the latest wrinkle

Emerging economies, following the post-WWII Japan model, start by offering cheap labor for simple manufacturing businesses, so that they can acquire training and technology from foreign firms.  At some point, a given country will run out of labor.  It must then transition to higher value-added endeavors.  Few succeed without a lot of heartache, because–I think–vested interests attached to the status quo are so powerful.

China now finds itself at this transition point, an issue which dominates its current economic policy.

More tomorrow.


2 responses

  1. You are completely right – this is an inflection point for China. I had a client who manufactured metal components in China for the last ten years. It had become less attractive to manufacture there except the mass quantity low quality required items as of four years ago. Surprisingly, Italy and South Koren were strong competitors to China as of four years ago (Italy only in semi finished metal components like valve balls needing specific polishing).

    • Thanks for your comment. The most interesting part of the current situation in China is that no country I’m aware of has made the transition from export-oriented manufacturing to domestic demand-oriented service economy without a lot of economic turmoil. The forces of the stats quo are just amazingly strong. I’m thinking that China will be an exception–that the economy there won’t get much worse than we’re seeing now (this sentence screams WATCH OUT!!!). Two reasons: Beijing has lots of very sophisticated, Western-trained economists who understand what needs to be done; the current heads of the part want the shift to take place, and they have great control of the police and the courts that they can use to carry out their wishes.

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