90 Miles From Tyranny : A Growth Dilemma: China on an Economic Seesaw

Sunday, October 20, 2019

A Growth Dilemma: China on an Economic Seesaw

The decline in the Chinese economy is a natural consequence of the Chinese Communist Party (CCP)’s blind and relentless pursuit of high growth.

Gone are the days of temporary­­­ prosperity driven by exports and real estate prices. Now Beijing is trying desperately to sustain the economy by playing a dangerous seesaw game between soaring housing prices and declining consumption.

This is an unfulfilling and ineffective last resort that will fail to stop or hide the increasingly obvious deceleration of the Chinese economy.

From Growth Frenzy to Growth Dilemma

A country’s economic growth relies on three factors, often referred to as the three-horse-carriage. They are exportation, consumption, and investment. Economic growth would slow down significantly when one or two of the horses lose mobility. If all three fail, the economy can’t go far.

The Chinese economy today is just like a carriage without a horse. Due to the recent deterioration of the China-U.S. relationship, China’s exports have suffered significant losses with the August export volume down 4.3 percent compared to last year, the first decline in nearly three years. In the meantime both investment and consumption also deflated. Real estate investment growth has slowed for four consecutive months, and August manufacturing activity declined by 1.6 percent compared to a year ago. Consumer buying power has also been weakening. While Chinese authorities had to admit to the downward trend, they are unwilling to acknowledge that the past frenzy for high growth is the true cause of today’s decline.

Let’s first discuss the absurdity of China’s export gold rush. After China joined the WTO in 2001, it has relied on exports to pump up its economy. Between 2003 and 2007, China’s exports increased by 25 percent each year.

China’s foreign trade dependence (or FTD, ratio of the total amount of foreign trade of a country to its GDP) soared from 38.5 percent in 2001 to 67 percent by 2006, more than four times as high as Japan’s peak FTD towards the end of its asset price bubble era. Drunk withthe its effortless prosperity, China did not realize such export-reliant growth is not only unsustainable, but also very fragile.

Can a country maintain a 25 percent annual export growth rate for decades? Obviously not. For a very small country with low export volume, theoretically it may be possible to maintain a longer term trade surplus. But for a large country like China, with 26 percent of the world’s work force, the global market is too small for it to maintain long term export growth even if all other...

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