In recent years, China has adopted a version of “export-led growth” (ELG or EOI–export oriented industrialization). Largely by manipulating the value of its currency (which we’ll discuss later in the term), the Chinese government has encouraged exports to the “West.” This strategy has largely worked, powering tremendous economic growth; but it also has some costs.
Before the current economic crisis, I wondered about several things:
(1) How would the Chinese fare if foreign demand declined? At the time, I feared political backlash, that Western export-competing producers might secure protection from Chinese imports. But the current economic crisis has served to produce the same result: skittishness on the part of consumers in the West has decreased demand for Chinese exports.
(2) How long could the Chinese government continue to encourage exports at the cost of increased domestic consumption? Simply put, when would the Chinese consumers begin clamoring to keep more of their products at home for their own use?
I just ran across an article in BusinessWeek that addresses some of these issues. In response to decreased foreign demand, Chinese manufacturers appear to be reorienting production towards the home (Chinese) market.
The competition there, however, is fierce. This latter insights sheds some light on my second question. The answer seems to be that the margins in China are much, much thinner. Simply put, there are more producers chasing less demand; and the demand is low, I presume, because incomes are low.
Here’s the article:
http://www.businessweek.com/magazine/content/09_08/b4120026074539.htm?campaign_id=rss_daily
Thoughts?
Politically, the timing of the current economic slowdown could not be worse for Beijing. The Chinese press, media, and state-managed civil organizations (Such as the Deng Xiaoping Thought student organization, whose secretary I knew at ZUT Hangzhou) have been engaged in a coordinated public information campaign commemorating the thirty years of the Reform and Opening up. The Chinese government is hoping to capitalize on its record economic growth with the public and hoard political capital. However, a disturbing public consensus is becoming palpable; that is, the past several years have produced limited or no gains for the majority of Chinese workers, even if their appraisal of the reform as a whole is positive.
Even more disturbing, it is also a matter of public consensus that recent university graduates, the best educated sector in the Chinese workforce, is finding it increasingly difficult to find suitable employment. I ran into a fair number of these myself in my travels along Eastern China. This is a longstanding problem, extending before the economic slowdown. Some China watchers, including an acquaintence of mine at the Fairbank institute, believe that in light of the past role of University students in democracy movements (ex:1978, 1989) China is now ripe for political unrest. I am more skeptical, but I don’t doubt a couple lean years will tell us all alot about exactly how much political capital the CPC has.
Well, I’ve said enough for now. Next time I will bring more hard facts to back up my intuition, but its getting late.
-Shawn
“Even more disturbing, it is also a matter of public consensus that recent university graduates, the best educated sector in the Chinese workforce, is finding it increasingly difficult to find suitable employment. I ran into a fair number of these myself in my travels along Eastern China. This is a longstanding problem, extending before the economic slowdown.”
This is great point which highlights one of the broadest economic issues facing the nation in terms of its future: the youth (according to the adage, they are the future, right?). In addition to the issue Shawn highlights above, young Chinese entrepreneurs – some of the nation’s brightest, most innovative minds – often quit the country for the US after completing their education; with its extensive intellectual property laws, abundance of capital, and highly active scientific research community, the US is one of the most desirable locations for any innovative mind. The problem for China is that, due to hysteresis, the outflow of entrepreneurs and other innovators compounds over time, robbing China of opportunities for wealth generation and economic advancement. As the US example dictates, innovation is major driver of prosperity.
Professor Colander, in his macro theory course last semester, shared his views on China at various points throughout the term. In his opinion, the current economic crisis is a long-overdue readjustment process which will reorient the distribution of economic and political power over the course of the next 10-40 years – possibly reversing the global political, economic, and cultural significance of China and the US. He often cited the law of one price as evidence of this process. According to the law, Chinese and American wages (for the same task) must equalize to the same level. Whether this will actually happen, and how long it will take if it does, depend largely on the long-term economic setbacks China experiences relative to the rest of the world.
China has long relied on the sheer size of its productive capacity (labor force) and, as the article states, its ability to export in order to achieve the high growth rates it is known for. However, trends from the past 5-10 years show that more and more R&D for American firms is being outsourced to China, further suggesting that China’s industries are undergoing a structural change (however gradual it may appear to be). This data (the source for which I’ve unfortunately misplaced) may offer additional support for Professor Colander’s readjustment theory, though, like most things in economics, there are a plethora of other factors (like the outflow of entrepreneurship) involved in shaping the nation’s economic future. Only in hindsight will it be clear whether any broader reshuffling of the global deck is now occurring in the midst of the downturn.
I also agree with Claris that the claim China has been manipulating its currency in order to gain an edge advantage with its export to the world is really debatable. Ever since when people started to blame China for their job losses here in the US, Congress have been pressing China to give up the fixed currency rate and allow its currency to appreciate. However, think of this way, if policies are placed to influence China’s currencies, then both companies invested in China and consumers abroad will suffer loses.
China’s export has become a major component of the U.S economy; therefore, by pressing China to appreciate its currencies against the U.S dollar under the threat of trade sanction, it would not only disrupt the trade flow with China, hurt producers and workers in China, it would also deteriorate the U.S economy with high prices. In addition, the claim that China’s cheap export causes job losses here in the U.S is also somehow based on faulty assumption. If we assume that China does not produce cheap labor intensive goods, the U.S investors and traders would seek somewhere else with cheap goods because their priority is profit. But let’s look at from China’s perspective, China has been relied heavy on its export and with the current financial crisis, the decreasing demand for China’s export is causing frustration at mainland China. Although some previously foreign dominated industries managed to shift their target of consumer back to China, many have suffered closing down and bankruptcy. Therefore like almost everywhere in the world, the unemployment rate of China has gone rapidly high. Chinese people have the tendency to feel as secure as possible, thus it’s understandable that facing today’s financial crisis, people are becoming even more careful when spending money. In the past decades, China’s growing economy has been depending on the increasing foreign demand for its goods; however, as this demand diminishes, it is no question that China’s booming economy is going to face some challenges.
However, I think there’s still a sign of hope in China’s industry, as it has comparative advantage in producing number of goods because of its cheap labor and natural resources. Therefore with the diminishing of foreign demand, Chinese government is trying to bolster domestic consumer demand through various legislations. Also, with governmental aid stimulus plan in place, http://www.nytimes.com/2009/03/05/world/asia/05china.html?ref=asia
China will hopefully overcome its economic crisis and continue its path toward modernization.