Friday, 26 July 2013

China - Slowing growth and political challenges

Consumerism and urbanization will dominate China in the next decade
Forbes/Kenneth Rapoza 
The Chinese economy has benefited tremendously from decades of a low-wage, export-based system that has allowed it to consistently to grow. Recently, China has explored its economic and foreign strategic interests in exploring markets that are not so crowded in Africa and Central/Southern Americas. Most crucially, however, is China's territorial claims to the South China Sea which forecasted, by 2025, will consist of nearly half of the world's GDP passing through the maritime territories of Vietnam, Indonesia and the Philippines. As a consequence of its development, it is a major power and will continue to be so.

However, it may start to change. With the mainstream media calling into question the validity of the "Chinese economic miracle", the Chinese economy according to Chinese figures grew by 7.5pc as opposed to its 10.2pc in 2010. The slowing growth is an illustration of the limitations of the thirty-year model. The model has relied on obscenely low-wages in comparison to the West whereby workers in China are unable to afford to the products they produce. Thus, the Chinese system relies on heavy exportation in order for products to be purchased.

The result of which has created an interdependent relationship between the China and the United States. However, China are beginning to feel the brunt of this interdependency. The Western economic model traditionally contracts and expands and so to does the demand. Western demand is the crux of China's economic model. It has done this without much acknowledgement of the contractions in demand in the Western world and is predominantly the reason it finds itself in the declining growth, insecure and uncertain.

Unemployment has been a concern for China and will continue to be. The social consequences of unemployment in history have always been synonymous with social stability. It is worth noting that there are 900m Chinese people who are in poverty. The average wage between is reported to be around $2-4000. China finds itself at a crossroads with no easy option to make. China must be able to create employment to curtail social unrest but it does this at create expense. By subsidizing failing businesses which only leads to the production costs rising. This inevitably rises inflation and inflation undermines a nation's ability to be competitive in an export driven market.

Condense social unrest 

The government has put plans into creating the framework of urbanization and consumerism in China. The limit of the high-export, low-wage model has just about been reached and turning 800 million or so workers into consumers will be the greatest challenge the government faces the next decade. One of these measures is by increasing the minimum wages to 40 pc of average provincial salaries.

Constructing a consumer culture will be a difficult and painful task but it is a necessary task. The culture of pragmatism in the Communist Party of China will see China become a new role in the international system. The long process is primarily to curtail and condense social unrest as individuals in China become "more free". On the surface, this seems paradoxical. An economy and society where individuals are free, mobile and driven by a competitive economy controlled by a strong, firm central government.

In essence, Beijing are playing a balancing act. The transition to a consumer economy is being paid by subsidies in inefficient businesses to keep unemployment levels down to curtail social unrest whilst gradually deconstructing export-driven businesses into pillars for consumerism without attracting the social unrest it brings. As for the success of this policy is up for contention and only time will tell. One thing's for certain - China will be a very different country than it has been the past three decades.

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