Made In China: The Chinese Economy Explained

by Anmol Arora

The name, “China”, more often than not, brings up an identical thought in people’s minds- “made in China”. While a majority of consumer goods are manufactured in China, this wasn’t always the case. Before 1988, China was similar to the Cambodia of today, except with a larger population.



The Chinese economy has undergone a massive restructuring and witnessed a tremendous amount of growth over the past few decades soon after Deng Xiaoping laid the pivotal path to liberalization and decentralization in the economy.


THE GOOD


China’s service sector has doubled in size over the last two decades to nearly 52% of the total GDP. Still, however, it is lower than other developed countries like the US (79%) and Japan (73%). This is primarily due to the government’s immense attention towards making china a manufacturing hub not only for Asia but for the whole world.


As far as I can tell, they have succeeded. China’s exports stood at a mammoth $250 billion for the year 2019, higher than the combined totals of Russia, Turkey, and Japan. An abundant supply of semi-skilled labor, a much more permissive regulatory environment, and slashed export duties make China “the world’s factory” as we know it.


China has managed to grow its GDP at an astounding rate over the past few years. From roughly $2500 billion in 1980 to nearly $20,000 billion in 2020, China’s economy was flourishing with industrial production and the service industry, both on record highs.



Per capita GDP of the country has improved massively as well- from $89.52 (1960) to $9770.85 (2020) and the nation has now achieved the status of “middle income”, which seemed far-flung just a few years ago. This is especially laudable for the sole reason that the country, fortunately, or unfortunately (I’ll let you decide that one), has the highest population in the world.


THE NOT SO GOOD


While all seems hunky-dory, the Chinese economy is not free of teething troubles of its own. Due to the country’s huge developments in manufacturing, it heavily relies on the West for an inflow of cash from exports. If the US, as it has been doing, raises duties and imposes sanctions on China, the country could bleed a good deal.

Another argument against the Chinese economy is related to its infrastructural projects. Over the past decade, China has continually focussed on developing its infrastructure- roads, buildings, dams, and so on. While this sounds outstanding for Chinese citizens, do these comprehensive projects make economic sense?


Well, not according to Dr. Ansar, Programme Director of the MSc in Major Programme Management, Saïd Business School. He says, “The evidence suggests that for over half of the infrastructure investments in China made in the last three decades the costs are larger than the benefits they generate, which means the projects destroy economic value instead of generating it”.


On average, there is a 31% overspend on such projects. The fact that worries even the IMF is that most of China’s large infrastructure projects are financed purely by debt. The country’s debt is now over 300% of its already huge GDP. This presents a big red flag for the government as international investors are now analyzing their exposure to the country and trying to minimize it.

Although China has the world’s largest population, its age demographics might put the government in a conundrum. Approximately 23% of the population is over the age of 55. That rate falls to a mere 14% in India, a population heavy country, and a “rival” of China. This demographic is higher in China due to the lower pollution levels, regular exercise, and most importantly, an exceptional, and I must say unusual age-old diet.


Now, while this may sound great to the public, it might not yield the same reaction from an economist. Having an older population, so to speak, increases health care costs for the government and a higher tax dependency ratio. This has the potential to severely disrupt business in the country unless taken care of soon.

The Debt Games


Shifting a little from the main economic frame, we analyze Chinese debt-trap diplomacy. In a push to gain rapid political and economic ascendency across the globe, China is dispensing billions of dollars in the form of concessional loans to developing countries mostly for their large-scale infrastructure projects. China’s “cut” comes in when these countries fail to pay back the loan on time. Beijing, then, gets a chance to demand concessions or advantages in exchange for debt relief.


For instance, Sri Lanka was forced to hand over control of the Hambantota port project to China for 99 years, after it found itself under massive debt owed to Beijing. This provided China with a strategic foothold along a key commercial and military waterway positioned at the doorstep of its rival, India.


COVID-19, something familiar



As the first country to be engulfed in the COVID-19 pandemic, China was several weeks ahead of many other countries on the curve of the virus progression. The country managed to, rather swiftly, contain the spread of the virus, thus protecting itself from severe economic and social impact, as compared to countries like the US and UK, where unemployment figures went through the roof.


Although consumption numbers were impacted adversely, they are expected to pick up soon. Country-wide lockdowns and international travel bans proved instrumental in the effort to contain the spread.

Having said that, there have been job losses and salary cuts mainly in four industries- food and beverage, retail, real estate, and travel. Compared to other countries, the support measures that the government has put in place have been relatively limited. There are other programs in place as well, but most of them require the companies applying to be involved in the effort to combat the virus spread.

Although the country has seen a new spark in infections, the prevailing opinion is that it will be contained effectively. In this period, when the world is struggling, China has prioritized developments in Science and technology.


The government is trying desperately to pull ahead in the race towards getting 5G telecom technology in the country. Since the government has started to invest heavily in research and supporting Chinese nationals to acquire technical skills from abroad, it is only a matter of time before the country becomes a strong player in that space as well.

The nation has, so far, been fortunate enough to not have a severe economic downturn like its counterparts in the West and can use this time to its advantage by emphasizing reducing its leverage in international markets and focussing on further domestic development.


References

· https://www.indexmundi.com/china/demographics_profile.html

· https://www.china-briefing.com/news/social-economic-impact-covid-19-china-recovery-potential/

· https://review.sbs.ox.ac.uk/Why-Chinas-infrastructure-investment-may-be-doing-more-harm-than-good.html

· https://www.investopedia.com/articles/investing/103114/chinas-gdp-examined-servicesector-surge.asp

· https://tradingeconomics.com/european-union/imports-by-country

· https://www.investopedia.com/articles/investing/102214/why-china-worlds-factory.asp

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