China Economy - the Past and the Present

THE PAST AND THE PRESENT

China, one of the last Communist holdouts, has made enormous advances over the last two decades in the direction of becoming an industrialized country with a market-driven financial system. Its people, a fifth of the world's populace, are still amid the world's poorest; however, the effects of quick industrialization and urbanization will make China a main economic power in the 21st century.

In 2000 and 2001, China's economy was performing moderately well. GDP growth was positive, although the actual rate was several percentage points below that which was reported. Price declines appear to be moderating. Budget deficits and national debt remain manageable, and the overall position in foreign trade, foreign debt, foreign investment and foreign reserves is excellent.

China's economic performance has fallen short in the critical area of job creation, primarily in the services sector. National employment growth in this sector stayed below 1% in 2000 and even slowed slightly from 1999. This continued a 3 year long trend. In 1998 and 1999, employment in industry declined but employment in agriculture actually increased, indicating the share of employment in services has hardly changed. China's challenge is to generate GDP growth based on quick development of service-sector jobs.

China is in the initial phase of capital buildup and, consequently, is dependent on quick labor output development. As capital investment in technology increased in the past decade, China is demonstrating quick labor efficiency development compared to any other country.

China has approximately 735 million people or 58% of the population in the labor market. The number of unemployed white-collar workers in urban areas was 6.8 million. China does not provide statistics on unemployment in rural areas. In view of the fact that Chinese labor is so underutilized, in general, the only significant growth occurred in non-agricultural service. The number was 382 million in 2000 or 54% of the manual labor force, up from 43% in 1990. China produced 107 million new jobs in the 1990's. If the present tendency carries on, non-agricultural service might increase to 62% of the entire manual labor force by 2010. The labor marketplace would be much enhanced, though the situation would still be far from complete employment. It is likely that China's manual labor market will not reach complete employment until 2025 to 2030.

China is dealing with something else these days -- price inflation. In the first nine months of 2003, China's consumer-price index rose 0.7% and it is expected to exceed 1% next year. Compared to other countries, China's CPI rise is mild and is a far cry from the 25% inflation that spread through China's economy in the early 1990's. Yet, it marks the first major inflation China has seen since 1997, showing how China's booming economy is creating demand not seen in nearly a decade.

Several causes are behind the climbing prices. Money supply is up more than 20% this year, fueling inflation by making more money available to spend. Demand for raw materials, such as steel, rubber and cement, has risen. The result is economic growth that could reach 9% this year, as well as surging investment across the economy. The return of inflation is significant to China because it ends a five-year bout with deflation, a fall in China's price level caused by tight credit and an oversupply of goods ranging from rice to cell phones. While lower prices were a boon to Chinese and foreign shoppers, they brought alongside fears of global price deflation. As China's exports moved across the world market, there was concern that China was spreading deflation. Such fears have now been put to rest.

For now, it is unclear to what extent inflation will grip China. Although personal incomes in the biggest cities are rising rapidly, they are rising more slowly in many other parts of the country, particularly the countryside. Uneven income growth hinders consumption, which has grown at a flat rate of 8% for five years.

CHINA'S GROWTH

China's economy grew by 8.5% for the first three quarters of 2003. Great news for China? No, the country is producing so much so fast that it may prove impossible for China to absorb it all. Local companies are building shopping malls, office buildings, and suburban housing estates. China's wealthy class is growing fast. China's urban incomes are up an average of 8% a year since 1998, which drives up tax revenues that help finance government projects such as six-lane highways, bridges and tunnels. Factories are building more refrigerators, DVD players and cell phones which had produced vast demand for commodities such as steel, aluminum, copper, zinc, driving world prices to new highs. As a result, China's growth could slow considerably next year, damaging its mainland as well as neighboring countries increasingly reliant on China. Exports of excess goods could also hurt manufacturers worldwide.

One telling example of China's overheated economy is auto production. Accounting firm KPMG estimated that China would have the ability to produce 2.7 million cars this year, nearly a million more than its consumers are prepared to buy. Surplus could grow to 2.3 million cars by 2005. Increases in production are in large part driven by foreign investment. Automakers such as Toyota, Nissan, Honda and General Motors recently announced plans to put billions of dollars into new production. For example, on October 17, 2003, Ford Motor Co. said that it would invest $1.5 billion over the next several years expanding production in China. The long term effects of these trends are hard to predict.

Then there is China's real estate market, which resembles a huge construction site. The pace of construction is increasing, and investment in new real estate projects was up 33% in the first eight months of 2003. Investment in fixed assets, such as roads and railways, new homes and factories, was up 31.4% and foreign investment was up 30%.

Once again, this pace of growth may sound like great news for China and the region. Yet, economists