A lot of ink has been spilled about the rise of China and the growth of their economy. The country has managed to overtake Japan as the second largest economy in the world and China has a huge population that is able to bear the brunt of sharp population decline experienced elsewhere in the world. Over the past few years China has grown exponentially and is due to overtake America as the world’s biggest manufacturer in the near future, a title America has held for 110 years.
Investors have taken heed of this near double-digit economic growth. Billions of dollars have been funneled into China to feed the industrial machine. China’s demand for raw goods is insatiable and government backed takeovers of raw material companies are dominating economic periodicals’ headlines. All these positive indicators make it very easy to forget the underlying problems that could destroy the Chinese economy. In all this triumphalism and speak of a new world power that will overtake America, it is important to explore the failures in China’s Social market economy.
The first of which is the method of acquisition of international firms by Chinese ones (obviously supported by party officials). As a recent special-report in The Economist has shown, a great deal of western CEO’s and executives are appalled in the method that the Chinese firms use to negotiate. Many claim that Chinese officials overpay for international companies due to their huge government backing. If the party sees a need for raw materials, for example, the party often allows the Chinese firm to buy at the highest asking price or even asks the international company what it would cost to control the firm. This tactless approach often leads to dangerous bubbles where many Chinese owned foreign companies are bought for much more than they are worth. To make things worse, Chinese officials often fire existing officials in these companies to replace them with Chinese officials, which may be a great deal less efficient. To compound these issues is the fact that many nations are wary of doing business with Chinese owned firms that are backed by the Communist party. Nonetheless, China currently owns around 6% of international companies, while Britain and America owned about 50 – 55% at the peak of their power. China has a long way to go, but continued buying of international companies at highly inflated prices will only be detrimental in the long-term.
Another main issue with China’s economy is their obstinance towards world trade law. In their bid to join the World Trade Organization (WTO), China underwent a number of reforms that sought to fix many of the concerns that existing WTO members had. Most important of these rules was the treatment of intellectual property (IP), where China breached IP rights approximately 90% of the time compared with 40-50% in western Europe and 21% in America (as of 2005). Although they have made strides in fixing the intellectual property issues, they are still lagging behind. But it is not an issue of inability to fix breaches of IP rights; it is a problem of state-sponsored breaches exemplified by the most recent dispute with Japan, Europe, and America about rare earth minerals.
Around 96% of the world’s rare-earth minerals are produced in China. They are used for electric cars, light bulbs, wind turbines and other technology, but China is wielding their monopoly rights on production to promote domestic companies opposed to foreign companies. In fact, China has imposed an export on rare-earth minerals for the past four years, which is illegal by World Trade Organization rules. For example, “Dysprosium, which helps rare earth magnets preserve their magnetism at high temperatures, is mined almost exclusively in southern China and sells for $95 a pound to domestic Chinese firms”, while they sell for an uncompetitive $135 to foreign ones.
The worst part about both the rare-earth mineral dispute and breach of intellectual property rights is the inability for foreign countries to place sanctions on China. While China is a member of the WTO, the dispute settlement process is the only method to resolve such issues. This is actually much more difficult for foreign countries to deal with because many companies that support the government dispute claim are scared to do so for fear of retribution. For example, even if a dispute on intellectual property was won by America with the help of American companies, these companies would lose their business in China almost automatically. It is a Catch-22 where keeping quiet just continues the unbalanced status quo, while speaking out against the unfair policies might lead to a positive result, but will get the company kicked out of China. This unfair advantage over truly free-market economies can’t last forever. Eventually China will relinquish this power, which may leave uncompetitive Chinese firms in trouble in comparison with their international counterparts.
Furthermore, there is a real-estate bubble in China that has been controlled, but authentic figures are always disputed due to the obscure nature of party controlled releases. As the world economic crisis has shown us, real-estate bubbles are enough to cripple nations completely. If you don’t believe me, ask the Irish, Latvian, Spanish or Portuguese. If the real-estate bubble bursts then China’s growth will also suffer as tremendously as many of these other countries. Just because China is growing fast now does not mean it is immune to such ills.
China is no doubt a great place to invest and a rapidly growing economy, but certain underlying problems threaten to undermine the vast economic potential of the rising state. Social issues also raise important questions as political dissidents become more outspoken and further weaken the legitimacy of the one-party system. The Chinese experiment with a free-market under oversight by authorities is new for many theorists. Nobody can say precisely what will happen within the next few years or decades.
(Links used: http://www.economist.com/ , http://www.nytimes.com/ , The Economist print edition)
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