China: Is it going US way?

December 11th 2012

In the past decade or so, China—the Asian dragon, has scripted astronomical GDP growth, thanks to the miraculous progress that the Mainland has made in the manufacturing sector. Now, it is the world’s second largest economy —only next to the fiscally-troubled United States. Now, among the major world economies, China is the fastest growing one, with an average growth rate of around 10% for the last three decades. This Asian giant is also the world’s largest exporter and this year, it has outsmarted US to become the world’s largest manufacturer. This phenomenal economic success has been bolstered by a goal-oriented political structure and superior type of economic management. On the other hand, US, currently looks like a faltering behemoth —with its fiscal situation in doldrums, competitiveness on a decline, political system on a tizzy and future direction shrouded in uncertainty. Now the situation has become so serious that it would require astute fiscal maneuvering, an all-encompassing master efforts and of course, political consensus to stem the rot.

However, here we are not discussing about the ways how US can get out of its current crisis. Rather we are limiting ourselves to the challenges that China is actually facing at the present moment. China is also beginning to face huge economic pressures, some of which are natural outcomes of the meteoric economic development that the country has made in recent years. How the country copes with these mounting challenges will determine the future progress of the Mainland as well as the global economic order.

Firstly, the tremendous growth that the country has registered in the last decade or more can mainly be attributed to the abundant supply of labor at a very cheap rate. With its excellent marketing strategy, China sold its low-cost products to virtually all parts of the world. At the same time, the low cost, labor-intensive and export-oriented manufacturing sector have created numerous employment opportunities in the country and has been instrumental behind China’s rapid growth. However, the unparallel competitiveness of the Chinese products has recently been hit by the emerging low cost destinations such as Vietnam. In fact, wages in the country are rising by 12% in real terms. Moreover, there has been growing unrest in the country over the labor issues. However, such developments are inevitable with stratospheric economic advancement. Now, the challenge is up to the Communist-led China to continue with this advancement. To maintain the momentum, China needs to move up the value chain by focusing more on innovation and high-tech industries. The coming days will be tough for China as it will need to constantly innovate, enhance quality and create brands. Otherwise, the country will stuck into mediocrity.

Secondly, China is hugely dependent upon its property market. According to a study by Jonathan Anderson, a leading economist with UBS, real estate and the construction sectors are the two main drivers of Chinese growth. These two sectors are the prime sources of demand for all sorts of things that the country buys from the rest of the world. The new homeowners, who are purchasing home appliances and furniture, are instrumental behind China’s rising consumer spending. So, it is quite likely that a decline in the China’s property sector will put a drag on the growth momentum of the Chinese economy as well as the rest of the world. It will also have a negative effect on the global supply chains and will have a negative impact on the business for all kinds of commodities and products. Much like the US housing crash sent shockwaves through the global economy, a crash in the housing market in China, can do the same.

How Beijing deals with these challenges in the coming years will determine the future course of Chinese economy. However, no one knows what is going to happen in future. Unlike the US, China has an authoritarian government, which is in a better position to control economic crisis. Again, on the other hand, the corporate sector in China is not as efficient and skilled like the US. It will indeed be a tough task for the Chinese companies to innovate and stay ahead of low cost competition. What is very much important that the Chinese leaders should learn from the mistakes committed by Washington.

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