Another Economic Bubble Burst Ahead – China? (Part 3)

In the second part of this article, the author elaborated on some of the negative and positive ramifications of China's pace of economic growth. Now, in this final part of the article the author will continue with the implications of the economic growth, changes that needs to be made and the collaborative effort required to forestall any future economic failure.

Judiciously, to allay the fears of skeptics and expedite its strategic investments on the international scene, the Chinese government would have to deal with the political and economic freedom parameters especially corruption which is a real killer of economic growth as outlined in the second part of this article. Meanwhile, it is expected that China's strategic investment in the developing and underdeveloped part of the world would increase because of its estranged relationship with the western world. Furthermore, with the Chinese government and investors loosing interest in investments in the low interest US treasuries and bond primarily due to the fiscal imbalance (that is massive U.S deficit) and the plummeting of the dollar, Chinese investors may be compelled to pursue a new sense of investment direction. Unfortunately, such a redirection of investment has negative impact on the U.S deficit whose source of funding is substantially through the sale of treasuries and bonds to these investors. As a matter of fact, a greater percentage of United States huge foreign debt is underwritten by China. Accordingly, a reduction in the purchases of the US securities would lead to a rise in interest rates which could partially affect the investment sector in the U.S exacerbating the unemployment situation. Moreover, it appears China is under pressure in the last few years to distance itself from the U.S its main trading partner and pursue its ambitious economic agenda. For example, in 2005, China decided to unpeg its currency the renminbi (whose basic unit is the yuan) from the dollar and to let it float followed by the revaluation of the currency. Also, in the past year China together with the BRIC countries (that is Brazil, Russia, India & China) tried to convince the world about the volatility and incompetency of the US dollar as a world's reserved currency and the need for a switch to another currency. Supposedly, the dependence of the United States foreign debt on China must be an issue of concern for both countries because of its proclivity towards power transference from United States to China. All these developments are a foreboding of what is in the pipeline.

The next issue of concern is the effect of its population on the sustainability of its economic growth. There is a wide disparity in income distribution and purchasing power between the rural poor and the urban rich in China. Consequently, the urban rich percentage contribution towards domestic demand far exceeds that of the rural poor. These factors coupled with demographic and migration report from the United Nations predicting that by 2015, the percentage of the urban and the rural population would be almost equal ( 50% each) substantiates the need for strategies to bridge the purchasing power disparity. Thoughtfully, it would require initiating more projects in the rural areas to improve upon their lives so that their contribution towards domestic demand can parallel that of the urban folks. Remember, a prior analysis in the first part of this article revealed that a higher portion of the GDP growth emanates from domestic demand. That supports the notion that if China is to maintain its economic pace in the midst of the global slump in demand for exports then it would have to close the standard of living gap between the urban and rural folks.

Another subject worth deliberating on is the energy needs. Environmental pollution concerns are imminent when one considers China's growing energy need. As matter of fact currently over 70% of its energy comes from coal and natural gas both non-renewable energy sources and potential contributors to acid-rain formation and global warming. The growing energy needs suggest an increase in dependence on oil and coal. However, the country cannot continue to depend on non-renewable sources energy for it supply and should consider stepping up its investment into the renewable energy source to obviate any future environmental disasters. The growing international pressure on countries to pursue environmental friendly industrial practices encompassing cost effective measures and accountability for carbon emissions should gravitate with the concerns of Chinese authorities. Truly, in the past environmental cost has been trivial and the contribution of the cost of damage to the environment on operational cost has been negligible. The story is expected to change after the just ended climate change conference in Copenhagen as several nations operational cost would increase due to the active inclusion of environmental cost in the cost of doing business. In the interim some austerity measures may be required from China. For example, the country would have to step up its regulatory framework in order to be able regulate effectively and efficiently its growing industrial and manufacturing sector. Remember, China is second to the US in the industrial and manufacturing sector of the world. Obviously, effective regulatory measures would increase cost but it's worth it for the Chinese people and the rest of the world. Studies show that pollution cost forms about 7-10% of China's GDP each year. That means if the country is to effectively pursue the UN regulations agree upon recently, this cost would definitely increase operational cost and reduce expected profits.

Another factor that needs to be considered is the need for human capital the key to higher productivity and sustainability. The lagging behind of human capital can greatly retard productivity as is being experienced by a country like Denmark currently. In actuality, there is a causal relationship between productivity and human capital. Accordingly, if China is to keep up with its pace of economic growth then there is the need for revitalization of its educational sector to augment its human capital. It is true that China is advancing in technology ahead of the world but this is only sustainable with increasing level of human capital which is an integral part of the bedrock of productivity. Also, human capital is paramount to innovation, entrepreneurship, research and development all principal promoters of productivity. Innovation is needful in the energy and infrastructural sectors to meet its growing energy needs and its urbanization programs.

Now, in spite of some negative connotations associated with the economic growth, China should be commended for attainment of this high level of economic growth. Having the highest amount of foreign exchange reserves and recently overtaking Germany as the world's largest exporter in 2009 is a laudable accomplishment which epitomizes China as an unprecedented economic super power and also an industrious nation. The fact is that no country can achieve such a distinctive status without infringement or petty international violations. Ultimately, much as the western world would want to see China comply with trade laws and the likes, they should also be ready to work with the country to ensure the sustainability of its economic growth. It is an indisputable fact that China is currently the locomotive engine of the world economy with worldwide strategic investments whose tentacles permeate even to the remotest parts of the world. So any expert in how a train operates would tell you what happens to the coaches when the engine derails or fails. In fact, there is a high probability of the coaches also derailing or failing if the engine derails or fails. Thus any failure of the Chinese economic system would spread pervasively to almost every economy of the world sending the world into another era of recession. By now, the world has learned from experience the repercussions of the failure of the United States economy plunging the world economy into recession and would not want a repeat of such an occurrence with China. Let's not forget the fact that just as no economy was immune to the impact from the United States case, so be it for no economy in the world should the unexpected happen to China. Therefore, China would need the assistance and cooperation of the world especially the major economies to be able to control its macro-economic and political factors to ensure the sustainability of its economy and prevent economic super heating which is antecedent to an economic bubble burst. There are some who believe that all the pursuits of China have the objective of marginalizing United States and Europe and would want to be pessimistic about the future of the Chinese economy. However, united we stand divided we fall. Passivity is the key.

Finally, I would not want to complete this article without elucidating the fact that the attainment of such an economic status of leadership in manufacturing, technology and possibly the financial sector can be coupled with the attainment of superior military power. In reality, superior military power is primarily a result of the adoption of a superior military technology. Thus, the propensity by an economic super power to adopt and use its technological know-how leadership to create a superior military is inevitable. Another dimension of the technological leadership is the ability to infiltrate other country's military system or security systems or better still hack the system.

Conclusion
Several economic empires have come and gone and unfortunately the demise of these empires termed economic bubble burst has often sent economic shock waves to the rest of the world. It is in the light of these developments that the world is wondering whether China the reigning economic empire would follow the same fate. Macro-economic factors describing the Chinese economy namely GDP, current account balance, CPI, inflation and foreign exchange reserves are currently favorable. Superficially, it is possible to think that China's pace of economic growth is sustainable and there is no cause for alarm. However, a critical look at the economy reveals the need for a review of its policies that governs its economic freedom, political freedom and its international deliberations all of which can gravitate towards the initiation of an economic bubble burst. The long term absence of which could wreck the current pace of economic growth with reverberations to the rest of the world. Finally, it must be emphasized that China cannot do it alone and would need the cooperation of the world especially the major economies to ensure the sustainability of its economy and that of the world.

Source: Charles Horace Ampong [MSc(Eng), MBA(Finance)]

GLG Councils Consultant
Blog: http://charliepee.blogspot.com

Development / Accra / Ghana / Africa / Modernghana.com