Over the past 30 years, China’s economy has expanded at an average annual rate of 10%.
As a result, the country now boasts the second largest economy in the world, driven by its unsurpassed manufacturing and export base.
“Impressive,” for sure, as the World Bank states.
But in a new report, the bank quickly follows that up by saying that such growth is “unsustainable.”
Now you might be reading that, thinking, “Hmm… after 30 years, how come it’s suddenly unsustainable?”
According to World Bank director, Robert Zoellick, China has now reached “a turning point in its development path,” where “the case for reform is compelling.”
Among the measures World Bank proposes:
- Increased adoption of free-market economy practices.
- Greater innovation.
- Higher investment in clean energy.
- More cooperation with the global economy.
But is China on board with such a vision?
China’s “Problem P’s” – Pollution and the Poor
There’s no doubt that China’s remarkable growth has come at a cost.
And you don’t even need to read the financial news to appreciate one of the biggest problems… you just need to look at the thick layers of smog that hover over China’s largest cities.
You can’t generate such massive economic expansion without using a ton of energy. And the International Energy Agency says China sped past the United States as the world’s biggest energy consumer in 2009.
As China has sucked up energy and spewed it back out, the country is now the world’s biggest carbon dioxide polluter.
How the nation will specifically solve the pollution issue remains to be seen.
But there’s another problem, as well: The widening gap between China’s “haves” and “have-nots.”
Quoted in Bloomberg, Mark Williams, a China specialist at Capital Economics:
“For most people in China, the stellar double-digit growth rates of a few years ago didn’t translate into equivalent increases in income or spending.”
That reality has triggered increasing anger and resentment among the masses. According to sociological research at Beijing’s Tsinghua University, the number of strikes, protests, riots and other economic-based strife doubled to 180,000 between 2006 and 2010.
To tackle the growing imbalances and inequality, the Chinese government has adjusted the official poverty line, which means almost 130 million now qualify for welfare and other aid. It’s also building 36 million new residences for low-income citizens by 2015.
It seems the Chinese have finally realized one incontrovertible truth: What goes up, must come down…
The Chinese Slowdown is On
In a speech to China’s National People’s Congress next Monday, Chinese Premier, Wen Jiabao will spell out a significant ideological shift…
Rather than the blazing growth model that has defined China for the past 30 years, it’s now more important to arrest the economy’s rampant growth, in hopes of reducing pollution and redressing social and economic imbalances.
Specifically, that means lowering the annual GDP growth target to less than 8%. That’s a significant drop from the 10.4% and 9.2% growth notched in 2010 and 2011 respectively. But it would allow the country to implement the fundamental, widespread reforms needed to rebalance the economy and “adapt to major changes in the world and national economies,” according to Zoellick.
The slowdown is already underway…
- During the final quarter of 2011, China’s economy expanded by a year-over-year rate of 8.9% – the lowest level in two years and down from 9.1% in the third quarter.
- China’s exports dropped for the first time in two years in January, due to the ongoing malaise in Europe – China’s largest trading partner. Imports also slumped by 15% in January.
- HSBC and Markit Economics estimates call for a fourth straight month of manufacturing sector contraction when the February figures are released.
If these trends continue, coupled with the government’s new mandate, the “C” in BRIC will be looking a bit smaller.