Chinese Investors Are Learning and Expanding Globally

China’s Foreign Direct Investment outflows started to surpass the inflows in 2016. According to the World Development Indicator (2017), China’s foreign direct investment net outflows reached $217.20 billion while net inflows was $170.56 billion. It was the first year that China’s outflows was greater than the inflows. Chinese investors are globally seeking for mergers and acquisition in the foreign countries in order to access to natural resources for their production input, acquiring technology and being closer to the market.

Inwards and Outward

Source: World Development Indicator (2017)

The main destinations of the Chinese investors are countries in Asia, especially Hong Kong and Singapore. According to China’s National Bureau of Statistics (2016), countries in Asia shared 74.4% of the destinations of Chinese investors. Latin America is the second largest destination (8.66%), followed by North America (7.36%), and Europe (4.89%).

FDI destination

Source: National Bureau of Statistics of China (2016)

There are three main reasons that the business will decide to invest in the foreign countries: 1) To be closer to the market or avoid the import tariffs (so-called “Tariff jumping”), 2) To own or access to the natural resources, or 3) To get cheaper input (skilled labor or unskilled labor). Even though North America shared only 7.36% of the destination, the value of investment has been increasing dramatically. In the United States, the value of foreign direct investment from China used t be only $119.93 million in 2004. It had strikingly risen to 8,028.670 million in 2015 (see the following graph).

China US FDI.jpg

Source: National Bureau of Statistics of China (2003-2016)

If the government of the United State insists to use the protectionist policies toward Chinese imports by tariffs, Chinese investors are able to use foreign direct investment for “tariff jumping” and set up their factories here, similar to the situation of Japanese automotive companies in 1980s.  It seems like Chinese investors have learned from the history and prepared themselves very well in the dynamic of globalization. Although they are new in term of multi-national business compared to the investors from the advanced economies, it seems only a matter of time before they step up to be among the leaders.

 

 

Thailand’s Corruption Perceptions Index dropped in 2016

From the report of Transparency International (2016), Denmark had the highest score (90) in term of corruption perceptions index. United States ranked 18th. Japan ranked 20th and China ranked 79th in 2016. Thailand’s Corruption Perceptions Index had dropped from 38 in 2015 to 35 in 2016. Thailand is now ranking 101th from 176 countries.

The very high risk category for corruption in Thailand was the defense and security sector. Thailand’s corruption perceptions index was at the same level as Gabon, Niger, Peru, the Philippines, Timor-Lester, and Trinidad and Tobago in 2016. The report noted that the government repression, lack of independent oversight, and deterioration of right eroded public confidence in the country.

Untitled

Source: Transparency International (2016)

Note: What is the Corruption Perceptions Index? It is the index that Transparency International (TI) calculated by defining the corruption as “the misuse of public power for private benefit.” TI uses 13 different surveys asking business people and data from 12 different institutions to calculate the score for a country. The highest score is 100 which represent less or no corruption. The least score is 0.

China’s Middle Class and the Future of Political Regime (2)

My last blog post was about the growing size of the middle class in China. Today we will look at the changes in their wealth and living conditions that can lead to the possible change of political regime in China.

The economic growth of China has been slowing down in the past six years. The Chinese economy grew 6.9% in 2015 and 6.7% in 2016, significantly lower than 10.6% in 2010 (World Development Indicator, 2016). Last year’s growth rate was the slowest growth in 26 years. When we calculated the average growth rate after China opened for foreign trade and investment in 1978, the average growth rate of the Chinese economy was 9.7%. During 2012-2015, the growth has dropped below 7%. The bright future is not likely to happen for the global economy if the biggest producer of the world with roughly 20% of the world population are going to have an economic collapse. That’s why we need to pay close attention to what will happen in China’s future.  

The hypotheses about the relationship between the state of economic development and the political regime have been widely tested since Aristotle. Lipset (1959) used various indices of economic development – wealth, industrialization, urbanization, education and the indicator for democracy. He found that the average wealth, degree of industrialization and urbanization, and level of education are much higher for the more democratic countries. The increased wealth is not only related to the development of democracy by changing the social conditions of the workers, but it also affects the political role in the middle class through changing the shape of stratification structure so that it shifts from an elongated pyramid, with a large lower- class base, to a diamond with a growing middle-class.

Slide1

Another important literature related directly to China is from Eckstein (1970). His study focused on the political change in communist systems and economic development. The study concluded that the capacities of the economic and political system are constrained by the stage of development. He explained that when there is economic development, there will be growing demand for technical and scientific skills. When the production technology requires less labor, there will be more labor surplus. There will be an increasing division of labor and a growing functional differentiation of occupations, occupation roles, and social roles (Eckstein, 1970, pp.491). Finally the process will produce a managerial elite class. These phenomena then produce an urban way of life, creating demand for consumer products. A command economy will become more and more difficult to manage as industrialization proceeds and as the economy becomes more complex. When the economy is more complex, it needs high reliability and transparency of information. The centralized command economy might end up with a lot of errors in the system because it cannot provide speedy and transparent information. The pressures to change the political system will be reinforced by a cross-cultural and transnational demonstration effect.

Acemoglu (2010) found that there is increasing recognition that institution and political economy factors are central to economic development. Many problems of development result from barriers to the adoption of new technologies, lack of property rights over land, labor and businesses, and policies distorting prices and incentives (Acemoglu, 2010, pp.10). In the 19th century, elites were landowners who enjoyed revenues and profit because of their political power, thus likely to take actions to preserve and consolidate their political power. The elites can lose their power to the middle class if the middle class is expanding and become wealthier.  In the 20th century, the elite may correspond to segments of industrialists or bankers with a monopoly position. In some stances, the elite may simply be groups in control of the state apparatus after the end of colonialism (Acemoglu, 2016, pp. 247).

From the last blog post, I mentioned some of the the main ideas of the three-class model. The poor prefer the highest tax rate (or positive) since they do not have to pay. The rich prefer zero tax. The most preferred tax rate of the middle class could be zero or positive depending on whether their income is greater or less than the average income.

When we look at the average income, China’s per capita income in 2012 was $1,106.99 (World Development Indicator, 2016). And the urban middle class income can be calculated using the average income from two subcategories of the middle class;

average income of middle class

From the calculation, the average income of the middle-class is a little bit higher than the per capita income. Therefore, we can imply that the middle-class in China will have different preferred tax rate than the poor. However, the preferred tax rate or economic policies of the middle-class are still far from the wealthiest group. They are still in need of infrastructure and welfare from the government like the poor. If the government impose too high tax, there could be a strong resistance from the middle class since they are now becoming the group that can put the pressure for the government to get the policy they want, otherwise, the political equilibrium will not be met.

From the structural changes in the income groups, there is a tendency that China will experience a serious pressure from the middle class for their preferred set of policies. The sluggish growth of China from 2010-2017 can also lead to the mobility among classes and inside a class. The upper middle-class will move to the mass middle-class if they lose their jobs and there is no welfare program to compensate. Jobs in some industries begin to move away from China because of the higher wages compared to emerging economies. The mass middle-income have a chance to be pushed down to the low income. Unskilled laborers in the inland China can be an example of this group. Since they do not have very high education, they do not have alternatives to choose if they are laid off from the footloose industry and have to move back to rural China to become farmers again.

When the society is not in political equilibrium, there are chances of social unrest and/or revolution. The process after can be explain by the following picture.

process of transition

Source: Acemoglu and Robinson, 2006, pp.176.

It starts by the threat of revolution or social unrest. If the elites or ruling class do not want to have economic disruption from the protest or unrest, they need to commit to future policies to serve the majority in the country. That will lead to the introduction of democracy and more political power in the future.

In the next blog, we will explore together the current situation of political movements from both of the urban and mass middle-class in China to see what has happened and what policies the Chinese government has been trying to mitigate the pressure from this group.

See you next time!

 

China’s Middle Class and the Future of the Political Regime (1)

China’s poverty reduction policies have been working very well since the country opened the economy. China’s growth after 1980 is very impressive. In 1981, 99.14% of the Chinese population were living by $3.10 or lower per day (World Development Indicator, 2017). Thirty-two years later, in 2013, only 11.09% of the population were living under $3.10. The poor in 1981 had moved their later generations to the higher income bracket (at least higher than $3.10 a day).

Poverty headcount

Source: World Development Indicator (2017)

Some of those who were poor in the past have jumped into the middle class group. To define the middle class,  McKinsey & Company (2013) used the range of income from $9,000 to $34,000 as the middle class household definition. From their survey results, they estimated that these households account for 68% of the urban households in 2012. Inside the middle-class, there are 54% that can be defined as the mass middle-income ($9,000-$16,000 per year) and 14% that can be defined as the upper middle class ($16,000-$34,000). McKinsey & Company forecast that by 2022, more than 75% of China’s urban consumers will become the middle class.

China Urban income group estimated

Source: Dominic Barton, Yougang Chen, and Amy Jin (McKinsey Quarterly, 2013)

Why do I offer these numbers to you?

I would like the confirm the picture of a growing middle class in China. This class used to be very weak compared to the ruling class during Mao’s revolution. They are now enjoying higher income and growing their power. You can see there are a lot of Chinese tourists traveling all over the world’s destinations and sending their children to get higher education in the western countries. The growing number and wealth of the middle class has been re-defining the power structure in China. According to China Tourism Research Institute, China had 120 million outbound tourists in 2015 compared to 40.95 million in 2007. And the money they spent in 2015 was $104.5 billion!

When people have reached a certain level of wealth they tend to demand non-material values, including freedom to choose political regime. Many people in China are becoming more and more frustrated by the lack of political accountability and transparency (The Economist, 2016). However, voting in China is still considered a distant dream. The poor have been excluded from the political power for a very long time. The re-defined structure of Chinese population by income is stimulating the revolutionary threats to the elite class. Even though the Chinese government policy set is centrally planned, the middle-class group can put more pressure on the government through some forms of threats such as demonstrations, strikes, or being more organized.

Daron Acemoglu and Robinson (2001)’s theory can be used for explaining the transition of the wealth redistribution and the political transition. Their theory was developed using the experiences of Western Europe and Latin America. The main argument is that in the democratic societies the poor impose higher taxes on the rich than in the non-democratic societies. This make the poor pro-democratic while the rich have incentive to oppose. The poor prefer to have higher tax since they do not have to contribute if their income is too low, and they will get the benefit from the tax. The rich prefer the low rate of tax because they are the ones who pay the most (assuming the progressive tax system is working well). How about the middle class? It depends. The upper-middle class might have closer preferred tax rate to the rich. The lower one will be more like the poor.

If the tax rate or the government policy in a non-democratic country is not serving the group which is the majority of the country, the tension will rise and create a higher possibility of that group making a credible threat or revolution to change the regime.

I am using the Three-Class Model of Acemoglu and Robinson (2006) for the framework to analyze this issue. The three-class model assumes that the society has three groups; the rich, the middle-class, and the poor. Whichever group has the largest number will be the dominant group. If the size of the poor group is bigger or equal to 50%, the majority voting will be the poor. Then the most preferred policy will tend to be from the poor.

China’s total population in 2012 was 1,350.695 million. The total poor from both urban and rural areas was around 21.28% of the total population or 287,441,532. The poor are not the majority in China anymore. The median voter is now the middle-class.

What is the preference of the middle class in China? What are factors that make the middle class movement? Will it change the political regime in China? I will continue on the next blog. See you next week!

 

References and Sources:

Acemoglu, D. and Robinson, J.A. (2001). A Theory of Political Transitions. The American Economic Review, 91(4), pp.938-963.

Acemoglu, D. and Robinson, J.A. (2006). Economic Origins of Dictatorship and Democracy, Cambrige University Press, New York, pp.259-260.

http://www.economist.com/news/special-report/21701653-chinas-middle-class-larger-richer-and-more-vocal-ever-threatens

http://www.mckinsey.com/industries/retail/our-insights/mapping-chinas-middle-class

Trump’s Protectionism will hurt Americans the most

The President of the United States, Donald Trump, announced during his campaign indicating that there will be a dramatic change in the whole set of economic and foreign policies. China is obviously his main target. He claimed that China has been manipulating their currency so the imports from China are too cheap and cause the huge amount of the  U.S. trade deficit. He has promised to impose a 45% tariff on Chinese products.  This protectionist trade policy can cause not only  haywire global trade but also shake the U.S.-China relationship to collapse.

One optimistic view is from Professor Keyu Jin, at the London School of Economics. She noted that Trump is unlikely to change much in terms of the U.S. economic policy since he should realize that imposing a very high tariff will hurt the U.S. economy instead of benefiting. She pointed out that Trump might make some changes in the foreign policy, but those changes may be more likely to please China than to make it worse. According to Professor Jin, no radical change should be expected. China’s leader need to focus on a cooperative bilateral relationship. (http://prosyn.org/D98xwAs)

But what if Trump keeps his promises and does all of the trade protectionist policies that he announced? That would lead to a global recession. William Buiter, Chief Economist at Citi, wrote to his clients that this might spark a global trade war, “which could easily trigger a global recession” (Business Insider, 2016). Before signing any policies, the U.S. president should also keep in mind that China is not in the inferior position. They are the single largest non-U.S. holder of Treasury debt.

I agree that the harsh protectionism will lead to a global recession. First of all, the argument that Chinese products are cheaper because China manipulated their currency might not be valid anymore. China did manipulate their currency lately, but mainly for defending yuan from falling sharply, not for making their exports cheaper. Secondly, if a 45% tariff rate is imposed on products from China, China will surely retaliate by imposing tariffs to American products. The practice of imposing tariffs to every product is also against the World Trade Organization’s rules. The U.S. is among the strongest voice that asked the developing countries to cut down their trade barriers in the past. China just entered the WTO in 2001 and was among those developing countries. If the U.S. ignored the the WTO’s rules, no one will care about following the rules anymore. All the WTO members will start raising their tariffs and non-tariff barriers again. Global trade will be drastically dropped. This phenomenon will kill millions of jobs around the world, including in the U.S since the export sectors of every country will contract. The middle-class people, who have jobs in the factories and have just started to climb up to the upper-middle class, will fall miserably and suffer the most. When they lose their jobs, they will cut down the spending. It will cause a domino effect to every other part of the economy.

The direct effect of trade protectionism is falling on Americans (or residents of the U.S.). Products of China have been part of the poor and the middle-income for more than two decades. American consumers enjoy buying cheaper products from China, and that is not their faults. Consumers should have the right to buy the cheapest goods under their budget constrain. If the tariff is imposed, the importers will pass that burden of higher price to consumers. A lot of importers might stop importing from China, but they won’t start to produce by themselves. They just have to change the suppliers from China to other countries like India, Bangladesh, Vietnam, etc.

The cost of living for Americans will be a lot higher while there is absolutely zero sign that Trump will support to increase minimum wage. Protectionist policies won’t create many jobs, since the U.S. will be in the trade war with other countries and lose the existing export markets. Domestic demand will be doomed. Trump’s Protectionism will hurt Americans the most, especially the poor and the middle-class.

 

 

 

ผู้ใหญ่ไม่ผิด เด็กรุ่นใหม่ก็ไม่ได้ผิด เราโตมาต่างบริบทกัน

เป็นข่าวใหญ่โตครึกครามจากการที่เด็กคนหนึ่งจงใจแสดงออกถึงการตั้งคำถาม และต่อต้านประเพณีปฏิบัติของมหาวิทยาลัยที่ได้ชื่อว่าถูกก่อตั้งด้วยพระมหากรุณาธิคุณของพระมหากษัตริย์สองรัชกาล ไล่ออกนอกมหาวิทยาลัยบ้าง ไล่ออกนอกประเทศบ้าง กลุ่มสนุบสนุนก็รอคอยเพื่อจะได้ตอบโต้ว่า นี่ไงคิดแบบลุงป้า ประเทศถึงไม่เจริญ

จึงมานั่งคิดให้เหตุผลกับการกระทำดังกล่าวของเด็กน้อย และให้เหตุผลต่อกระแสต่อต้านจากผู้ใหญ่และเด็กบางคน อย่างแรกและแน่นอนที่สุด คนเราเติบโตมาในครอบครัวต่างกัน สิ่งใดที่เรียนรู้ว่าดีงามตั้งแต่เด็กก็มักจะใช้เป็นระบบอัตโนมัติตัดสินว่า สิ่งนั้นดีงาม พร้อม ๆ กับขยายความออกไปตัดสินว่า สิ่งที่ตรงข้ามคือความไม่กูกต้อง

อย่างที่สอง เด็กและผู้ใหญ่เติบโตมาในบริบทของสังคมต่างกัน การเรียนรู้เพื่อให้มีชีวิตรอดในสังคม เราใช้วิธีการต่างกัน บางอย่างที่เคยจำเป็น ก็ไม่จำเป็นอีกต่อไป

คลุมเครือมามากพอแล้ว ยกตัวอย่างกันดีกว่า

ผู้เขียน เกิดปี 2525 อายุสามสิบกว่าแล้ว ตอนเด็ก ๆ เคยเห็นพระมหากษัตริย์ทรงงานหนัก ออกเยี่ยมราษฎร พอน้ำท่วมก็เรียกผู้ว่าราชการจังหวัดมาเพื่อแก้ไขปัญหาเร่งด่วน ได้เรียนรู้จากรุ่นพ่อแม่ว่า พื้นที่บางแห่งเคยเป็นที่ร้างทำการเกษตรไม่ได้ ก็มีโครงการของพระเจ้าอยู่หัว แล้วเกษตรกรก็ทำกินได้ ชีวิตดีขึ้น ทรงใส่พระทัยในทุกรายละเอียดความเดือดร้อนของประชาชน ผู้เขียนจึงรู้สึกจากใจทราบซึ้งในพระมหากรุณาธิคุณที่ทรงทำให้ประเทศ จงรักภักดี และเคารพ จากบริบทและความทรงจำที่เคยเห็น

ตอนเด็ก ๆ เราไม่มี Google เวลาเราไม่รู้ คนแรกที่เราจะนึกถามก็คือญาติผู้ใหญ่ พ่อ ๆ อันนี้ทำยังไง หรือไม่ก็ไปหาครูบาอาจารย์ ขอเรียนรู้ ขอวิชา เราจึงทราบและซึ้งในบุญคุณของท่านทั้งหลาย เข้าใจความกตัญญูในรูปแบบที่มีเหตุผล เราจึงยกมือไหว้ และหมอบกราบ เพื่อแสดงถึงความเคารพและสำนึกในบุญคุณ ยอมรับว่าเรารอดชีวิตมาได้ก็เพราะท่าน

คนรุ่นเดียวกับผู้เขียน (อาจจะไม่ใช่ทุกคนหรอกนะคะ) มีเหตุผลจากบริบทของสังคมที่เติบโตมาในการไหว้ แสดงความเคารพในรูปแบบที่บ่งบอกว่า ซาบซึ้งในบุญคุณอย่างสูงสุด การหมอบกราบไม่ได้บอกว่าเราเป็นทาส แต่บอกว่าเราขอบคุณ

ทีนี้มาถึงเหตุผลของเด็กรุ่นใหม่ น้อง ๆ ที่เพิ่งเข้ามหาวิทยาลัย อายุ 17-18 ก็น่าจะเกิดช่วง 2541-2542 เด็ก ๆ อาจจะเคยเห็นสถาบันพระมหากษัตริย์แต่ในทีวี ไม่เคยเห็นว่ามีอะไรในสังคมเปลี่ยนแปลงที่มาจากสถาบันพระมหากษัตริย์ เวลาไม่รู้อะไร ไม่ต้องถามพ่อแม่ มีการตั้งคำถามกับครูบาอาจารย์และระบบมากขึ้น Google ตอบได้เกือบทุกเรื่อง (ในแบบที่ Google อยากโชว์) สังคมเป็นแบบปัจเจก ไม่ต้องพึ่งพาแบบสมัยก่อน สถาบันครอบครัวมีหน้าที่สนับสนุนในการเรียนรู้ แต่ไม่ได้ทำหน้าที่หลักในการสอนอีกต่อไป เมื่อสถาบันพระมหากษัตริย์ไม่มีบทบาทในสังคมมากนักจึงถูกเปลี่ยนไปเป็นแบบคล้าย ๆ เทวราชาอีกครั้งหนึ่ง เพื่อรักษารากฐานความจงรักภักดี สังคมที่เปิดกว้างมากขึ้น เด็กรุ่นใหม่เรียนรู้มากขึ้นว่าต่างประเทศเป็นอย่างไร การไปต่างประเทศก็ง่ายขึ้นมาก มีสไกป์ มีไลน์ มีเฟสบุค มีวิกิพีเดีย จึงไม่ใช่ความผิด ที่เด็กจะมีการตั้งคำถามว่า ทำไมบ้านเราจึงไม่เป็นแบบนั้นแบบนี้บ้าง

ผู้เขียนคิดว่าไม่ใช่ความผิดที่เด็กรุ่นใหม่บางคนไม่ซาบซึ้ง ไม่เข้าใจว่าทำไมจึงต้องปฎิบัติตามธรรมเนียมแบบเดิม และเกิดการตั้งคำถาม และต่อต้านด้วยวิธีการเรียกร้องความสนใจแบบที่เป็นข่าว

หากแต่ผู้เขียนมองว่า เด็กเองก็ต้องเรียนรู้ที่จะเปิดใจและเข้าใจสังคมที่อยู่ในกระบวนการเปลี่ยนผ่าน ไม่ใช่จ้องทำร้ายจิตใจคนรุ่นเก่ากว่าด้วยการทำลายพิธีที่มีค่าทางจิตใจของคนบางกลุ่มในสังคมเช่นกัน

สิ่งที่ผู้เขียนอยากจะบอกสังคมก็คือ เสรีภาพในการแสดงความคิดเห็นและตั้งคำถามนั้นควรมีอยู่ในสังคม แต่ควรอยู่ภายใต้การเคารพซึ่งกันและกัน เคารพในที่นี้ไม่ได้หมายความตามอายุ แต่เคารพที่เราโตมาในบริบทของสังคมที่ต่างช่วงเวลากัน การหล่อหลอมเป็นคน ๆ หนึ่งซึ่งต่างกัน เหมือนกับเราผมสีดำ เธอผมสีน้ำตาล เราไม่ได้ดีกว่าเพราะเราผมสีดำ เธอไม่ได้แย่กว่าเพราะเธอผมสีน้ำตาล

สังคมไทยในอดีตเป็นสังคมที่เรียนรู้จากประสบการณ์ (Experience based) นั่นคือเรียนรู้จากการลองถูกลองผิดของปู่ย่าตาทวด  ลองปลูกข้าวแบบนี้ปีนี้ได้ผลดี ปีหน้าทำอีก หรือไม่ได้ผล ปีหน้าก็เปลี่ยนวิธีการ สมัยก่อนเราไม่ได้ถูกสอนให้คิดสร้างห้องแล็บ เพื่อทดลองปลูกข้าวทีละต้นสองต้นแบบในสมัยนี้ ที่สังคมได้รับเอาวิธีการเรียนรู้ด้วยการทดลอง  (Experiment based) ของตะวันตกเข้ามามากขึ้น การเรียนรู้แบบการทดลองของเด็กสมัยใหม่จึงต้องปรับตัวด้วยการตั้งคำถามที่อาจจะขัดใจคนรุ่นเก่าแบบผู้เขียน ทำไมเราไม่ลองแบบนั้น ทำไมเราจึงต้องอยู่ในระบบนี้ เป็นต้น

กระบวนการเปลี่ยนผ่านของสังคมต้องใช้เวลา ความคิดต่างกันไม่ได้แปลว่าใครผิดใครถูก ผู้ใหญ่ลองคิดและฟังเหตุผลเด็กบ้าง อย่าเพิ่งด่าอย่าเพิ่งโกรธ เด็กน้อยก็ควรเรียนรู้ที่จะเปิดใจและเข้าใจผู้ใหญ่บ้าง เหตุผลที่ผู้ใหญ่พยายามอธิบายอาจจะไม่ใช่วิธีการเอาตัวรอดในสังคม แต่เป็นตัวอย่างการใช้ชีวิตในรูปแบบหนึ่งซึ่งอาจจะแฝงความปรารถนาดีให้กับเธอ

สวัสดีค่ะ

What happened to China’s growth?

According to the Economist Intelligence Unit (The Economist, 2016), China’s GDP growth last year (2015) was 6.5%.

Can we tell any story from this number?

Well, it is positive, should it be considered good?

Wall Street Journal reported that it was the lowest growth of China in 25 years, showing the sharply slowing down of the economy. It was since 1990 that China had lower growth rate than 6.5% (China’s growth in 1990 was 3.9% according to the World Bank). Following by the report of growth for the first quarter of 2016 which was 6.7% (BBC.com, 2016), China had the slowest first quarter’s economic growth in seven years.

Long-term China’s growth path is converging to a stable path (World Development Indicator, 2016). Rising dragon is not quite rising anymore.

China GDP Growth 1961_2014

What are the reasons behind China’s economic slowdown?

Looking at the important factors of GDP growth, I drew a graph showing export growth, government consumption, capital formation, and household consumption expenditure growth to see what happen to the GDP components.

China GDP Component growth

From the graph, you will see that the export growth of China had dropped sharply during 2006-2009, rose again in 2010, but had been decreasing after that. We therefore can see the evidence that the export sector is the main reason why China’s growth had been stagnant. The Chinese government consumption expenditure had a stable path since 2005 but also started to drop after 2013.

The sluggish export sector has already affected the middle-class Chinese in the industrial cities who have jobs in the manufacturing factories. If the overall economy cannot pickup in the next few years, other classes (the wealthiest and the poorest) in China will finally be suffering from the depressed domestic demand. The poorest group of people will be hurt the most if the government has to move its resources to help the industries and cut down the welfare.

The export sector of China has been slowing down from the uncontrollable sluggish demand of the Europeans and Americans, the only one key to maintain the economic expansion is the domestic sector, both investment and consumption.

From the graph, China’s household consumption (% of GDP) has an decreasing trend. After the Asian financial crisis in 1997, Chinese save more and spend less. The consumption component of China’s GDP therefore has potential to drop even more and make the situation worse.

Final Consumption

The government sector has already been trying to pour money into the infrastructure investment. However, Chinese private companies as well as State-Owned Enterprises are showing signs of reaching the limit of demand. The best example is so-called ‘ghost cities’, showing empty towers and apartments which no one lives in. The real estate bubble in China has already been blow up by the local government to the point that it is ready to burst.

manhattan_aap330_19r487v-19r4889

Downtown Yujiapu, dominated by newly-built skyscrapers is a ghost town. Photo: AAP (https://au.pfinance.yahoo.com/money-manager/real-estate/article/-/24358644/future-shaky-for-chinas-manhattan/)

Another big problem is debt. When a country is having debt, it does not imply that the country is in a problem, as long as the borrowing is used for the growth creation. China has accumulated the external debt stocks over time, especially in the private sector. Overall, Chinese government, corporate and household’s borrowing have been strongly increasing. Unfortunately, Chines debts creates less and less growth. According to the Economist, “China requires more and more credit to generate less and less growth”. (The Economist, 2016).  Debt payment burden will become harder when the business sector is not supported by foreign and domestic demand.

China External debt stock.jpg

I know, all of these does not sound like a bright future of Chinese economy. But we all learn from good and bad experience. China can learn a lot to build a stronger economic structure from this potential recession.

How about the effects of China’s slow growth to the United State? That is an interesting question that I will try to answer next time.

See you next blog!

 

Note:

All graphs are constructed using World Development Indicator from the World Bank database.

Sources:

Magnier, M. (2016). China’s Economic Growth in 2015 is Slowest in 25 Years.Wall Street Journal,  January. http://www.wsj.com/articles/china-economic-growth-slows-to-6-9-on-year-in-2015-1453169398

The Economist (2016). The Coming Debt Burst. http://www.economist.com/news/leaders/21698240-it-question-when-not-if-real-trouble-will-hit-china-coming-debt-bust

BBC (2016).China GDP: Economy Slows to 6.7% in first quarter. 15 April 2016. http://www.bbc.com/news/business-36051327

Problems of Modern China (II)

I started to talk about problems arising from China’s economic reform in the last blog. When the country became wealthier, there are more rich people getting richer. Even though China can help a lot of people escape the poverty, the existing poor are getting poorer. Growing income inequalities led to the problem of ‘underconsumption’ in China. The middle class are aware of insecurity from the weakened welfare system and therefore increase their saving.

Today I would like to talk about another two big problems that followed the market economy; Water Crisis and Labor Unrest.

Water Crisis

Environmental problems cover many sub-problems like air pollution, water pollution, deforestation, and habitat and biodiversity. The main problems that Chinese people are severely affected by now are air and water pollution.

When China started the industrial clusters along the main rivers; Pearl River Delta (around Shanghai), Yangtze River Delta, and Bohai Bay Region, the water pollution problem followed immediately.  Factories and cities along these rivers flow their toxic chemicals and wastes into their fresh water resources. More than one third of this waste flows into the rivers without any treatment. A survey conducted by China National Environmental Monitoring Center in 2006 reports that 32% of total drinking water tested was not suitable for drinking (Liu, 2006).

Water pollution plastic

Photo: http://riverlink.org/water-pollution-an-ounce-of-prevention-is-worth-a-pound-of-cure/

Dirty freshwater resources cause the water shortage problem. When there is growing demand from the urban lifestyle, the water crisis in China is getting worse.

wateruse_1

Map of Water availability in China (HSBC Global Research)

(Photo source: http://qz.com/158815/chinas-so-bad-at-water-conservation-that-it-had-to-launch-the-most-impressive-water-pipeline-project-ever-built/)

You can see from the map that the areas experiencing water crisis are along the coast. Nearly half of China’s largest cities face water shortages. Beijing, Tianjin, Hebei, Shandong, Henan and Shanxi are having an extreme water scarcity problem (0-500 cubic meters per capita per year). This problem is exacerbated by the lack of investment in the water management infrastructure.

The water crisis also leads to many more problems. Public health is at high risk. Diseases can be spread out easily from dirty water and fishery products. Industrial zones need a consistent running water system otherwise the production will be interrupted. The Chinese quality of life and economy are in danger if the Chinese government cannot solve this problem very soon.

 Labor Unrest

Profit is the most important incentive of the investors and entrepreneurs in the market economy. Since profit is the surplus after paying for all cost, reducing labor cost is the strategy where businesses focus. China has the largest labor surplus in the world economy. This labor army reserves makes the labor-intensive manufacturing industries stay competitive.

However, wage rates in China have been increased from higher demand for labor along the coastal and southern cities. Some businesses have decided to relocate their factories to lower wage countries. Industries that are characterized as ‘footloose’ will not have significant change when the location changes because the installation cost is very low. A large share of factories in China falls in that category.

Imagine if you are working in one of the ‘footloose’ factories in China and do not have an alternative job. You have no choices even though you have to work very long hours and the working conditions are very poor. When you have an alternative to choose, you might start to think about quitting the job, bargain for better working conditions, or strike – the only one tools that workers have in bargaining.

From the economic prosperity, Chinese people can afford more education. Chinese workers who have higher degrees started to realized that they have some other choices and learned more about labor standards and labor rights from the international labor organizations. The vast majority of the labor protests in the second half of the 1990s were carried out by workers being laid off from the state-owned enterprises after they went through restructuring (Silver and Zhang, 2009). Labor in the industrial cluster zones then started to have more strikes. There is a very interesting picture from the Washington Post by Denise Lu showing the number of labor strikes in China.

 

CHINALABOR0225-web-v2

Photo source and more detail:  https://www.washingtonpost.com/world/asia_pacific/strikes-and-workers-protests-multiply-in-china-testing-party-authority/2016/02/24/caba321c-b3c8-11e5-8abc-d09392edc612_story.html

More choices in Guangdong province leads to more labor unrest. Inner China areas like Tibet or Qinghai provide less choices for the labor movement. These labor protests can discourage foreign direct investment and become political risks for the communist party. The Chinese government have recognized this problem and passed the ‘New Labor Contract Law” for enhancing job security and putting more restrictions for employers to hire or fire workers without cause. This law is shifting more of the bargaining power towards the workers.

Despite the growing labor unrest in China, keep in mind that in the capitalist system, ‘the capitalists’ own the physical capital (building, machines, assembly lines and equipment). This provides more power over the labor. Also, the Chinese government needs to keep encouraging the capitalists to run the market economy. Therefore, there is a tendency that the labor unrest will continue growing and become a big challenge to the Chinese economy in the future.

 

Reference: 

Liu, Y. (2006). “China’s drinking water situation grim; Heavy pollution to blame”. ChinaWatch. WorldWatch Institute.Retrieved April 1, 2016, from http://journal.probeinternational.org/2006/08/03/chinas-drinking-water-situation-grim-heavy-pollution-blame/

Silver, B.J. and Zhang, L. (2009). China as an Emerging Epicenter of World Labor Unrest. In Ho fung-Hung, editor, China and the Transformation of Global Capitalism, Baltimore: The John Hopkins University Press

Is the U.S. losing economic power?

This simple question is being asked by many people who have concerns about the growing power of many developing countries that they will surpass the U.S. economy very soon.

I want to answer by a simple graph.

This graph shows the GDP share of six economies to the world GDP (%) from 1990 to 2014. I compared GDP share of U.S., European Union, and BRICs to the global GDP in the graph. I used the data from World Development Indicator (World Bank, 2016). This series of GDP is calculated using PPP technique at constant 2011 international dollars. PPP GDP is gross domestic product converted to international dollars using purchasing power parity rates. An international dollar has the same purchasing power over GDP as the U.S. dollar has in the United States (Detail: http://data.worldbank.org/indicator/NY.GDP.MKTP.PP.KD). This technique can eliminate the effect of inflation in different countries.

BRICs is a group of big developing countries that have potential to grow and some analysts and economists expect that they can surpass the U.S. economic power very soon. BRICs consists of B- Brazil, R-Russia, I-India, and C-China.

GDP Share by PPP

EU has the biggest share of world GDP (17%) while U.S.share is around 16.02% in 2014. China’s GDP share is growing very fast, from under 5% in 1990 to 16.57% in 2014.

Now China has higher share of world GDP than the U.S.

Other countries in BRICs have only slightly increased in their share of the world GDP in the past 24 years.

Therefore, comparing the GDP share (PPP), the U.S. is losing economic power to China.

– -That is my simple answer from this graph.

 

Please note that if you consider ‘economic power’ in term of nominal GDP, the competitiveness, the quality of higher education system, number of innovations or quality of life , you might see different pictures.

 

Problems of Modern China (I)

China’s rise after the 1990s has created a lot of optimistic expectations of its future. A lot of people say China will surpass the United States as a dominant power in terms of economics and politics. The rising path was shining.

Yes, it looks like that. And I think it is very possible.

However, it is not that easy and simple.

Every system has its own flaws, including market economy. While the modern China was enjoying double-digit GDP growth, there were also growing problems – both inside and outside the country. Problems outside include China’s threat on the hegemonic power of the U.S., China’s growing trade deficits with many countries, and China’s persistence of exchange rate policy, and many more. However, today I want to talk about problems inside modern China. From all news,  reports and articles I have studied, the following problems have been cultivated inside China after the 1990s.

Growing inequalities: While the urban areas along the coast and in the south are growing from all special economic zones, the rural-inner China (especially far west) have suffered from less welfare security and migration. Economists normally use Gini index to measure income distribution in a country. It helps define the gap between the rich and the poor. Zero value of index represents perfect equality and higher values represent more inequalities.

China Gini

China’s Gini index increased from 27.69 in 1982 to 42.06 in 2010. This means the rich are getting richer and the poor are getting poorer in China. People on the eastern coast are enjoying their wealthy lives while the rural poor people are getting hurt.

chineseluxe2

Luxurious brands are growing in urban China.(Photo: http://fashionchinaagency.com/beware-of-the-chinese-growing-appetite-for-trendy-niche-fashion-brands/)

When China decided to move toward a market economy, the welfare system was weakened. Since the price is now determined by demand and supply, healthcare and education are not always free anymore. When there are more jobs in the cities, a lot of Chinese decided to leave from their farms to get higher paid jobs in the industrial or service sectors. Villages in rural China are left behind with elders and babies.

poor village.jpg

A woman and her children sit beside a collapsed yard wall in Lishixi village, Northwest China’s Ningxia Hui (Photo: http://www.chinadaily.com.cn/photo/2011-08/19/content_13152698.htm)

Underconsumption: Growing inequalities in China leads to the second problem, underconsumption. When the welfare is getting unsecured, Chinese people save more for the uncertainties in their lives. Urban parents are reported to pay introduction fees of as much as $10,000 to middlemen to win entry into the better schools. Poverty intensified in the rural inland area. Job created by export-oriented global capital could not catch up with the jobs disappearing from state-owned factories (Hung, 2009). Chinese’s consumption expenditure to GDP in 2014 is around 50% (World Bank, 2016) while the U.S. ‘s consumption to GDP was higher than 80%.

China Consumption to GDP

Consumption can be a good indicator of domestic economy. From the fact that China’s GDP growth is increasing and consumption is decreasing, it can be implied that China’s growth depends more and more on other parts of GDP; investment (government and private) and foreign trade. These two components of Chinese GDP are also having problems.

There are more problems of the modern China to explore! Next time I will investigate China’s environmental problems, growing labor unrest, and the “overinvestment” of Chinese government. See you next week!

 

Reference: Hung, Ho-fung (2009). China and the Transformation of Global Capitalism. Baltimore: The John Hopkins University Press.

Note: Gini index measures the extent to which the distribution of income (or, in some cases, consumption expenditure) among individuals or households within an economy deviates from a perfectly equal distribution (World Bank, 2016).