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China has declared an apparently impressive annual economic growth rate of nearly 10 percent over the past two decades. However, whether China can maintain its economic miracle in the new century is uncertain, considering the country’s loss-making state enterprises, millions of unemployed urban workers, and inefficient banks with billions of dollars of bad loans. Will the bubble burst? Four leading experts gathered for a February 12 seminar to explore this and related issues. The four speakers included Thomas Rawski of University of Pittsburgh, Charles Wolf of RAND, Deborah Davis of Yale University, and Fenwick Yu of the U.S. Department of Commerce. Earlier in the day, Wolf and Rawski spoke at a Capitol Hill breakfast seminar for congressional staff on the same topic.
Rawski pointed out the unreliability of Chinese statistics regarding economic growth. Although official Chinese statistics provided a generally accurate measure of national economic achievement between 1978 and 1997, they have been distorted by an upward bias since 1998 because local officials often exaggerate economic performance to satisfy Beijing’s growth targets. The potential for high-speed growth in the future lies in, among other things, the development of private business and the continued boom of labor-intensive industry. However, the government’s poor decisions on investment and bungled management of existing fixed assets will keep China on the current path of low growth, stagnant employment, and widespread over-capacity.
Wolf challenged a generally prevailing consensus that China’s economy will be able to sustain high rates of economic growth by highlighting eight potential adversities. These problems include 1) unemployment, poverty, and social unrest; 2) negative economic effects of corruption; 3) HIV-AIDS and epidemic disease; 4) water resources and pollution; 5) increasing energy consumption and prices; 6) fragility of the financial system and state-owned enterprises; 7) possible shrinkage of foreign direct investment; and 8) potential conflict with Taiwan. According to Wolf, should all of these problems deteriorate at the same time, China’s economic growth would be reduced over eight percent annually. While China is unlikely to suffer from all of these adversities, the occurrence of a cluster of them could slow down China’s economic growth significantly.
Davis observed that China has experienced a rapid increase in income inequality over the past 15 years, with a large gap between urban and rural incomes. The major winners in contemporary China are a minority of men with high education, working in managerial positions in large coastal cities. Despite the increasing income inequality, China’s economy will continued to grow. Demographically, the situation is far from dire; the percentage of the population under age 15 or above 64 held steady at about 32 percent during the 1990s. In terms of education, China has significantly reduced the rate of illiteracy, increased rates of secondary school attendance and graduation, and created greater access to post-secondary education. This “human software” advantage will help China’s continued economic development.
In his commentary, Yu emphasized the positive impact of China’s entry into the World Trade Organization (WTO) on that country’s economic development. According to Yu, China’s WTO membership will force Beijing to protect intellectual property rights, develop the rule of law, and reform China’s state-owned enterprises and banks through global market competition.
In brief, the four speakers differed as to whether China’s economy will sustain high-speed growth in the years ahead. However, none of them believed the country’s economy will soon collapse.
Drafted by Gang Lin, Asia Program Associate
Robert M. Hathaway, Director, Asia Program
Ph: (202) 691-4020
China's Economy: Will the Bubble Burst?
Download Special Report #111