[OPE-L] Fw: China's Economy: Miracle or Myth?

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Tue Jul 04 2006 - 14:24:37 EDT

----- Original Message -----
From: <mailto:antepaglia@tiscali.it>Antonio Pagliarone
To: <mailto:chinalist@yahoogroups.com>chinalist@yahoogroups.com
Sent: Friday, May 05, 2006 10:09 PM
Subject: China's Economy: Miracle or Myth?

China's Economy: Miracle or Myth?

By Caylan Ford
Epoch Times Calgary Staff
Sep 08, 2005
For centuries, China has been hailed the last 
great untapped market in the world. One 
enterprising Englishman in the 1850s famously 
said that if he “could add an inch of material to 
every Chinaman's shirt tail, Manchester weavers 
would go forever.”
In order to reach their goals of breaking into 
the Chinese market, Britain flooded the country 
with opium through India, sucking money out of 
the hands of addicted Chinese, and then in 1848 
finally defeating China in the opium war and 
forcing open its doors to the West. Most of the 
western European powers, on the other hand, were 
initially willing to swallow their pride and 
kowtowed before the Chinese in order to gain 
limited access to China’s coastal ports and 
engage in trade.
Many Western businesses, like their counterparts 
centuries ago, seem just as willing to engage in 
all sorts of ungentlemanly acts and have often 
discarded their own principles in order to wrest 
market share of the Chinese economy from their 
competitors. But what has almost never been 
discussed is the dark side of China’s economy—one 
that prompts the question of why China’s market 
has been “untapped” for so long.
The GDP Myth
So, just what is it that makes the Chinese 
economy so irresistible to investors and Western 
businessmen that they would be willing to toss 
integrity out the window? Frank Xie, an assistant 
professor of marketing at Drexel University in 
Philadelphia and an expert on the Chinese 
economy, says that foreign investors are lured to 
the Chinese economy by the steady growth rate the 
country boasts every year of 7 to 8 percent GDP 
But Xie, like many other China scholars, warns 
that there may be more to China’s budding GDP 
than meets the eye, pointing out that “there 
exist many puzzling contradictions, 
inconsistencies, and even deceptions in Chinese 
economic life.”
One of the more anomalous inconsistencies in the 
Chinese economy was revealed by Dr. Thomas 
Rawski, a professor of economics at the 
University of Pittsburgh. Dr. Rawski studied the 
Chinese economy from 1996 to 1999. During that 
period of time, accumulated GDP of China grew by 
25.6 percent. One would expect that the rate of 
energy consumption would increase 
correspondingly. However, despite the 25.6 
percent GDP growth, energy consumption during the 
same three year period actually dropped by 12 
Obviously, says Xie, these numbers don’t add up.
Neither do provincial reports on GDP growth. 
During last year’s People’s Congress, officials 
from within the central government confessed that 
the GDP numbers from local and provincial 
governments, when tallied together, were 
inconsistent with the national GDP. In fact, the 
numbers were off by difference of 3.9 percent.
“A percentage of 3.9 percent may not sound like a 
big number, but when talking about GDP growth, it 
represents a huge difference,” says Xie.
Similarly, in 2001, Dr. Rawski’s research notes 
that all but one of China’s provinces reported 
growth rates higher than that of the national 
average. Upon further investigation, the bureau 
of statistics found 62,000 false reports on 
growth had been filed between the months of May 
and October of that year alone.
If indeed China’s reported GDP growth is 
inaccurate, this would explain China’s reluctance 
to appreciate the value of the Yuan. It wasn’t 
until pressure from countries like the United 
States and the EU reached a critical mass that 
the Chinese government finally unpegged the Yuan 
from the American dollar and allowed it to 
appreciate marginally.
One also has to wonder how, despite China’s 
claims of consistent GDP growth, it continues to 
account for less and less of global GDP.
During the reign of the Qianlong emperor 
(1711-1799) in China’s last dynasty, China’s GDP 
accounted for 51 percent of the world’s total. In 
1911, when Sun Yat-Sen founded the Republic of 
China, that number was at 27 percent. By 1923, it 
had dropped further to 12 percent. When the 
Communist Party took power in 1949, China’s GDP 
accounted for only 5.7 percent of the world’s 
total. In 2003, the number was even lower at just 
4 percent.
Finally, if indeed China is enjoying a booming 
economy with its GDP growing at such an 
impressive rate, it should naturally follow that 
the country is full of employment opportunities.
Unfortunately, as professor Xie points out, that’s not the case.
“When the United States experienced recession in 
the early ’90s, the unemployment rate was around 
7 percent, and we were screaming like crazy. 
Prof. Hu Xingdou of the Beijing University of 
Science and Technology said that the Chinese 
unemployment rate is at least 20 percent, and it 
could be as high as 30-40 percent. This is higher 
than that of any Western countries.”
Of course, determining the actual unemployment 
rate in China would prove a nearly impossible 
task. The Chinese government claims unemployment 
is minimal. That’s because in China, being 
unemployed is not called being unemployed; 
instead, it is referred to as temporarily 
stepping down from duty.
Banks on the Brink
Many who have been to major Chinese cities in 
recent years have seen half-completed 
construction projects and empty, shabbily-built 
buildings with no developers in sight dotting the 
landscape. In some cases, developers take out 
huge bank loans, begin a project, and then jump 
ship, carrying the rest of the cash off with them.
It’s just one example of why China’s banking 
system has become one of the most vulnerable in 
the world.
According to the international rating agency 
Standard & Poor’s, 45 percent of loans from 
Chinese banks turn out to be non-performing loans 
(NPL). Some scholars have estimated that the 
number may be closer to 50 percent. By Western 
standards, China’s banks should have collapsed 
several times over already.
It wouldn’t be so bad if it weren’t for the 
Chinese Communist Party forcing the banks to loan 
money to failing state-owned enterprises.
The banks, in turn, are supported by the savings 
of China’s middle class. With no other banking 
options, China’s citizens have no choice but to 
park their cash in the country’s unstable banks, 
putting their savings at great risk.
So what happens when the Chinese people realize 
that their money is parked in money-losing banks? 
If they withdraw their money en masse, China’s 
banks and the state-owned enterprises they 
support are doomed to collapse. That day may not 
be far off. As a part of the conditions of China 
joining the WTO, in 2006 it will be forced to 
open its doors to foreign, more stable banks.
Adding to the crisis is the fact that thousands 
of Chinese officials have fled China, taking with 
them countless millions in hard currency. 
Professor Xie says that as of June 2003, some 
8,362 Chinese officials had fled the country.
Moral Dilemmas
The moral issues surrounding investing in China 
don’t end with the obvious ethical questions of 
slave labour, or of fuelling a totalitarian 
regime that denies its citizens the most basic of 
human rights and is willing to use violence to 
control its people. It also involved the question 
of environmental degradation.
China is home to 7 of the world’s 10 most 
polluted cities. In its seven major river 
systems, 40.9 percent of the water is unsuitable 
for consumption by humans or livestock. The 
amount of wastewater produced in China is 43.95 
billion tons—82 percent more than the environment 
can withstand. The pollution in some areas is bad 
enough to prompt uprisings and protests by local 
citizens. In suiting with the Communist Party’s 
early mantra to fight and struggle against nature 
and the earth, China is currently teetering on 
the brink of a full-blown environmental disaster.
A large part of the blame for China’s 
environmental problems rests with the 
manufacturing industries, which are among the 
most inefficient energy users in the world.
Mr. Niu Wen Yuan, Chief Scientist of the Chinese 
Academy of Science, estimated that China 
contributed to less than 4 percent of worldwide 
GDP, but consumed 1/3 of world’s material and 
energy in coal, steel, and cement. For every 
dollar worth of goods that China produces, it 
consumes five times as much energy and water as 
other countries would to produce the same thing. 
For example, China uses between 7-10 times as 
much energy as Japan would to produce the same 
Echoing the 19th-century English businessman’s 
dreams of China riches, Coca-Cola said in the 
1980s that if it could sell two cans of Coke to 
each Chinese it would “make a fortune.” Perhaps 
Coke should take a hint from its top competitor 
on how difficult that can be. Pepsi went for 
twenty years in China without earning a profit, 
not because the Chinese people were uninterested 
in its product, but partially because it was 
taken advantage of by an unscrupulous business 
partner in Sichuan, China’s most populous 
province, and because the Chinese government and 
legal system did not give it any opportunities 
for fair treatment.
Businesses speak of the Chinese economy and 
market in glowing terms, seeing not only 
potential but also certain success. Yet many 
companies are finding that the price of doing 
business in China’s ‘miracle economy’ just isn’t 
worth it.

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