Alright, in this post I will make it succinct, because, who wants to read verbose analyses nowadays? :D
This post is about how China is currently regarded as strong country in terms of economic. But here, I’ll show you how actually its foundation is shaky.
1. The effect of one child policy introduced in 1979 that creates low birth rate. This is further exacerbated by the imbalance between men and women: boys under 20 are 32 millions more than girls under 20, because back then female babies were aborted more than male (because from cultural side, only male children could pass his family’s name). How this affecting China economy? Firstly, in the future China would experience the lacking of labors meanwhile its industries are mostly labor intensives. Secondly, in the future China’s social services system will be overburdened. If we take a look into China’s population curve, it shows how older populations are abundant compared to children and newborns. If this trend continues, then every single child in China will be burdened to taking care the cost of living as many as six parents and grandparents.
2. The danger of property market bubble. Currently, the price of property market in China continues to rise irrationally (for instance, a 40 m2 apartment in Beijing is priced at USD 112,000 or 1 billion rupiah) in spite of government attempts to curb it by increasing interest rates and minimum down payment. How could this happen? Turns out that this is a result from irrational decision taken by Chinese government back then. The plenty of consequence free loans backed by the saving of its 1 billion workers made government recklessly invested it into luxurious properties in Beijing and Shanghai, and also a number of golf course in northern China (despite the fact that water is scarce there) instead of the more affordable housings in rural area. This trend drives the property price in China to be overvalued and thus go skyrocketing. (I will make another post about the origin of economic bubble, but not now :D)
3 Middle income trap. According to a paper by Donghyun Park and Kwanho Shin, an economy experiencing rapid catch-up growth (like China) will experience a decline in its per capita output level at USD 17,000. It is predicted that China will hit that level in 2015 and the middle income economy that comprises the majority in China will suffer from economic slowdown. How could this happen? Suffice it to say, the causes are multi-factorial: misallocation of investment to projects that aren’t economically viable (like in point 2), low interest rates, undervalued currency, various direct and indirect subsidies, and incentive system that gives reward to jurisdiction that initiates investment but spreading the cost to entire banking system. These all disguised the true growth rates of China that is actually not sustainable. Meanwhile the cost of living keeps on increasing, wages of labor and social security system can’t keep up with that rising cost.
Then how could China survive from these? In my opinion, China should firstly improve working condition of labors, including wages, social security, health care, and working environment. This will lead to an increase in purchasing power parity, which then is used to drive economic foundation from investment (which is overly done and become unsustainable) to domestic consumption. Secondly, to lessen the discrepancy between urban and rural area and to redistribute wealth and labor, China should do something to stop urbanization. Thirdly, improvement in land and water use, improvement in living environment (including the usage of waste and pollution management and also clean and sustainable energy), and also massive utilization of information technology. Fourthly, some scheme to add capital to back up its banking system against the massive capital inflows (that are mostly hot money) to further guarantee its strength in case of massive capital outflows occur in the future.
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