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February 28, 2007
China
Written by Jeff Thredgold, CSP, President, Thredgold Economic Associates
Chinese economic growth of the past 30 years has been most impressive. China is a centrally-planned Communist nation that has strongly embraced its unique version of free enterprise. By most measures, China now ranks as the world’s fourth-largest economy, trailing only the United States, Japan, and Germany. Given its enormous population and vast natural resources, China could challenge Japan for economic leadership within the Pacific Rim by 2020.
Even as economic growth has been impressive, the Chinese face major challenges in coming years. One major issue is the growing income disparity between the newly wealthy and the majority of the population, especially those in rural areas. Tens of millions of Chinese citizens have seen strong economic growth boost their standards of living. However, similar numbers of Chinese have fallen further behind.
At the same time, powerful Chinese economic growth has led to serious issues with environmental damage. Too many cities are covered with clouds of polluted air, while too many rivers have been poisoned with industrial runoff. Greater environmental protection must be factored into the Chinese growth equation in coming years, a move likely to slow future economic gains.
China’s financial system is also fragile, with Chinese banks holding vast amounts of uncollectible loans. Too many loans have been made based on political relationships and cronyism. At the same time, a vast lending network between Chinese citizens exists which bypasses the banking system.
The Labor Issue
China’s rise as a major manufacturing center has been impressive. However, the illusion of limitless and inexpensive labor availability in this nation of more than 1.3 billion people is simply that. Shortages of skilled labor, including managers of all types, are a reality today.
Engineers are in short supply. Such shortfalls of talent will become increasingly apparent as China continues its desired move from being a low-cost producer of apparel, games, toys, and various commodities to higher-skill, higher-cost output including electronics, steel, furniture, and autos. Land costs have also risen dramatically in recent years.
Substantial pressure remains in place from the United States and other major nations for the Chinese to allow their currency, the yuan, to sharply appreciate as a means of trimming its massive trade surplus with the United States. Critics maintain that the Chinese keep their currency at an artificially low value as a means of flooding the world with exports.
The Chinese have allowed this process of currency appreciation to occur at a modest pace. The Chinese have also made it clear that they will determine the pace of additional yuan appreciation in coming years, and will not have such decisions dictated to them by a U.S. Administration or members of Congress.
The Dollar Issue
The flipside of China’s massive trade surplus with the United States is their accumulation of hundreds of billions of dollars and dollar-denominated securities. Critics of such a development warn of the threat that the Chinese could, at some future point, decide to sell some or all such dollar holdings, triggering a massive fall in the dollar. In contrast, major dollar ownership is also the reason why the Chinese would not entertain such a move on an elaborate scale.
China’s increasing role as a major global competitor will require certain changes to occur. The rule of law and copyright protection must be strengthened, while state-owned enterprises should eventually give way to greater private sector participation.
I am asked frequently if the Chinese Communist leadership could stop the powerful entrepreneurial growth underway in recent years. My answer is to picture a powerful thoroughbred flying down the race track. Picture a tiny jockey holding onto the reins for dear life near the tail. The horse is the free enterprise explosion underway in China. As you might assume, the jockey is the Communist leadership.
India
India’s emergence into the global mainstream has been somewhat overshadowed in recent years by the rise of China. Even so, the emergence of India as a world-class player in the 21st century is a major development.
The economically competitive nature of the Chinese and the Indians has changed the global landscape forever. The addition of roughly 1.5 billion potential workers from these two nations, combined with new labor competitors in other Asian lands and in Eastern Europe, has seen a doubling of potential global workers.
India fell behind much of the world in the 1960s through the 1980s as it remained steeped in isolation. Relative standards of living in India versus other major Asian nations declined appreciably. This has now changed. Indian real economic growth of 6 percent to 9 percent annually over the past decade has been most impressive, but still in the shadow of the Chinese. Such growth is likely to continue.
Indian Strengths and Weaknesses
Competitive advantages versus China? One can start with an English-speaking population, a well-regulated stock market, a viable banking system, and ownership and copyright laws that are enforced. One can also focus on the fact that a majority of Indian growth is tied to meeting strong domestic demand, while China’s economy remains focused on potentially volatile exports.
Impediments to growth? The list would include an outdated infrastructure, a poor-quality airport and highway system, and antiquated sanitation and water systems. The list would include a literacy rate that ranks among the lowest in the world, with a third of the population who cannot read or write.
At the same time, the contrasts are amazing. India has a higher number of information technology graduates than any other nation. As is well known, India is rapidly developing as a world-class center of R&D and various types of “white collar” and other professional jobs.
Outsourcing
India and American outsourcing go hand in hand. The American media provides one story after another of American companies who eliminate jobs in the United States in order to ship jobs half-way around the world. Such employment transplants have and will continue to occur. Many American companies, which formerly spoke quietly of such changes, now boast to Wall Street of immense cost savings.
However, such moves are becoming less valuable as wage levels climb sharply in India. Turnover rates are high. A shortage of skilled engineers in India has become a reality. Competition in terms of wage levels and skills from other nations is intense.
The connection between American technology centers and those in India is real, with hundreds of successful American companies having Indian nationals in leadership positions. It is not unusual for talented Indian entrepreneurs to keep one foot in the United States, with the other firmly planted at home.
India has seen its middle class of an estimated 300 million people expand rapidly. At the same time, hundreds of millions are destined for a lifetime of poverty. A caste system in existence for thousands of years remains firmly in place, especially in rural areas, limiting opportunities for tens of millions of residents. The AIDS crisis has impacted India in a tragic way.
India is a land of enormous opportunity. A more effective government focus on developing a world-class infrastructure could help lead India’s emergence as a major economic power over coming generations.
Market Gyrations
Yes…stocks go up AND down.
Many bulls want to see a 7%-10% market correction in order to clear market sellers and establish a foundation for higher prices later.
Bottom line?…no worries!
“Tea”ser
Economics is the painful elaboration of the obvious.
—from our book, On the One Hand…The Economist's Joke Book
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