China on the horizon

The World Bank's China 2030 report recommends economic reforms

COMMENT, Business, Economy, Reform

This time last year, the Arab Spring was in full swing with rebels in Libya showing that not even Ghadaffi was impervious to the winds of change.

With the back-drop of RPG launchers fired from the back of pick-up trucks, and the leaders of the West locked in heated debate over the support or non-support of a no-fly zone enforced by NATO, there seemed to be little that would be able to overtake the headlines in those first weeks of March last year.

That all changed on the morning of March 11th when everything became secondary to the news of that a vast tract of Japan’s east coast had been hit by an enormous tsunami that triggered a national nuclear calamity at Fukushima, and killed more than 19,000 people.

Into our third month of 2012 we are again caught up in crisis coverage, trying to avert a meltdown of the Euro and a new flare-up with Iran. Somehow, I can’t help feeling that we may again get unpleasantly surprised by something around the corner.

Last week the World Bank issued the China 2030 Report, recommending reforms towards a freer economy by turning state-owned companies into commercial enterprises. The report states: “China could postpone reforms and risk the possibility of an economic crisis in the future – or it could implement reforms

This, along with other sporadic news reports of an impending slowdown for China makes me fear what a sudden sharp downturn would entail. China connects the world economy like no other nation. It is the world’s factory with its cheap labour, a guarantor of the US dollar with its holdings of US treasury bonds, and upholding the prices of every commodity from Australia and Africa to South America. The implications of a hard landing for China would be difficult to predict. There’s no doubt it would affect the political stability, both domestically and internationally, of the country and impact deeply on world markets. The national security and outlook for states that have grown ever more dependant on Chinese trade and investment will also be hit.

A challenge for maintaining growth lies in part in the artificiality of China’s economy. Government mega projects in infrastructure along with state-owned companies in banking, energy, telecom, health care and technology sectors, account for about 40% of the country’s GDP. The 2030 report from the World Bank goes on to encourage China to move away from government engineered growth and allow for more competition and entrepreneurship.

For the last three decades China’s growth averaged around 10% annually. Much of this tremendous growth is explained by its rural population moving into the cities and taking on unskilled manufacturing jobs. While this growth is impressive, estimates by UNICEF on the number of people living on less than $2 per day was 468 million, or 36% of the population (2009 figures).

The real question lies in just how big China’s growth potential is, and just how long it will continue to rise. Even now the evidence is mounting that China’s property market is suffering – with numerous developments standing empty, and a reported decline in real estate prices in 52 of 70 cities across China. A reason may be a misalignment between a demographic consisting largely of labourers and the heavy investment into high-end real estate.

At the same time, the economic sense behind the massive infrastructure projects such as the high-speed rail links are going to have to start proving themselves by showing a payback on investment. Robert Zoellick, President of the World Bank Group, summarised the situation in a statement: “China’s leaders have recognised that the country’s growth model, which has been so successful for the past 30 years, will need to be changed to accommodate new challenges."

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