China Decoupling Theories Bunk

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Global Trade, Macroeconomics

Distortions in the structure of the Chinese economic model are beginning to show up as severe strains in the economy and could result in social unrest if action is not taken fast according to Mr Huang, professor of international management at MIT Sloan School of Management.

The thrust of Huang’s argument is that China has been focused on growth in export industries at the expense of generating domestic consumption, delaying the point at which China will ever become a true global power in its own right. The sudden decline of growth in the economy has shown that the investment banks theories about decoupling to be bunkum as China is clearly dependent on export markets for its continued prosperity. At the heart of the problem is the lack of land ownership laws in China that have prevented the general population and peasants in particular from benefiting from the massive urbanization of large swathes of land. Wages for these displaced workers though higher in factories than on the land are still kept way below the level necessary to develop a robust internal consumption market. In the absence of compensation for land taken for industrialization the country’s wage costs are kept artificially low to support China’s continued competitiveness in export markets.

In an established capitalist market, land values are set by supply and demand, investment decisions are made on the basis of real costs set by the market. But in China, land costs have been kept artificially low encouraging massive industrialization a significant portion of which may not have been viable in a well functioning market economy. For those investments that went ahead, wealth would have been distributed among the local population if land ownership and values were fairly protected by law. Instead what has happened is the wealth has largely been exported to western buyers in the form of cheaper goods.

Alongside the lack of land rights is an equally lax but often overlooked failure to enforce environmental protection. In the west this is often seen as China’s problem and something that is rarely reported, but is a burning issue for many Chinese. As political freedoms are slowly squeezed out of the government they will increasingly become a source for discontent and unrest.

The government appears to be acutely aware of this frailty and their economic stimulus package announced last year set supposedly at 4 trillion RMB on top of the previous year’s annual budget of 6 trillion RMB is such a vast sum of money that it is bound to eventually have a significant effect. The problem is it will probably be targeted at exactly the same areas of infrastructure investment rather than the gradual distribution of wealth among the wider population that is required to create a robust internal market for consumption.

–Stuart Burns

Post Script: The original article in which Mr. Huang was quoted came from our colleague and associate in Tianjin, China.

Comment (1)

  1. Brad Pritts says:

    Mr. Burns, and Professor Huang, are correct in calling attention to this issue. Civil unrest has been increasing in China in the past several years even in the face of the economic expansion. While not widely publicized, it is well known among China scholars that there are thousands of “incidents” ranging from small peaceful demonstrations to full blown riots. Land transfers (forcing relocations of residents), layoffs, and environmental issues have been frequent issues leading to these “incidents”. Recently, the milk contamination problem has also become a factor, with some protestors jailed.

    With economic/ job growth slowing or reversing, we should expect that these incidents will take a significant further increase.

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