Wealth BuildingChina is increasingly important |
But not without risks.
The year has barely crawled out of its shell and we are again facing headlines dominated by China and its enigmatic ability to keep the world economy afloat.
Given the increasing size and importance of the Chinese economy, the economic and political changes in this country will have a growing impact on the rest of the world. What one must clearly bear in mind is that there are very long-term cycles unfolding in front of us, but these could easily be overshadowed by the stuff that newspaper headlines and stock market hype is made of.
China's growth and demand for raw materials, as well as its even more remarkable ability to direct the short-term path of its economy through policy adjustments like the four trillion Remnimbi stimulus package, certainly saved the world in 2008 from that last step over the edge. In calendar year 2009, for example, global copper demand was 222,000 tons higher than the previous year - at face value surprising - given the implosion we had seen in the global economy. If we excluded Chinese demand from these numbers though, copper demand for the rest of the world would have been 1.8 million tons lower. The same can be said for many other commodities.
China is slowly but surely building up an increasingly dominant position in the global economy and is already the third largest economy in the world in terms of GDP as measured by Purchasing Power Parity. This is more a function of the population size though, than the country's productivity and economic evolution. A key to the sustainability of China's long term growth remains its urbanization policies and job creation. It is estimated that to keep in line with the government's vision of poverty alleviation and urbanization, roughly twenty million new jobs need to be created every year. Economic growth of 10% per annum is being targeted and growth rates below mid teens increases the risks of social unrest.
A big argument made in favour of China and Asia increasing their contribution to the global economy is the size of the region's population, and the fact that they can take over as consumer of last resort, a privilege that was bestowed upon the US consumer for the last few decades. But this is where the biggest risk lies too. The world as we know it is overpopulated, and the concentration of roughly 20% of the world's population in one country poses enormous risks from a social stability and, possibly more importantly, environmental point of view. This was not a problem the world faced as the West industrialized.
Some fascinating statistics from a website called factsanddetails.com highlights some frightening information about the state of water pollution in China, and poses a serious risk to the country's long term development. China has some of the world's most polluted rivers and dams and it is estimated that all of China's lakes and rivers are to some degree polluted. A Chinese government report noted that about 70% of Chinese waterways are polluted to the extent that they have no fish whatsoever and about 78% of water from Chinese rivers is not fit for human consumption with roughly 90% household sewage being released into rivers and lakes.
The most polluted rivers are around the major population centres in the East and South. The Yellow river is the second longest river in China and sixth longest in the world, but due to pollution, is too dangerous to swim in or eat the fish caught in it. One estimate shows that about 4,000 of China's about 20,000 petrochemical factories are situated on the banks of the Yellow river.
The Chinese government has thus far managed to grow the economy despite some significant recent headwinds, but these things have a funny way of catching up with you. The economic model that they have launched post the cultural-revolution days was built on economic zoning and exports, with all the negative social and economic side effects that goes with it. Criticisms from the West has largely fallen on deaf ears. This export-driven development continues even today, which is why they are obstinately keeping the Remnimbi pegged to the US dollar.
We can criticise Chinese policy as much as we want, but it is worth pointing out that the development of Europe over the last few centuries, especially post the industrial revolution, was sped up by the exploitation of colonies, countries and continents, which is why it is difficult to now point fingers to the East for policies that sit uncomfortably with us.
The immediate future of China remains heavily dependent on an export- and industry-orientated model. For China to continue growing at current growth rates though, and for the government to achieve their vision of a "harmonious society" in the long run, a gradual shift towards a more consumer-driven economy will be required. This will necessitate a higher portion of income distributed to labour. The growing income inequality in China already poses big risks to this outcome and could become worse as Chinese consumers become increasingly exposed to the consumption-driven culture of the West.
The economic development of the West was not without its bumps along the way and we can rest assured that the development of Asia will be no different.
*This article was first published by Alphen Asset Management
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