It is only recently that China finally supplanted Japan to take position as the second largest economy in the world. But some, after looking at the numbers, believe that China’s economic state is precarious, based on a bubble and bureaucracy, and something must be done before it bursts.
China’s path to a large economy is vastly different than that taken by most other large world economies. The economy is based on investment, and that investment is attracted by deliberately keeping low the cost of capital for firms doing business in China. Such a low overhead is made possible by artificially keeping low wages and deposit rates. The central Chinese bank holds over $2.45 trillion in international reserves as a way to keep the yuan down against other world currencies.
The result is an incredible number of exports, as China is unable to sell what it produces within its own borders — its citizens are unable to afford it. In July alone, the nation had a trade surplus of over $28 billion. But with debt management on the minds of many western nations, the purse strings may be tightening, which would threaten the amount of exporting China could do, necessitating a greater focus on domestic sales that the economy is in no position to support.
China recognizes the problem. Many believe they will adjust within a decade, emphasizing urban consumption, technology, and placing a greater reliance on market forces to move the economy in the right direction. A vocal number, however, believe China does not have ten years to change — and the Communist party will be unable to move past their own carefully groomed network of supporters with vested interests in keeping things the same for as long as possible.
It remains to be seen whether the Party will be willing and able to adapt its economy in a more democratic fashion. If they dally, time may make the decision for them.
