“China’s economic development is most threatened by its regional disparities”. How far do you agree?

“China’s economic development is most threatened by its regional disparities”. How far do you agree? (Challenges to China’s economic development)

 

Since the start of reforms in 1978, spectacular economic growth and poverty reduction in China have been accompanied by sharp rises in inequality and increasingly frequent manifestations of social tension through unrest of various types. In response to these rising inequalities, an explicit objective of “harmonious development” was adopted by Chinese governments in 2005, with a key dimension of harmonious development being a balanced development across regions. Hence, it could be seen that regional disparities, if not resolved, could pose a major threat in slowing the country’s economic growth rate is also threatened by other equally important factors such as the sustainability of its cheap labour, ageing population, its property bubble and its bad debts.

 

  • Regional Disparity

Regional disparities pose a major threat to China’s growing economy as protests and unhappiness among the citizens may cripple the economic development. With location advantages, the increased investment and tax breaks made the coastal regions more attractive to both foreign and domestic companies. In less than 2 decades, China has become the largest recipient of FDI among developing countries from a virtually closed economy in the late 1970s. As a result, the coastal regions experienced much more rapid growth, widening the coastal-inland gap in the reform period since the 1970s. Since China’s economic growth success is not equally shared among its huge population, the rise in food and China’s property prices has made life very difficult for China’s poor and in turn, has resulted in increased social tension and protests against the government whereby up to 300-500 protests are occurring in China each day as of 2014. Therefore, the problems stemmed from regional disparities could act as obstacles to continuous economic growth which the Chinese government needs to observe closely.

 

  • Sustainability of Cheap Labour Costs

Nonetheless, other equally important factors such as the sustainability of cheap labour cost, could also pose a great threat to the economic development in China. For decades, China’s economy has prospered tremendously, being termed as the “manufacturing hub” of the world. However, a large part of China’s successful growth is because of a massive supply of cheap labour, with workers from rural parts of the country migrating to the cities to find employment and also attracted many multinational corporations such as Apple and Microsoft to move manufacturing operations to China. However, China’s sustainability of cheap labour costs proved to be short lived whereby many foreign manufacturers are downsizing or leaving the country due to an increase in the supply of low cost/low quality products as well as the increase in labour costs in China in recent years. For instance, Microsoft have been shutting down its factories in China, and with plant closures in Beijing and Dongguan, resulted in 9,000 job losses that made up half of the 18,000 announced in 2014. However, this is not a surprise as in any developing economy where the supply of cheap surplus labour starts to fall and the bargaining power of workers rises.

 

  • Ageing population

Another potential great threat to China’s economic development is that the ageing population may hinder the economic progress significantly. Over the past 30 years, China’s total fertility rate has fallen from 2.6%, well above the rate needed to hold a population steady, to 1.55% as of 2015. On top of fewer children being born, China is ageing rapidly, with 10.5% of its population being over 65. This means that China is likely to grow old before it grows rich, making it the first major economy to encounter such a problem. Furthermore, an ageing population would also mean that the number of people coming towards the end of their working lives would significantly increase, reducing China’s manpower which affects its economy. Hence, with an ageing population, the reduced working population in China could slow down economic development significantly.

 

  • Bad debts by local governments

Bad debts that is held by local government is also a major threat to the country’s economy. Over the years, the debts accumulated by local governments were built up to fund public works, which were supposed to be funded by the central government before the financial crisis struck in 2008. However, after this crisis, the Chinese government went on an unprecedented borrowing binge and has been struggling to clean it up ever since. As of 2015, China’s debt to GDP ratio had reached record high, with it being 250% of its total GDP. This ultimately poses as a huge threat as should its debt not be reduced, it would only result in fatal consequences such as derailing state-owned banks, triggering a systemic crisis as banks are closely linked to the government.  As such, the debt by the local governments poses a major threat to China’s future economy. If it does explode, the central government will have to step in and help.

 

  • Property Bubble

Inflated by high end speculation and the flow of cheap money, China’s property bubble seems to keep on growing and now it’s nearing its popping point which could cause a collapse in its economy. Chinese huge property bubble continues to expand spectacularly and remains central to its economy, accounting for some 10% of its total GDP as of 2013. As such, the government must, once again balance the need to cool the market, clamping down on speculative activities, while not damaging economic growth. Hence, the possible imminent property bubble burst could threaten the country’s economic development.

 

In conclusion, upon analyzing the various possible factors that could affect the economic development of China, it can be observed that although regional disparities poses a major threat to the country’s economy,  the combination of a smaller workforce and a rapidly ageing population further pose a double whammy to China’s economy.

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