Ray Dalio, the founder of Bridgewater Associates once claimed, “A bad year in China is going to be a great year in any other country”. Though the statement itself is innocuous in what it claims to address, the reality is much more complex. In recent times, the experts and analysts have been left perplexed at what they believe is an astonishing rise of the Chinese economy. It was never in doubt that China was indeed the sleeping “Asian Tiger” and that once tapped into, its unlimited potential would create a boom, both domestically and internationally.
With Deng Xiaoping now at the helm, China embarked on radical reforms that included more private property to enable the general public, foreign investors and corporations to operate and support the state run economy.
In 1979, Deng Xiaoping led what many now consider an economic upheaval for the Chinese country. Though a Marxist and a stout believer in Mao Zedong’s ideals, Deng believed that it was necessary for China to consider economic reforms specially as it was seeking a place for itself in the global arena after the split from its Communist neighbor and ally, the Soviet Union. At that particular time, the average per capita income of the Chinese population was a few hundred dollars a year. There was widespread poverty, bicycles were a common sight owing to the general populace’s inability to afford cars and starvation was still a genuine reality. With Deng Xiaoping now at the helm, China embarked on radical reforms that included more private property to enable the general public, foreign investors and corporations to operate and support the state run economy. With Capitalist incentives for those willing to put their effort, both monetary and labor, into businesses that would later flourish, bringing in more revenue for the country. Agricultural reforms in the shape of limited privatization was a key decision. This lead to a boom in that particular sector, allowing domestic and international corporations to turn massive revenues from these privatized lands which led to further privatizations of the same ilk. On a similar track, China’s manufacturing industry witnessed a boom no other developing nation had witnessed before leading to unprecedented exports which in turn led to China multiplying its revenue by ten folds.
Over the last 35 years, China’s GDP has increased at an average of nearly 10%. By comparison, the US economy never grows at about more than 2% a year. In plain layman terms, this means that the standard of living for the average Chinese doubles every seven years. Meaning that every seven years there’s a new version of China and its economy functioning on the global scale with a similar model to guide their progress. This has led to China’s increase in influence both politically and economically over the great game of the world order. This implies that a 10% increase in GDP for over 35 years means that relatively speaking, each year a new China is there to be seen. As an economist, China is undoubtedly one of the most interesting place to witness. It can be seen that the scope of progress and development that took many European and American nations years, decades and centuries to achieve, matched in months and days to the progress of cities across China.
Over the last 35 years, China’s GDP has increased at an average of nearly 10%. By comparison, the US economy never grows at about more than 2% a year.
In these years of rapid growth, there were some notable features such as high levels of savings, an even greater level of investment and an unprecedented devotion to establishing one of the most efficient and well organized infrastructure. During all this time, China has been investing 48%, almost half of its GDP. It does not take an economical prodigy like Milton Freidman to understand that it takes a supreme effort of both calculated assessments and a fair degree of gamble to invest that much money, and to invest it well. China did that particularly well, it had a list of priorities that it knew it had to fulfill and through the encouragement of the Central Government it did that very well. It revolutionized its infrastructure, its roads, it’s housing and its urban metropolitans but it has now hit a wall that many had anticipated.
Most of that low-hanging fruit has been achieved. Its ambitions of modernizing itself have been accomplished, but now it needs to conform to more complexed needs of a rampant economy. China needs a smarter healthcare along with a more efficient retail service and an influx of startups. The only problem with this is, there’s no plan for investments as complex as these. Again, putting this conundrum in layman terms, China made a great deal of money and it rightfully invested that money in building its roads, schools, houses and infrastructure. But now, it has money and it knows where it must invest it. However, the problem is it does not know how to.
Another major problem faced by the Chinese economy was that at 10% growth, a lot of underlying economic discipline is lost.
There is no checklist here to get these sorts of investments done. There is no simple way of throwing resources at these issues. As mentioned before, China’s economic needs of today are ones that require a “trial and error” concept in consumer markets. It needs more experimentation. It needs a greater market discovery process that allows it to understand exactly what the market and its consumers need. Another major problem faced by the Chinese economy was that at 10% growth, a lot of underlying economic discipline is lost. People get too optimistic, the government pushes through disregarding debt, there can be poor decisions and bad execution but a 10% growth rate can blanket cover it all. In 2009, the recession hit globally however China was excluded from its impact. The state banks and companies spent more on infrastructure when less spending was called for, this kept the recession at bay but it came at a cost. China’s GDP to debt ratio is almost as high as 300%. In other words, China’s entire growth has been built on borrowed money. Although the Central Government has routinely maintained that China would keep growing at a steady pace, most analysts looking at other vital pieces of information believe that China is undoubtedly about to enter an age of economic volatility, where no one will know how much growth or deficit can be expected.
Privatization, or rather exponential privatization is where China’s hope of economic salvation lies. It presents the only stable option towards economic stability for an economy that has profited on over hyped optimism of its investors. The tactic of buying US Dollars to maintain the value of the Yuan has kept them afloat till now by enabling cheaper exports and imports, but it is not a feasible policy. It is bound to blow up sooner or later. Through the OBOR initiative, China hopes to gain access to foreign private consumer markets. It can act as a tremendous boost to an economy that has relied heavily on domestic consumption. An addition of the entire Middle Eastern belt in its projection of markets can bring economic complexity that can hopefully propel the Chinese economy to a far safer outlook.