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Business in China

March 20th, 2004 · No Comments

The Economist writes in a survey:

This survey will cut through some of the hyperbole currently enveloping China. Progress there is as real as it is dramatic, but the country is still in transition from one political and economic system to another. The constraints imposed by the communist leaders (not least on themselves) have produced a darker reality behind the impressive statistics and soaring skylines, in the words of Orville Schell, a professor at Berkeley who knows the country well.

China needs 12m-15m new jobs every year just to keep pace with its population growth. It has to provide opportunities for the 800m people living in rural areas who have been left behind by the current boom, and a third of whom are under- or unemployed. It also has to deal with the 100m-150m migrant workers in the cities who have no job security, no long-term housing and no health care. And it needs a functioning pension system. No wonder the government is concerned, above all, with growth and job creation.

Currently there are worries that the economy is overheating. Bubbles are beginning to form in property, steel and cars, and power generation is running up against capacity constraints. China’s real problem, however, is not inflation but overinvestment. In its quest for growth, the government has directed its state-owned banks to open the taps. Easy credit is producing massive overcapacity, leading to deflation, more bad debts and fewer new jobs. Already, nine-tenths of manufactured goods are in oversupply, yet investment in fixed assets last year grew by 30% and contributed 47% of GDP. Three-quarters of China’s growth comes from capital accumulation, according to Paul Heytens and Harm Zebregs of the IMF, yet total factor productivitya measure of overall economic efficiencyrose by only 2% a year in 1995-99.

Tags: Emerging Markets

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