The Next Five Years.

Chongqing, Southwest China

What will happen to China’s economy over the next five years? While the future is never easy to predict, I’d like to take a stab at it.

This is what I think needs to happen for China to truly become a major, competitive force in the developed, higher-tech world economy.

The domestic economy’s development in China is key. Economic indicators for 2009 show that China’s manufacturing suffered significantly during the global recession. While its GDP continued to grow at a rapid clip during this time, a large portion of it was due, in this author’s opinion, to the USD586 billion it contributed to infrastructure development, along with continued expansion of various housing bubbles around the country. While China did not suffer nearly as much as the rest of the world did during the recession, I believe the country still needs to make changes if it is to ensure continued growth at above 6.5%, which some officials claimed was necessary to continue employing its increasingly more educated population.

But this is just simple macroeconomic progression. When a country’s manufacturing booms to a certain level, the cost and quality of life increase. PPP goes up. China has managed so far to stave off a drastic increase in its currency value, and has kept inflation at acceptable levels by raising interest rates, but these are all temporary fixes.

China’s next step should be entrepreneurial development. It has a huge population in the interior that for the past decade has migrated to factories on the coast to work. The migratory workers helped keep labor costs artificially low for years. Now that manufacturing has slowed and the infrastructure development projects are winding down, the CCP must find new ways to employ the massive workforce that exists in the interior.

In the 80s, according to MIT economist Huang Yasheng, China had credit cooperatives and state-owned banks that focused on small business loans. Throughout the 90s this trend ceased as the cooperatives were no longer tolerated and the state-run banks focused on big business and state-owned enterprises. Over the past decade, the banks have been cleaned up and privatized, with many selling shares of ownership to western banks. They have become a bit more liberalized in lending habits, but there remains a dearth of funding available to small business development.

Should China begin allowing entrepreneurial endeavors by letting credit cooperatives pop back up as they did in the 80s, I expect we would see a fairly swift chain reaction in the country.

As increasing numbers of small businesses popped up, the owners, wanting to protect their investments, would start demanding stronger enforcement of Intellectual Property Rights (IPR) regulations. Once the CCP discovered pressures from within to increase enforcement, it would be carried out. Increased IPR enforcement would result in further innovation. Further innovation would result in a rapid increase in the interior’s economic development, which would benefit not only the country, but the West as well.

US companies, especially those already established in coastal areas (Best Buy comes to mind), would be able to move further into the interior and find new market opportunities as PPP leveled out more across the country. While there would still be competitive discrepancies, and the local players would continue to have some sort of advantage, the playing field would be much more level. Companies that understand how the Chinese consumer works and how the Chinese consumer and the CCP differ will find success in a newly developed domestic economy with a lot more clout than what we see when we look to China in the present.

Deng Xiaoping famously stated that although it was good to get rich, some would have to get rich first. His implication was obviously that the rest would eventually follow. I believe China has reached the point in its economic development where the rest must follow or the country will suffer.

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