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Caru On March - 6 - 2011

Will the Chinese economy collapse? That is the question which I hope to explore today. Now, while it is true that the world’s second largest economy is facing many difficulties such as those of energy production and property speculation, reasons like these are not why I think that the Chinese economy may collapse. The reasons why I think that this may occur are twofold:

1.) Exponential Growth, even if artificially aided, is impossible to maintain.

2.) Growing unrest within China.

I shall explain these two points in order.

The People’s Republic of China has prided itself on its yearly 8% growth rate. Now, while it is true that many well-respected economists have disputed the veracity of the data coming out of China, for the purposes of this article I shall assume that they are true because I think that they eventual outcome will be similar either way. This rapid and continuous growth has become known as the Chinese miracle and is a paragon of the so-called “Tiger Economies“. However, I think that China’s economy has become, in a large way, dependent on the fast and unsustainable growth. Eventually, there will be a contraction. This is a certainty that lays at the peak of any economic growth. How severe this contraction will be is largely determined by how fast the growth was.

Now, I am in no way saying that economic growth will eventually reverse itself. What I am saying is that after any period of growth there will be a contraction. How large the contraction will be is mostly determined by the previous rate of economic growth and the length of time in which that growth occurred.

Why does this bode ill for China? Well, my reasoning can be explained in that a an economy that is growing at a rate of 2% can better absorb a contraction of 1.5% than an economy growing at a rate of 8% can absorb a contraction of 6%. Even though both economies contracted by the same amount relative to their previous growth, the latter economy is likely to face a much larger crisis than the former economy would face, even accounting for relative size. However, this alone would probably not cause a wholesale collapse of the Chinese economy. For that, I will now move on to my second point.

To explain this point I shall briefly examine three aspects of Chinese society: Population, class and ethnicity.

China is the most populous country on the planet. It is the home of over 1.3 billion people, representing nearly 20% of the total world population. One can only imagine the strain that this puts on a centralised bureaucracy like the one that exists in China. The system is open to staggering amounts of corruption and inefficiencies. These problems would be a very significant issue if China were to suffer a contraction because they would be a severe detriment to response and recovery, creating unrest.

China’s economic boom has created an ever-growing consumer class within the country itself. While this helps the country’s domestic economy it has created massive amounts of resentment from large majority of the population that has not experienced such an increase in their standards of living. In the event of a contraction this lower class would likely be hit the hardest and many of the new consumer class will plummet back into poverty. This would add significantly to the potential unrest.

Lastly, China is home to dozens of ethnic minorities many of whom are resentful of Han dominance. Furthermore, even though it is common to think of the Han population as a single, cohesive group, nothing could be further from the truth. To think so is comparable to believing that all North Americans and all Europeans are a homogenous group. It is true that there are overwhelming similarities, but that only appears if you look at the picture on a Macro scale. On a Micro scale, there are clear and sharp differences. An economic crisis could very likely bring these tensions to the fore.

This unrest that could significantly grow in the event of an economic Crisis could very well tip China over the precipice and plunge the country into chaos.

What I have outlined above or some variation thereof is what I think could very well happen. However, there is every possibility that I’m wrong and that China will not collapse, but either continue growing or morph into a different type of economy. But, I believe that China will suffer a contraction in the near future, whether or not this will be fatal remains to be seen.

P. S.

I am certainly not an economist and am not even that well versed in economic theory. The above scenario was arrived at through logical (hopefully) thought. If anything that I have said is wrong, please tell me.

Written by Caru

I don't really have anything of note to put in here... Oh, I won a bar of chocolate once.

24 Responses so far.

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  1. NanaMex says:

    Trying to assess China by using Western rational is always a mistake. China and it’s people are, and never have been anything like European or African societies, from where our own societal models evolved. At no time in it’s history have the people experienced what it is to be an individual. They have always been ruled by Warlords, and have maintained their aloofness from the rest of the world with only a few partial and temporary incursions by Spain, Portugal, England and the Japanese, all of whom they dispatched once they had enough of the arrogance and the opium (in the case of the Brits).

    China has 63 million single males under 30 years of age with no prospect of a wife. The solution is to send those young men to work in other countries where they have better prospects. (Yes, kidnapping of women is a problem at this time)

    China has long term plans for it’s people, and is showing a change in direction that is designed to both sooth the word’s fears of war and re-invigorate it’s people’s pride in being the worlds oldest surviving civilisation. Recently the study of the Teachings of Confucius have been made mandatory in schools. Dilapidated and neglected Temples and Shrines are being restored, and the Terracotta Warriors are being touted as an example of the enduring power of China throughout many centuries. China wants it’s people to be proud to be Chinese.

    China is spending massive amounts on it’s infrastructure, high speed rail and new cities with ready to occupy business centres where Technology will reign. Older, polluted cities will be abandoned as heavy industry is relocated to more modern and lower polluting facilities.

    China is spending massive amounts on establishing medical missions in Africa and in other war and disaster regions of the world, building schools and hospitals and seemingly not asking for anything in return but friendship. That lucrative contracts for mineral rights soon follow is inevitable, but it is done with a sense of respect for the countries involved.

    China is buying huge areas of agricultural land all over the world, including Australia and the USA. In their own farming regions the move is to develop sustainable agricultural practices, the technology to be exported to their newly acquired farms throughout the rest of the world.

    China is building massive alternative energy projects, not just in it’s own country, but throughout the world.

    China currently has no bases in other countries, is active in no wars, and is the largest creditor nation in the world.

    In short, China is not going to instigate any wars. Why should they when they can simply BUY the rest of the world?

  2. Khirad says:

    I think another event such as happened in 2009 is waiting to bound to happen again: http://news.bbc.co.uk/2/hi/asia-pacific/8135203.stm

    Especially in the Western parts of China which become more Central Asian, and the South (Guanxi), which is more Southeastern Asian.

    And what are some examples of differences within the Han majority? I’d be really curious to learn more about the distinctions. Are they mostly provincial?

    Most people rightfully focus on the economics, but I think ethnic issues are often forgotten. Particularly in a place as large as China. Not all of China is “Chinese” per se.

    • Caru says:

      Oh, I just saw the rest of your post.

      From what I understand, the differences in the Han majority are cultural and linguistic. This is because the Han is largely a constructed people who have “absorbed” many different peoples over their rise. And, yes, it is provincial because most people don’t migrate, though that is changing too.

      Take this example:

      Regional reporters in China have to give reports in their local dialect -- just to be clear, this is more than an accent -- so that people in that area will understand them. The differences within China with regard to language are far greater than those between America and Britain with regard to English.

    • Abbyrose86 says:

      Excellent point Khirad.

    • Caru says:

      Whoa, thanks. I didn’t see this when I trawled through the Beeb this morning.

  3. Abbyrose86 says:

    Interesting analysis.

    I just read an article this morning about China upping their spending on social programs and on trying to raise incomes thus attempting policy to help reign in the wealth gap.

    http://online.wsj.com/article/SB10001424052748703362804576184364247082474.html?mod=googlenews_wsj

    http://www.cbc.ca/news/world/story/2011/03/05/china-budget.html?ref=rss

    “We must make improving the people’s lives a pivot linking reform, development and stability … and make sure people are content with their lives and jobs, society is tranquil and orderly and the country enjoys long-term peace and stability,” Wen told the 2,923 delegates gathered in the Great Hall of the People for the opening of the national legislature’s annual session.”

  4. Questinia says:

    Caru, here’s a video you may be interested in. It may be hard to assess China using Western definitions:

    http://www.dump.com/2011/01/25/understanding-the-rise-of-china-video/

    Is China too old and too highly individuated to collapse? Is China really run by a centralized bureaucracy?

    Is the state seen as the patriarch and steward of Chinese civilization, therefore accepted as part of the family?

  5. whatsthatsound says:

    Caru, I think your points are well worth considering. China’s growth is mostly a result of its decision to become “the world’s factory”. Many of these factory workers are exploited, and tremendous strains are put on them not only at work, but by their exodus to the cities from their small towns and villages they return to en masse during this period of Chinese New Year. Meanwhile, a very slim minority have reached virtual parity with the wealthy urbanites of any Western country, as well as Japan. Whether or not they know or appreciate it, their shopping sprees in Paris, their Hermes scarves and Gucci bags, etc. are being purchased by the hard work of those tens of millions (hundreds of millions perhaps?) toiling away at thankless jobs in the factories.
    Like so many places in the world, this is a situation that cries out for correction. The government has been surprisingly successful at keeping things from boiling over. One of the ways they do this, I feel, is by fomenting anti-Japanese sentiment. Better to keep peoples’ hatred focused outside ones borders, after all, when one wants to maintain power.
    I have no idea how things will go with China, but if that factory work begins to slow down, millions will likely take to the street, and we all know how China traditionally reacts to challenges like that.

    • Questinia says:

      How pervasive is this, wts?

      • whatsthatsound says:

        Sorry, Q, I’m not sure which part of my comment you’re referring to. I’ll assume the “anti-Japanese sentiment”. Well, it’s pretty complicated, and it goes both ways. Japanese politicians don’t help matters when they say demeaning things (which they have a habit of doing) or when they pay visits to honor the war dead of Yasukuni Shrine, a nationalistic shrine that has the remains of some who were classified as war criminals. China feels that Japan has never properly atoned for or even truthfully acknowledged the extent of its atrocities in WWII.
        That said, when a group of anti-Japanese chose to protest in front of the Japanese embassy a few years ago, the government, usually so quick to quell protest, let it go on for days and days, with red paint being thrown on the walls, windows breaking, etc. Only when it seemed that it could become something uncontainable did the government finally intervene and calm things down. BUt the hatred is there. If you look at some of the comments thrown around on the internet, you can see that is a widely held sentiment by many young Chinese, very ugly stereotypes tossed around which I won’t repeat.
        What complicates things is just how intertwined Japan and China are economically. They still need each other, though China is clearly aiming for a time when it won’t need Japan anymore.

    • Caru says:

      Is the anti-Japanese sentiment getting worse? I’ve known that it was bad.

      • whatsthatsound says:

        Not getting worse, just ongoing. They’ve done a really good job so much so that even many teenagers despise the Japanese, young people whose grandparents experienced the horrors the Japanese military wrought. Japan sends billions of dollars of aid to China each year, but nevertheless the govt. gives a wink and a nod to the vicious rhetoric of the haters.

        • jkkFL says:

          Anyone:
          Why is the Japanese Government still sending billions of aid to China? Reparations for war?
          Thanks Caru, this is an area of the world I know little about, and would love to learn more.
          I would like to see someone explore China the way Khirad explores the Middle East for us. I have learned so much from him- it’s like taking a course!
          * No tests please :)

          • Kalima says:

            Japan started sending aid money in 1980 to help with the poverty over there at the time. It is also thought that this will soon no longer be sustainable because of Japan’s own economic woes in the last few years, and some fear that if Japan starts to cut the amount of aid to China, Japanese companies might find it harder to do business over there due to the anti-Japanese feelings the government nurtures with impunity.

            • Kalima says:

              Japan has been China’s most important trade partner for many years, but China plays dirty sometimes, and has overtaken Japan by becoming the number one economy in Asia by refusing to lower their currency rate during the years they have been expanding. Japan’s trade deficit now stands at 471.4 billion yen in January of this year.

              A mined component used in the manufacturing of microchips here, has been a bone of contention between Japan and China because contracts for shipments from China, even though under contract for years, are failing to be sent, putting workers here in Japan on hold for months at a time. Trade yes, fair trade, no. As I said once above, China plays dirty sometimes, they change their rules on a whim.

            • jkkFL says:

              See, I really need tutoring on the subject!
              What is the scope of trade between the two? And why does China feel Japan owes them? Japan has been having economic difficulties for a while, it must be a burden on the Government to continue aid; and aren’t the Japanese wondering why it continues.
              I would really like to see something on the China-Japan relationship.
              Thanks all! Appreciate your patience.

          • whatsthatsound says:

            Not reparations, standard economic development. Japan is the world’s largest donor. BUt it is becoming an increasingly sticky issue, obviously, as China has surpassed Japan as the #2 economic power in the world. Many Japanese feel that enough is enough. But stopping would invite retaliation by China, and their economies are so interlinked that it seems that the status quo will be maintained for a while.

        • Caru says:

          Ah. It’s typical really. Rulers have used the “evil outsider” as a way to distract from internal issues for thousands of years.


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