Global Connections Edition
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Labor Article

Impact of Growth on China

What have been some of the negative consequences of China’s rapid growth?

Short Term:

Overheated Economy: China’s explosive growth has led to a massive trade imbalance with the United States and Europe, and the largest foreign exchange reserves in history (See “Trade”). Because of China’s inflexible and undervalued currency regime, much of the excess capital has been reinvested in industrial production, creating over-expansion and an overheated economy. In 2007, the government raised interest rates six times in an effort to take some steam out of the economy,[1] but the risk in that is that as US interest rates continue to decline due to fears of recession, the higher Chinese rates will attract capital inflow, which is exactly what an overheated does not need.

Inflation: Though inflation grew by a modest 4.8% in 2007, driven mainly by a hike in food prices (which rose 31.7% in 2007), the Chinese government in early 2008 targeted inflation e for fear that it would lead to public unrest. The demonstrations in 1989 at Tiananmen Square that led to the June 4 crackdown was believed to have been partially due to discontent over rising living costs (inflation at that time was 25%).[2] Government controls to rein in inflation include raising wages in certain provinces and imposing price controls. The danger with the former is that wage increases could contribute to further inflation as producers passed higher prices onto consumers; the risk with price controls (whether of foodstuffs, oil or coal) is that producers may under-produce, leading to higher prices.

Long Term:

Uneven Economic Growth: China’s economy has always been more like a set of loosely coupled regional economies, historically isolated from each other and subject to their own interpretations and enforcement of central laws and directives. In the last quarter century, development has been uneven with the economies of the Western regions, the industrial Northeast and other rural areas lagging significantly behind the coastal and urban economies. This has led to growing resentment by the people in these underdeveloped regions who perceive that others are getting ahead at their expense. About 200 million rural laborers have moved to the cities looking for work.[3]

Increasing Income Inequality: Although more than 400 million people have been lifted out of poverty, around 200 million still continue to live below the World Bank’s dollar a day standard.[4] Per capita income in the countryside averaged 4,140RMB in 2007 compared to 13,786RMB in the cities.[5] There have been many protests in the countryside over this income inequality, land rights, and local corruption. There is a fear that with around 740 million rural residents (56% of the population),[6] the widening income gap due to unequal development will lead to even greater unrest.

Unemployment and Loss of Safety Net: One of the biggest casualties in China’s move to a market economy is the disappearance of the once sacrosanct “iron rice bowl” – the idea that Chinese citizens were guaranteed a job, and health and pension coverage for life. With the massive layoffs from restructuring State Owned Enterprises (SOEs) and the loss of a safety net, ordinary Chinese have become big savers with one of the highest savings rates in the world. In 2006, for example, China’s spending by households was only 36% of GDP, while the US’ was 72% of GDP.[7] The high savings rate contributes to the excess capital floating around. Ironically, to encourage domestic consumption, the government may have to re-institute some policies and safety nets from its communist days.

Structural Problems and Bad Debt: After China started to open up its economy, State Owned Enterprises (SOEs), which dominated production during the communist years, were slowly de-coupled from their controlling ministries and forced to compete in the marketplace and to provide economic results. While some SOEs thrived, transformed in the economic boom of the last few years, others found themselves unable to compete but were still propped up by China’s banking system. How many of these inefficient SOEs still exist today that are covered by cash flow from banks is not entirely clear. The official estimate is 7% in 2007, down from 30% in 2001, but independent analyses have placed the figure closer to 20%. Most experts, however, don’t think a banking crisis will bring down China’s economy.[8]

Environmental Degradation: China’s headlong rush into economic expansion has taken a heavy toll on its environment, from heavily polluted air to toxic lake, river and drinking waters. China’s greenhouse gas emissions also make it one of the biggest contributors to the problem of global warming. Estimates of the annual cost of environmental degradation range from 1% to 3% of GDP.[9] For more details, see “Environment.”

Competition for Resources: As China continues to grow, its demand for energy and raw materials has sent it scouring the globe for resources and driving up the price of everything from oil to minerals. At the same time, China’s growing investment in Africa and its establishment of trade with countries deemed unfriendly by the United States has also become a source of concern to the U.S.

1 Olivia Chung, “China to maintain cooling efforts,” Asia Times Online, July 19, 2008, http://www.atimes.com/atimes/China_Business/JG19Cb01.html (accessed 7/23/08).

2 John Ng, “China’s Expansion Fastest in 13 years,” Asia Times Online, January 25, 2008, http://www.atimes.com/atimes/China_Business/JA25Cb01.html (accessed 7/27/08).

3 Alexandra Harney, “Migrants are China’s ‘factories without smoke’,” CNN, February 3, 2008, http://edition.cnn.com/2008/WORLD/asiapcf/02/01/china.migrants/index.html (accessed 7/24/08).

4 Albert Keidel, “China’s Economic Rise – Fact and Fiction,” Carnegie Endowment for International Peace, Policy Brief 61, July 2008, p. 11, http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=20279&prog=zch (accessed 7/18/08).

5 Jason Subler, “China urban-rural income gap continues to widen,” Reuters India, January 24, 2008, http://in.reuters.com/article/asiaCompanyAndMarkets/idINPEK1715020080124 (accessed 7/15/08).

6 Jason Subler, “Appliance rebate program is aimed at rural China,” International Herald Tribune, February 21, 2008, http://www.iht.com/articles/2008/02/21/business/yuan.php (accessed 5/3/08).

7 Jason Subler, “Appliance rebate program is aimed at rural China,” International Herald Tribune, February 21, 2008, http://www.iht.com/articles/2008/02/21/business/yuan.php (accessed 5/3/08).

8 “China’s Economy: How fit is the panda?,” The Economist, September 27, 2007, http://www.economist.com/finance/displaystory.cfm?story_id=9861591 (accessed 7/18/08).

9 Michael Pettis, blog post on “When Will China Overtake the U.S. Economically,” The Seeking Alpha Blog, February 25, 2008, http://seekingalpha.com/article/65931-when-will-china-overtake-the-u-s-economically (accessed 5/4/08).