Lonely at the top: Five hurdles to the rise of Chinese economy

Chinese economy faces hurdles
The Chinese economy has made major strides in industrial and technological spheres, but its ascent to the top of the economic ladder is fraught with several economic and social challenges.

By Anil Kumar Kanungo

Chinese economy’s rise to the top: China is expected to overtake the US as the largest economy in the world by 2030. The growth of Chinese economy in the last 30 years has been unparalleled in the recorded history of the world. While the Asian nation has made major strides in economic, industrial and technological spheres, its ascent to the top could be affected by several economic and social challenges.

China is likely to witness a series of socio-economic challenges in the near future. The foremost among is an ageing population that could unravel China’s economic miracle. Dealing with ageing is a quality-of-life issue, but it also has economic implications. About 17.5 of China’s population is 60 years of age and above in 2021 and the share is expected to reach 25% in 2030. Adequate healthcare facilities and social safety nets are not in place to take care of this eventuality.

READ I  How can India correct trade imbalance with China

Ageing trouble for Chinese economy

The ageing population could have a debilitating effect on China’s economy. It will shrink the country’s productive workforce, but the exact dimension of the crisis is not known yet. As China’s workforce shrinks, there will be a corresponding increase in the number of people in the 60-65 age bracket. Keeping this group and the young olds (healthy and active older population) will be a big challenge for China.

China may stave off a dramatic labour force decline to register higher unemployment rate. Unemployment is currently hovering around 3.8% ( https://www.imf.org) and is expected to rise further in the aftermath of the Covid-19 pandemic. The productivity, largely dependent on the labour force comprising skilled and semi-skilled workers, will also be affected. As China prepares to adopt Artificial Intelligence and machine learning, the unemployment rate will rise again. The country’s claim of lifting people out of poverty may not last longer as more people may go below the poverty line.

China has started counting on robots and automation to fill the gaps in labour force, but it will be difficult to match the pace of automation with the decline in a particular job profile. The social safety net and retraining programmes will be increasingly important to help people shift jobs.

READ I  Trade negotiations: How can India strike a strategic balance

Lax IPR protection may hit Chinese economy

Another weakness of China is a lack of innovation and misutilisation of intellectual property rights (IPR). In the pursuit of economic success and high growth rates, China has violated the norms and rules of IPR. Several disputes are pending at the WTO Dispute Settlement Mechanism (DSM).

If digital services take edge over the movement of goods, then design, data, transmission of ideas will be crucial and will need IPR protection. This is where China’s future reputation will be at stake. India could take advantage of the situation.

READ I  Housing boom: Mumbai real estate market in for an upswing

High debt-GDP ratio cause of concern

The Chinese economy will face a crisis in steering its growth because of its reliance on foreign investment. This is because the spectre of Covid-19 will haunt the country for a long time to come as investors see it as the source of the deadly virus. China’s debt to GDP is already very high at 303%. Borrowings in the form of corporate, household and government debt have been very high that may affect economic growth in Chinese and the world.

Asset price bubbles, and complex hidden risks pose a major systemic danger to the world’s second largest economy, which could result in a major financial crisis. There is the danger of a “Minsky moment” hitting the Chinese economy. US economist Hyman Minsky, who died in 1996, had warned of the risks of periods of financial excesses leading to crises. In its frenzied pursuit of wealth and power, China perhaps is causing too much damage to its internal economy and international trade.

READ I  Atmanirbhar Bharat: Reducing dependence on China for pharmaceutical ingredients

The debt accumulates over the years as the resources channelled during the rapid growth phase of Chinese economy turn inefficient due to the state-dominated system. Some of this debt could become non-performing assets. Old investment-heavy growth model is running out of steam because of the global financial crisis. If lending is financing productive investment and growth, then the debt-GDP ratio should have been stable.

Evidence suggests that for more than half of the infrastructure investment in Chinese economy made in the last three decades, costs are higher than the benefits they generate. This means the projects destroy economic value instead of generating it (Oxford Review of Economic Policy, Volume 32, Number 3, 2016). This confirms that China is currently sitting on a time bomb that may explode any time.

READ I  FDI from China: India must balance strategic and economic interests

Trade war with the US

The Made in China 2025 industrial policy is trying to direct innovation in 10 key industries. This approach is unlikely to succeed and has caused great consternation among trading partners because of IPR and technology violations.

The recent tech war between the US and China has already put the Asian nation in trouble. Some of the largest Chinese firms are under the scanner for IPR theft and spying charges. Beijing is accused of trying to access personal data and defence establishments documents.

READ I  RBI monetary policy: Rate cuts unlikely for the rest of 2021

Chinese economy must cut down emissions

On the carbon emission front, China is currently a major emitter. Its industrialisation drive at the cost of clean environment is currently a topic of hot discussion in the global climate change forums. China now produces about 28% of the world’s emissions. Coal consumption, which declined between 2013 and 2017 due to a push to improve China’s air quality, began to rise again in 2019 and 2020 as the government sought to stimulate industrial growth.

Forums such as the UN and the WTO need to deal environment and trade issues with a strong will. IPR, regulation relating to investment, dumping, cross-border data flows and subsidies where China seems to have operated non-transparently over couple of decades need to be pursued to create institutions that should prove objectivity and transparency of global concerns and issues.

A strengthening of the multilateral institutions that provide critical global public goods is required for the world economy to function smoothly. This will require practical compromises between China and the United States, and more generally between developing and advanced countries. China will need to take up more responsibilities commensurate with its current economic status.

(The author is Professor and Area Chair, Lal Bahadur Shastri Institute of Management (LBSIM), Delhi, India. He was former senior faculty at IIFT Delhi. The views are personal.)

Recommended For You

%d bloggers like this: