Braving the storm

The Chinese economy, it appears, has recovered from the recession in record time. According to the National Bureau of Statistics in Beijing, annual growth was unexpectedly strong at 11.9 percent in the first quarter of 2010. By achieving such high growth rates in times of global recession, many expect China to overtake Japan this year to become the second largest economy of the world. Strengthened by these economic gains, China has used its political leverage to facilitate regional integration, by engaging in a number of bilateral swap arrangements with countries around the world.

Given that China only has 10% arable land, it becomes imperative for the country purchase commodities from other nations to satisfy the country's growing consumption demands, and to invest in countries producing such commodities. Such a process will reinforce new corridors of increasing trade and investment flows between China and Africa, Latin America and the Middle East. Similarly, its gigantic market and related demand have led China to invest in natural resource supplies of different countries, especially those in Africa and the Middle East.

The spectacular growth of infrastructure in China has attracted international investment, especially for resource-rich nations such as Australia and Brazil, which have supplied key raw materials to the Chinese machinery. Newsweek recently wrote: "...all admiring eyes are on the boom in China, a force so powerful it has lifted the performance of many other economies ... Many big-name investors believe that China boom is set to continue, driven by investment spending. Investment now represents 45 percent of the Chinese economy, a level that is historically unprecedented, both in China and in any major economy. Yet China has been able to maintain this rate of spending for several years in a row, mainly because it has been industrializing a largely rural economy. With many laborers still available to move to new factories in manufacturing boomtowns, the government could keep pouring money into highways and factories."

Commodity exports to China account for 64 percent of overall Australian exports and 55 percent of total Brazilian exports. Australia has been banking on China to pull the nation out of the recession. "Australia, now more than ever, considers itself the "Lucky Country," as mining metals for China generates jobs and investment. Brazil expects blowout growth of 7 to 8 percent this year, making it a current darling of global investors." Thus, China's dependence on the resources provided by these countries serves to create a mutually beneficial alignment of their economies.

However, doubts are now being raised about the sustainability of Chinese growth rates. "The Chinese economic miracle" since 1980s has been a mix of reforms followed by focus on light industries. In the last decade or so infrastructure and heavy industries have received high levels of attention. Investment has been central to economic growth.

The Chinese economy is now reaching a stage worries of a strained capacity have emerged. Several analyses of China's industrial capacity and infrastructure development reveal that China's structural modernization is by and large complete. Furthermore, China's long-term investment needs are grossly overestimated, and that the economy will soon be functioning beyond its capacity. According to the latest figures by World Bank, industrial production and other key indicators reveal that the pace of growth is moderating. Having said this, it is worth noting that growth remains relatively strong, supported by real estate investments and a recovery in export demand. It is projected that domestic consumption can be the new driver of Chinese growth once the excessive reliance on exports fades away, a trend and a defense mechanism, similar to the country's falling back on increased spending on infrastructure and consumption during the global recession.

However, a new threat to the economy lurks in the shadow. The disparity in income and the demand for higher wages has led to a recent wave of labor strikes in China. Foreign-owned factories in southern China, especially Honda vehicle plants and parts suppliers, have been in the spotlight due to the activism of young Chinese workers from the countryside. According to Reuters, "this unrest could spread, especially in factories around Shenzhen and Dongguan in southern China where migrant worker discontent about conditions runs deepest." Thus far state response to these strikes has been remarkably non-violent and the police have not been used to disperse these strikes.

A more assertive workforce is also linked to the shifting job market. China has undertaken massive stimulus spending to counter recession and strengthen its economy. Manufacturing has begun to expand into the Chinese interior, leaving traditional industrial enclaves on the coast competing for labor and in the process, providing workers with a more powerful bargaining position, Ex. reported, "Discontent among China's estimated 150 million-strong pool of migrant workers who have helped power the country's growth, threatens to undermine the government's legitimacy and erode the nation's competitiveness as a low-cost factory hub." The workers demand higher wages, which are equivalent to their counterparts overseas. There seems to be increasing awareness of labor laws amongst the workers. As Pranab Bardhan notes: "With a more Internet-connected and vocal middle class, and the rise in unemployment (and wage and severance payment arrears) in the current downturn on top of a history of massive worker layoffs in the recent past and a large underclass of migrants, urban unrest may be more difficult to contain."

China will have to introduce innovations to its traditional growth model. Newsweek noted, "Wages will have to rise a lot faster to compensate for the fall in the growth rate of labor. That will mean a more balanced domestic economy, but it also will mean that low-end, high-growth manufacturing will continue to migrate to cheaper parts of Asia and Africa." Toyota and Honda have stopped production at their plants in southern China since mid-May following the strikes."

If the recent labor strikes in the country are successful in accomplishing their demand for enhanced wage rates, the price level of manufactured products will be driven up, turning them into more expensive exports. Increased cost of production will be inimical to future foreign investment as the comparative advantage of low-cost production wanes.

China has so far braved many storms. However, this time it will be a test of its political leadership and economic managers to set a new direction for the economy.

Raza Rumi is a writer and editor based in Lahore.

Raza Rumi is a writer, policy adviser based in Lahore. He is on the editorial board of The Friday Times, and also maintains a national development blog at www.razarumi.com. Email: razarumi@gmail.com

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