Chinese Puzzle: Why China Is the Big Loser From the Headline Events of 2011

Political upheavals in the Middle East, disaster in Japan, fiscal austerity in the U.S…. and 9.7% growth in China. What could possibly go wrong?

The first three months of 2011 have been interesting in the
sense of the old Chinese curse, “may you live in interesting times.” The year
began with unforeseen uprisings in North Africa and the Middle East, which have
now bloomed into armed conflicts in Libya, Bahrain and Yemen. Then Godzilla
struck Japan in the form of a cataclysmic earthquake and tsunami, followed by a
nuclear crisis of nearly fathomless horror. Finally, here in the U.S., a new
political movement swept into office, promising severe austerity measures
regardless of short-term consequences.


China has so far avoided the direct brunt of all this
turbulence. That does not mean they will dodge the ricochet.

Crisis? What crisis? Conventional
wisdom would say these events work to China’s advantage. Regional rival Japan,
which China recently
passed to become the world’s second-largest economy
, was dealt a crippling
blow. The U.S., Great Britain and France have now been dragged into another
regional conflict with no clear exit, reminding the world afresh of their unsavory
legacy as colonizers, petro-imperialists and military hegemons. America’s
deficit hawks are so bent on curtailing government spending, and so hostile to
President Obama on every front, that they appear unconcerned that their
policies are
likely to cause more economic distress
by reducing employment and demand
before recovery has a chance to set in.

China, meanwhile, continues its impressive rise. According
to the
most recent OECD forecast
, China’s GDP will grow at 9.7 % this year, down
from previous double-digit highs, but still building on more than a decade of
historically-unprecedented expansion. The country is in the peak years of its
demographic dividend, with more than 60% of the world’s largest population in
working age, compared to low numbers of dependent children and elderly. Many of
China’s homegrown companies have become global players. The nominally-Communist
country is now home
to more billionaires
than anywhere outside the United States.


Trouble beneath the
In fact, recent events have struck China like a torpedo below the
waterline, exacerbating long-term structural problems. The uprisings in the
Middle East, which seemed to come out of nowhere from a political standpoint,
are actually the products of a powerful mix of demographics, new technology,
and rising expectations: elements that are also present in abundance in China.

The Chinese government has preempted dissatisfaction among
its educated, wired and increasingly affluent urban youth by delivering the
goods: rising opportunity and lifestyle improvements to meet rising
expectations. Many have long feared that if China’s growth should stall, all
that youthful patriotism might curdle into the kind of discontent seen in other
countries where a brittle old establishment was unable to satisfy the ambitions
of the young.

China’s government is very eager for that not to happen. But
in China’s export-fueled economy, social harmony is purchased at a cost, and
that cost has been going up. At first it was possible to achieve staggering
economic gains by moving a large portion of the low-productivity agricultural
workforce into more productive manufacturing work, where low wages and
appalling working conditions still seemed like an improvement over life in the countryside.


Now the low-hanging fruit has been harvested. Most of the
exogenous gains have been realized, and a shrinking pool of available workers
is driving up wages even in low-skilled work. Meanwhile,
as Chinese companies climb the value chain, it’s increasing the demand for
higher skills, which command a higher price. Production costs are rising faster
than the perceived value of Chinese brands overseas.

Energy costs are rising.
Events in the Middle East have sent oil prices surging above $100 a barrel,
which not only increases the costs of production for China’s manufacturers, but
also increases the price of exports because of higher shipping costs. It does
not help that most of the world’s known oil reserves are sitting underneath the
countries that are ground-zero for this year’s most spectacular political
turbulence, or, like Saudi Arabia and the Gulf States, now seen as likely
candidates for social unrest.

Then there’s Japan, which generates about 30% of its
domestic energy from nuclear power, a number that was projected to rise to 40%
by 2017. Confidence in nuclear power is probably not real high in Japan just
now. That means that in the short term, the world’s third largest economy will
be wading into the world oil market for a rising, rather than shrinking,
portion of its energy needs, competing with China, India and other emerging
economies for a scarce and increasingly uncertain commodity.


More competition, fewer
China’s costs are rising just as new competition is coming
online from even lower-wage economies in South Asia. Meanwhile, their biggest
customer, the United States, is pursuing policies likely to slow an already
tepid recovery by reducing government spending and demand, which means
exporters will have to compete harder for increasingly broke and penny-pinching
U.S. consumers.

Chinese demographics
are about to go negative in a big way
. Starting in 2016, the legacy of the
one-child policy and the lifespan-increasing benefits of affluence combine to
make China the fastest-graying
society in world history
by the 2030s, and well into crisis by mid-century.

This is the environment in which the Chinese government must
continue to deliver historic, unprecedented rates of economic growth or face
the prospect of severe social and political unrest.


When all you have is a
hammer, everything looks like a nail.
Unsurprisingly, China has adopted the
one policy option available: its state-controlled banks and institutions continue
to buy up huge quantities of dollars to artificially depress the value of its
own currency, thus keeping the cost of its exports competitive. China then has
three choices for what to do with those dollars, all of which benefit the
United States. It can buy our assets, which inflates the value of our stock
market and real estate; it can buy our debt, which keeps interest rates low and
keeps our political system afloat; or it can buy our stuff, which employs
Americans and reduces our trade deficit.

All of this comes at a steep price to the Chinese consumer,
who subsidizes Chinese industry by paying artificially high prices for imports,
while setting aside huge savings to pay for retirement and the care of elderly

Some say this policy is unsustainable. History shows that
when governments are faced with a choice between the unsustainable and the
unacceptable, they choose the unsustainable every time.


Hard choices ahead. There
are signs that China’s economy is trying to shift away from over-reliance on
exports toward one driven by indigenous demand, investment and entrepreneurship.
We hear this
every year. Maybe this year it will come true, and China will be able
to decouple its economic growth from currency manipulation and co-dependence on
U.S. deficits.

Until then, China will have to decide whether to address the
long-term issues of demographics, export dependence, energy and domestic demand
brought into focus by the events of 2011, or just keep trying to outrun them
with economic growth on overdrive.

Rob Salkowitz is a
consultant, speaker, and author of three books including
World Rising: How Youth, Technology and Entrepreneurship are Changing the World
from the Bottom Up


About the author

Rob Salkowitz is author of Comic-Con and the Business of Pop Culture (McGraw-Hill, 2012), Young World Rising (2010), and two other books on youth and digital media as agents of change. He is Director of Strategy at MediaPlant, LLC, a Seattle-based communications firm he co-founded in 1999