The Chinese economy, which grew rapidly with the help of the government’s fiscal spending, has started showing signs of aging with its major industrial segments stagnating, real estate values falling and local governments accumulating huge debts.
In this situation, the government of President Xi Jinping regards the slowing economic growth as a “new norm” and does not plan to take any excessive stimulus measures. Unlike Japan, which experienced its economy moving from rapid growth to a steady maturity and finally to slow growth, the economy of China is jumping straight into a period of fast aging, which is even riskier than a hard landing.
An unofficial topic hotly discussed during the summit meeting of the Asia-Pacific Economic Cooperation (APEC) forum in Beijing in November was creation of the Asia Infrastructure Investment Bank (AIIB) with China taking the initiative with a view to providing funds for railway, road, airport and seaport construction and other infrastructure projects throughout Asia.
On Oct. 24, shortly before the APEC summit, representatives of 21 countries signed a document for launching the AIIB with the target date set in 2015. Principal signatories included Southeast Asian countries such as Thailand, Vietnam and Singapore; South Asian nations such as India, Pakistan and Bangladesh; and some of the Middle Eastern oil producers including Kuwait and Qatar.
Japan and the United States did not join because the AIIB scheme was obviously aimed at strengthening China’s influence in Asia; nor did South Korea and Australia.
Indonesia initially sat on the fence, partly because of pressure from Washington, but Indonesian President Joko Widodo, who was elected only in October, told the APEC summit participants that his country would join the new bank.
The projected AIIB would in many respects rival the World Bank and the Asian Development Bank, the latter traditionally headed by a Japanese official, but newly rising economies in Asia welcome it as a provider of low-cost loans for infrastructural development.
A crucial question, however, is what impact the projected AIIB would have on China.
On a stretch of several kilometers along national Highway No. 1 on the southern coast of Sri Lanka, which until recently was sparsely populated, there has appeared the huge Hambantota seaport facility and an airport with a 3.5-km runway bearing the same name.
Conspicuous on walls of buildings and on cranes are Chinese characters, which appear because Beijing funded the construction of all those facilities. This was done as part of China’s bid to secure strategic strongholds for reaching the Indian Ocean via a route known as the “string of pearls.” This move has assumed economic significance as well as military and geopolitical importance.
All of the Hambantota facilities have been built by Chinese contractors with steel frames and rods, cement and glass and cranes and other equipment supplied from mainland China. Because of this, the project has provided little benefit to local residents other than in the form of wages paid to construction workers. It has failed to cause a ripple effect commensurate with its scale.
Moreover, a large number of workers were sent from China, so the project offered only unskilled jobs to local Sri Lankans.
For the past decade, China has been advancing into developing countries in Asia, Africa and South America under the pretext of assisting them but with the ulterior motive of helping Chinese corporations expand their business activities and exporting more goods to those countries.
The true intent behind creating the AIIB is to further promote this strategy.
The amount of money to found the AIIB will come to $50 billion, which will be shared by the participating countries in proportion to their gross domestic product. China will undoubtedly hold a share of more than 50 percent as the second-largest economy in the world, which means that Beijing would have a strong voice in selecting projects, placing orders and procuring materials.
“All made in China and all paid for China” is a sarcastic remark coming from some of the countries participating in the AIIB scheme.
The Chinese economy today is beset with production overcapacity in all segments, from steel to aluminum, glass, cement, coal, shipbuilding and automobile.
Moreover, despite sluggish consumption, banking and industrial companies still continue to invest haphazardly believing in an optimism peculiar to China that the continued state investments in infrastructure projects would prolong an economic boom and boost the demand.
As is well known, the fiscal debts of local governments and the deficits accumulated by major state enterprises have reached perilous levels, making it impossible to hope for additional public spending or capital investments.
The most important factor that has led Beijing to create the AIIB is the belief that creating new demand abroad through the creation of the AIIB is the only way to avoid a simultaneous collapse of local governments and state corporations.
China has no difficulty in providing the initial fund for the AIIB as it has large foreign exchange reserves. Once projects led by the bank get rolling, the amount of funds needed for the projects would become dozens times as big as the initial fund.
Additional money would be borrowed from commercial banks, at home and abroad, and would also be obtained through bond issues.
Although international tenders will probably be held for many projects, Japanese and South Korean companies would not be able to participate as their governments are not AIIB members. Only a handful of companies capable of building roads, bridges, ports and harbors and railways can be found in countries outside China.
This would make it all but certain that the AIIB would achieve its primary target of opening new markets in neighboring countries for Chinese industries. One of the initial projects being contemplated by China is said to be construction of a high-speed railway line in Thailand, which was originally proposed by deposed Prime Minister Yingluck Shinawatra.
Although all these may appear to indicate that the AIIB scheme would serve as the Xi administration’s miraculous measure to revive the Chinese economy, this will not necessarily be the case because the Chinese economy’s trait of relying on the government’s role in creating demand would continue, and this would not lead Chinese corporations to improve their competitiveness in the global market.
For example, Shanghai Automotive Industry Corp. became one of the world’s largest car makers after receiving advanced technologies through joint ventures with General Motors and Volkswagen during the past two decades. But its new models have failed to attract domestic car buyers who have been satisfied with products supplied by Shanghai General Motors and other manufacturers from Japan, Germany and South Korea.
Other indigenous Chinese automakers like BYD Auto Co. and Cherry Automobile Co. at one time enjoyed a boom, but their sales fell after a couple of years because of poor quality.
American, European and Japanese automobile manufacturers followed a similar historical path of first gaining footholds in the domestic market and then later advancing into the international market. Even Proton Holdings Berhad of Malaysia followed a similar path.
In stark contrast, no Chinese automaker has been successful even on its own home turf, and the market share of foreign competitors in China has been on a steep rise. The better informed the car buyers become, the less they are attracted to domestic makes.
Except for firms like Haier Group and Huaway Technologies Co., whose products — such as home electric appliances, smartphone relay stations and Internet servers and rooters — have gained an international reputation, Chinese industrial firms are faced with the difficult task of coping with the increasingly mature domestic market.
Another serious problem facing China is the migration of farmers to urban areas. A 2012 report by the Chinese Academy of Social Sciences said it would cost 100,000 yuan (about ¥1.8 million) per year to provide each farmer settling in a big city with social security and public service benefits.
Some 250 million farmers are said to have moved to urban areas to become what is known as “farmer-turned industrial workers,” encouraged by the Chinese Communist Party’s fundamental doctrine that if more than 200 million of the remaining 500 million farmers find jobs in cities, the population in the farming areas will be reduced to an appropriate level, the economic standards of farmers will be elevated and the disparity between urban and rural areas will be narrowed.
According to this scenario, an increase in China’s urban population will lift consumer spending in big urban centers, which in turn will serve as an engine for a new phase of economic growth. But such a shift in population would result only in large financial burdens on such cities since they would have to pay for the new citizens’ pensions and medical services. That scenario is a sheer lie.
Urban dwellers will not accept such a migration of farmers to their cities. And farmers currently cannot get registration as city residents.
A growing number of farmer-turned industrial workers are returning home after failing to find jobs in big cities. But this is not expected to stimulate consumption in farm areas because farmers’ cash income is meager.
It is clearly impossible to hope for economic growth through urbanization of the population. The Chinese economy is already over the hill and the graying of the population and a drop in the number of those in the working age bracket will quickly plunge the nation into low economic growth, rather than a “new norm” with reasonable growth as hoped for by the Xi administration. Too rapid economic growth is about to cause too rapid aging of the economy.
China’s economy grew too fast, and is now prematurely beginning to age equally too quickly.
This is an abridged translation of an article from the December issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes. The magazine’s home page (in Japanese) is at www.sentaku.co.jp/
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