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China weathered the economic storm with college enrollment and household consumption

Yesterday we started looking at some of the strategies China has used to weather the first financial downturn. Today we’ll continue that by looking at two other strategies as well as their potential benefits and costs.

One of the major things that was supposed to happen after the economic downturn was that China was going to shift from being the world’s factory to a position higher up the production chain. The idea was that many of the factories on China’s east coast were shutting down, but increased domestic consumption and new college graduates would soon alleviate the slowdown.

Increased College Enrollment

When I arrived in 2007, my average class size at the rural college was 35, by the start of the 2009 school year that had jumped up to nearly 50. I didn’t need to read the papers to realize what was happening; college enrollment was being increased to absorb high school students who wouldn’t be able to find a job in the cities.

From 2005 college enrollment increased from 23 million to 31 million in 2010. University and junior college enrollment jumped 43% and graduate students had increased by 57%. Such a massive shift in just a few years meant an explosion in the number of private and public schools that were meant to train the next generation of Chinese scholars who would pull China’s economy up to the next level.

For the last few years, China’s colleges have succeeded in keeping the youth occupied.

But there was a major problem; as the college students began graduating they realized there were few jobs that actually required degrees. Students regularly discussed their disappointment in the fact that their high school educated friends were earning ~2,000rmb/month working in factories in Guangdong, but with a college degree they would be earning almost an identical amount. In fact many of them went on to low level sales positions, and a few ended up working in hotels.

Unemployment figures were also disguised (in rural areas unemployed migrant workers are simply reclassified as farmers). I knew of several colleges in 2009 that were struggling to place their graduates, but were facing tremendous pressure to report good employment rates. The practice they devised made it so a student would not be able to graduate until they had found a job. So even in the middle of the recession my campus claimed a nearly 100% employment rate, despite the fact that many of the students were no longer “graduating.”

This is an issue that still hasn’t been corrected. Just this weekend a friend was telling me that several of his graduate level classmates were disgusted with their new jobs that paid roughly 2,500rmb/month. They wondered what the point was of delaying their entrance into the job market by 6-7 years if there weren’t even jobs available (in this same time frame housing prices increased over 400% in some areas).

Now at some point, China will need a better educated workforce but as my friend said, “It seems very dangerous for the gov’t to have encouraged the creation of such a large pool of well educated and poorly paid scholars.” I share the concern that this is going to create an awaking in China similar to that seen in Occupy Wallstreet (which was buffeted by a similar demographic).

Domestic Consumption

One way of thinking about a country’s economy is by considering three major forces: government spending, household spending, and exports. With a Keynesian view of the economy, which China’s gov’t seems to endorse, when foreign exports drop like they did in 2008, gov’t spending and household spending need to increase to make up the difference.

Unfortunately, China’s gov’t made up almost the entire difference, and household spending (as a percentage of GDP) fell over 11% from where it was in 2000 to ~35%. This means that when foreign countries’ economies falter, China can’t rely on its own consumption to weather the storm. This is a major force behind China’s infrastructure projects, without the gov’t spending billions of dollars every year, the economy would come sputtering to a stop.

The gov’t has tried numerous subsidies to boost domestic demand on things like appliances and automobiles, which have worked to a large extent, but gov’t spending increases are outpacing these gains. The success of these projects can be seen in every traffic jam and polluted sky.

These gains however, were the easy gains. Now that many of China’s rural consumers have purchased household appliances like refrigerators, washing machines, and televisions, consumption will start to drop again as these subsidies expire.

One of the major limits on increasing household consumption is that China’s social security programs are still weak. Families realize it is necessary to save large portions of their salaries for unforeseen illnesses or losses. In the US there was much discussion of China’s personal savings rates, which many of us saw as a symbol of how out of control American spending was, but these same savings are also a limiting factor for China’s economic growth.

Conclusion

To me, it seems that these short-term solutions (including the one discussed yesterday) have helped China survive the economic crisis in 2008. If the rest of the world had taken similar steps, and the world economy was back on track, China would be in the perfect position to leap ahead. However, if the economy falters once again, China will be faced with massive local debt, infrastructure projects that have suffered from diminishing returns, a large educated but underemployed section of the population, and families that are still saving for a rainy day.

China survived one downturn, but in my opinion, it would be incredibly difficult for it to survive a double-dip recession without making drastic adjustments to the economy.

I am in no way “rooting” for China to falter, the losses in the countryside would undo many of the gains that I’ve worked for in the countryside. The destabilizing effect could also cause massive social upheavals that could have very ugly outcomes. 

Western companies should be blamed for China’s pollution

When talking with Chinese friends and co-workers about the pollution levels in Nanjing (awful compared to developed countries, but decent for Chinese cities), they are quick to point out that foreign companies in China are the ones that should be blamed for the filthy air. While it is absolutely true that foreign companies are adding to China’s environmental woes, I’m not convinced they should shoulder all the blame.

Today, I’d like to start by discussing three points related to this statement, and I hope you’ll continue the discussion in the comment section below.

Production for the West

This factor is undeniable. Western consumers have benefited from the destruction of China’s environment by purchasing cheap goods. If all of our environmental standards were enforced globally (and corporations actually complied), then the price of goods would be higher.

The latest example of this can be seen in the fact that Apple’s production facilities in China have created many environmental problems while making goods far out of reach for most Chinese consumers.

The problem I have with this argument, is that the destruction of China’s environment for the sake of producing goods for the West has also benefited many Chinese by creating jobs (from migrant workers to factory owners). The pollution has been seen as a by-product of development, without questioning how it could have been avoided.

However with the slow down in the global economy, one would expect that declining demand overseas would correlate to China’s yearly carbon dioxide emissions. Instead we see China’s emissions have continued to grow during this time, as there have been massive pushes to increase domestic consumption. It turns out cheap Chinese products made in polluting factories aren’t any less attractive in Chinese Walmarts than they are in the West.

While consumers in ALL countries have a responsibility to choose environmentally responsible products, due to the explosive growth of Chinese manufacturing, it would be very difficult to buy only “green” products.

Chinese Companies

Another important point against this argument, is that China was polluted before foreign companies arrived in the late 70’s. Foreign companies work largely through or with Chinese factories, and Chinese companies are among the world’s least environmentally conscious. The idea that western corporations are doing something different than Chinese companies is ridiculous.

Let’s take a quick look at two companies operating in China that have been attacked in the Chinese press:

In Apple’s case, Foxconn is their major supplier and also their major polluter. Apple clearly should be making greater efforts to practice corporate responsibility, but Foxconn should not be absolved of wrongdoing simply because it is working with a foreign company. Yet in Chinese papers you will always see Apple taking the majority of the blame.

The same is true of the recent oil spill involving ConocoPhilips. Both Global Times and People’s Daily railed against their environmental destruction, and both failed to mention that a state owned company owned the majority share of the project.

While blaming foreign companies might be more politically palatable, it does little to address the underlying problem.

Lax Regulations

Let’s be honest, when it comes to corporations, do we really expect them to take any actions that don’t add to their bottom line?

Corporations have a responsibility to their share holders to maximize profits, and few legal responsibilities to communities beyond paying taxes. This might be a fairly negative view of corporations, but it is not surprising that companies will dump as much toxic waste into rivers, and spew as much carbon into the air as governments will allow (if it is profitable).

While cheap labor is often cited as a reason for companies moving to developing countries, lax environmental standards are another major factor.

For example, in Nanjing there is a large chemical factory owned by a German multi-national that is often blamed for the smog in the air. The question I always pose to my Chinese friends is, “Why didn’t they build this factory in Germany?” The reason being that environmental regulations in Germany would make this kind of processing plant incredibly expensive to run. The Nanjing gov’t invited the company here because it would increase local GDP.

This is the major underlying problem. The pursuit of local GDP development (in return for promotions) has essentially aligned the interests of local government leaders with those of corporations, instead of the people they supposedly represent. While the Central government has created CO2 emissions targets and other environmental incentives, local leaders still recognize the fact that the key to promotion is GDP.

Perhaps the most troubling example is Huaxi (read my series on the richest village in China), instead of being condemned for it’s reliance on dirty industries like fertilizer production and steel, it has been lifted up as a national model of excellence.

Even in cases where factories have been “shut down” for violating the already lax environmental regulations, they are frequently allowed to continue their operations until people end up in the hospital (numerous examples of lead poisoning from “closed” factories have surfaced in the last year).

If local governments encourage the creation of heavily polluting industries, than they too must shoulder some of the blame for the resulting mess.

Ultimately, even if every multinational pulled out of China tomorrow, there is little evidence that this would actually bring an end to China’s pollution problems. Certainly the West is benefiting from this environmental destruction, but to pretend that this disaster is not largely of China’s own making ignores the reality of the situation.

For unbelievable photos of China’s environmental devastation and the toll it takes on China’s people check out this post from ChinaHush.com

200 Posts!

If you’ve read every article so far on Seeingredinchina.com now, you have now read the equivalent of a 200+ page book, and hopefully have learned something new about China.

If you haven’t caught every exciting article (and the ones in between) make sure to check out the archive.

Here are a few of the posts that I think were my best work:

I am also excited to announce that the SeeingRedInChina.com was recently given a glowing review by ChinaLawBlog.com, and was mentioned in an article by James Fallows on TheAtlantic‘swebsite.

In the coming months I’m planning on adding more pictures and videos, as well as new guest posts and hopefully some interviews. I am also working on convincing a friend to write a series of weekend posts that will tell his story from the moment he arrives in the middle kingdom.

I always welcome direct emails at seeingredinchina@gmail.com, and will generally respond within 24 hours.

Thank you so much for taking the time to read this blog, this project has been far more successful than I had imagined it could be.

-Tom

The Upside of All These Projects

Today we’ll be looking at a few of the upsides of these projects, and why they are for the most part appreciated by the people, despite the corruption and problems these vanity projects can cause (read my updated post on some of the problems).

Jobs

As the US entered the recession questions were raised about Keynesian economics, could gov’t spending really be the answer? While we battened down the hatch for another long debate as to whether or not it might be effective, and then moved on to how much to spend, China pushed ahead with massive spending.

While the long-term results are unclear (10 trillion rmb in local debts is worrying), the immediate benefits were obvious. Not only did several cities launch plans for expanding desperately needed mass transit, but thousands of locals got jobs that made up for factory closings. To date this has helped keep unemployment lower than we have seen in the US.

note: unemployment in China is incredibly difficult to measure, since a laid-off factory work from the countryside simply gets re-listed as a farmer.

This floating population of 221 million people rely on these projects for work, and the gov’t knows that keeping this segment of the population employed is key to maintaining stability. Each of these massive projects also come with unending upkeep, the new High-Speed Rail for example employs more than 1,300 “guards” just to keep an eye on the track (they are positioned every 1km all the way from Shanghai to Beijing).

Ultimately most of the wages paid out for these projects trickles down to the countryside, that now functions largely on remittances.

Access

While we have been focusing largely on China’s more ambitious projects, it is important to note that China only recently completed the backbone of its national highway system in 2008. These kinds of projects (unlike bullet-trains), are effective in improving the standards of living for large numbers of people.

While they don’t get many headlines overseas, these smaller projects are really the most important. As I discussed in my post on Longzhou, the fact that we were bypassed by the freeway meant shifting from a key town to a forgotten backwater. Freeways mean that local people can get their goods to market, and are necessary for factories to even consider establishing new plants an a region (this is not without new problems).

Opportunities

Finally, and perhaps most importantly, these projects give Chinese state-owned enterprises (SOE’s) a chance to demonstrate to the outside world their abilities. China’s companies are building dams, freeways, and trains throughout the world (largely in South America and Africa, but spreading to Europe and the US). These projects help bring more money back to China, and should be considered when discussing the costs of some of the projects (although often the money ends up in the pockets of these company’s leaders).

In the past week there were two major pieces of news corresponding with large-scale projects. The worrying piece of information was that a Chinese company had massively underestimated the cost of constructing a freeway in Poland. The Chinese company complained that material prices had unexpectedly increased, and that the standards were higher than they had though. The company had to forfeit the contract, and is barred from bidding for another two years.

On the other hand, a Chinese company today completed the construction of a bridge for California, they completed their work 5 months ahead of schedule. The company opted to make a name for itself, instead of seeking profits on this project. One step they took to ensure quality was requiring their employees to get US qualifications in welding. It was loaded onto ship this morning, and will later be assembled by American workers.

These projects (and future ones) are worth hundreds of millions of dollars, and are helping to grow China’s GDP, but only time will tell if they were worth the cost.

Big Projects, Fat Pockets

Wednesday we looked at part of the reason why Chinese officials like massive projects, and today we’ll be looking at the another major reason: corruption. This factor helps to explain why local governments are so eager to build infrastructure, but struggle to find money for schools, and why the National government continues to favor single major projects.

It’s no secret that China has thousands (hundreds of thousands? millions?) of officials who use their positions for extra gains.

Starting at 1:58 (What do you want to be when you grow up?)
Boy: I want to be an official
Interviewer: What kind of official?
Boy: A corrupt official, because they have many things.

This endemic corruption is essential for understanding not only infrastructure projects, but China as a whole. This problem of pocketing public funds and taking bribes has plagued China for thousands of years.

Why does the size of the project matter?

It’s simple, the bigger the project, the bigger the opportunity for graft. After all gov’t sources usually point out that as a percentage of major projects, the total amount “missing” is small. For example lets look at the Beijing-Shanghai high-speed rail, which had a budget of nearly 33 billion RMB (~$5 billion) .  Of that budget over 180 million RMB (~$28 million) was “misappropriated” and the Railway Minister was sacked for (allegedly) accepting nearly 800 million RMB (~$120 million) in bribes. Yet online it is emphasized that this is less than 1% of the total budget.

So it’s not surprising that city governments are eager to build massive new railway stations and airports, even though those projects are in many ways redundant. They are seen as opportunities to get rich. Not to mention that these projects are also racking up debt (some estimate more than 10 trillion RMB of debt at the local level), and are a major source of illegal demolitions and lost farmland.

Interesting note: There were 23,000 cases of illegal land use, but only 73 officials were blamed. Assuming 3 cases/official would be a 1% chance of being punished. Punishments were “warnings or demotions.”

Why does the National government continue with these massive projects?

One part is that infrastructure helps grow China’s GDP, government and real estate projects make up 70% of the total (we’ll look at the benefits of this on Monday). To put this number in perspective, in the US these figures account for about 20% of the GDP, and just before Japan’s building bubble burst in the 1980’s it was 35%.

Also as Ken Pomeranz noted in an interview on The China Beat (great blog), China had opted for the far costlier water transfer project, which will draw water from the South to be used in the much drier North, instead of fixing millions of leaky faucets and fixing irrigation canals. The reason he points out is that leaders in Beijing know that it is much easier to oversee one big project.

As Mark Twain would observe, China has opted to put it’s trillions of eggs into just a few giant baskets, so that it can more easily watch those baskets. Essentially the National gov’t is admitting that entrusting hundreds of smaller projects to the thousands of officials is a recipe for failure (or disaster).

Monday we’ll be looking be looking at why these projects are important for common people and China’s future.

Is China Headed For An Economic Crash?

I had a great discussion with a German man on the train yesterday, and thought you might find it interesting. He is in the garment manufacturing business and works for a large German chain similar to The GAP or H&M, and has been in China for 3 years.

In our conversation we talked about a variety of topics: Manufacturing, GDP growth, High speed rail, the housing boom, China’s environment, and in each topic he brought up that it wasn’t sustainable.

Perhaps it was made more apparent by traveling 300km/hour through what used to be China’s countryside, which now offers little other than new apartment buildings, gray skies, and a dozen coal power plants.

One of the most interesting things he said was that wages have gone up enough now that China was becoming less attractive for garment manufacturers, with almost all of the factories moving away from China’s wealthy East coast. He said wages in China are about $150-$200 a month, but in Bangladesh its only $50. The bigger part though were the tariffs being put on imported clothes from China, which he said were around 10% in Europe. He said that he still thinks garments will be made here for another 5-10 years, but companies are starting to look elsewhere.

He also mentioned that for health reasons he would refuse to stay in China more than 2 more years. He has a 10 year old daughter, and was quite concerned about what China’s air would mean for her long term health. However he did say that since the World Expo, it seemed that Shanghai’s air has improved somewhat. He said several times that it was better than it had been in the past.

Lately it seems that I’ve been having more conversations like this one with foreigners who have been in China more than a few years. They will bring up the China’s massive growth, but they no longer seem to be as impressed by it.

At the moment it seems like China is a bus headed for a cliff, and economists from outside China and within are saying, “Hit the brakes! We’re going to crash!” and the government’s response is to slow down from 80 to 75.

This article seems to be the perfect compliment to this conversation, so I hope you will take the time to read it. It raises a number of questions about the sustainability of China’s rapid growth, and the uneven distribution of wealth.

Note: This is not to say that I want China’s economy to falter. I work in development, and I would love nothing more than to see China continue to pull millions out of poverty. That is why I think it is important to highlight these issues, so the gov’t will address these issues instead of ignoring they exist.