Second thoughts about China?

In the words of shameless rent-a-quote Mr. Andy Xie, ‘the pessimists predict China’s imminent collapse and the optimists hail China’s unstoppable rise, but in the end, China tends to muddle on through somewhere in between the two extremes.’

Recently words such as ‘collapse’ have been replaced with, for instance, ‘unsustainable’ and speculation that China’s stunningly successful economic formula of massive domestic investment, cheap money, use of existing technology, export-led growth, cunningly hidden protectionist policies, the hard-selling of the mythical ‘China market’ and huge amounts of FDI cannot last forever and is consequently starting to show cracks. After all, what goes up, must come down, or so says this *must read* article.

Despite “insatiable” domestic demand and government measures to curtail investment in overheating sectors, China now has an overproduction of, for example, steel, cement and cotton – all this during the biggest building boom in history. Likewise, China’s factories are churning out too many finished consumer goods like cars, mobile phones, textiles and clothes. Adding to the gloom includes higher manufacturing costs, sluggish domestic demand, anti-dumping quotas, razor thin profit margins, fierce competition, rampant intellectual-property theft and a weak legal system. Furthermore, fixed-asset investment (infrastructure projects, factories, apartment blocks, office towers etc.) will likely top a staggering 54% of GDP this year. Comparisons with the investment frenzy that led to the 1997 Asian Crisis are inevitable.

It’s no wonder that foreign companies are starting to look to cheaper Asian locations and disversify their investments (the World Economic Forum recently ranked China a disappointing 47th out of 116 countries for business competitiveness). South Korean companies follow a “Chindia” strategy, Japan’s a “China-plus-one” formula and Taiwanese firms are increasingly investing in Vietnam. During the first 8 months of this year, Taiwanese investment in China/Mainland dropped 18%.

The result of all this? An economic slowdown. This might cause a few sharp intakes of breath but Jim Walker, chief economist for investment bank CLSA, predicts China’s GDP growth at 5% in 2006 and only 3% in 2007. Harvard Business School’s Michael Porter adds “The bloom is starting to come off the rose in terms of China being this mecca for business“. I myself still need to see a bit more hard evidence before I’m completely convinced. After all, I’ve read hundreds of similar articles over the years. It’s also possible that any economic slowdown could be handled by the government. Still, with China’s already considerable amount of domestic problems and challenges, any drop in economic growth would have a wide-ranging impact right across society. At the end of the day, however, it’s a bit too soon for doomsday scenarios just yet.

The Discussion: 18 Comments

I don’t think it’s a doomsday situation, BUT, i would say that this is a natural progression. It’s a ruthless market, and quite frankly China is hard to do business in compared to some other places – Vietnam is bending over backwards for investment, and is basically a much more transparent system than China. I think it’s just the evolution of the market.

Doomsday for China? hardly. But I do think that all the extrapolations that eager economists in and outside of China were making won’t hold water. 1, because of the environmental problems, and 2. because China is already starting to look less attractive than other places, and it’s only 20 some-odd-years into the “gaigekaifang”. China will be a real force in the world, sure, but it won’t be THE real force that some people were hoping for.

my 2 cents

December 1, 2005 @ 7:09 am | Comment

The World Economic Forum’s Rankings are utter bullshit.

Still, it is interesting how the CW on China blows hot and cold so quickly.


December 1, 2005 @ 8:13 am | Comment

I’m not a economics buff, so I was wondering if somebody would answer this question for me. Everybody talks of over investment in China, and the fact that growth is export driven and not consumption driven which will make the coming years difficult for China.

To me the solution to this problem seems simple. Cut government expenditure on infrastructure, increase taxes in overheated sectors, and then divert these savings by giving tax breaks for china’s poor. This will take care of further over investment, and also increase domestic consumption. The increased consumption will take care of the current excess capacity.

While GDP, which has been growing largely through investment might not register 9% growth, the purpose of growth has always been to increase the quality of life for the average person and therefore also assure political stability for the communist party. The increased domestic consumption may also serve to straighten out trade imbalances.

I haven’t heard any economist mention something like this so I’m assuming there is something wrong with my logic, can someone explain to me what it is?

December 1, 2005 @ 9:20 am | Comment

I just read an article in the HK standard (sorry, forgot what wire service it came from) that predicted the opposite: continued 9% growth through next year and 8% the year after. It sounds as if nobody really knows anything for certain.

December 1, 2005 @ 9:46 am | Comment

i believe there is some major change in China’s industry profile in the next 10 years. e.g. labor is no longer as cheap, and value-added has to move up, and it is a great challenge.

however, the newsweek article has a lot of problem. (i do not think it is intentional, but rather, carelessness of the reporter). it would have been a convincing story if the companies he interviewed are successful companies elsewhere or the reporter was able to pinpoint the reason for failure. but i looked at a couple example
1) Kymco. the low-end motorbikes has been banned or restricted in many chinese cities. it is a sunset industry in China. everyone who is critical of the pollution in china shoud understand why Kymco shifted the market focus to Vietnam
2) Garment maker Makalot: that is one direct result of US protectionism. but after 2008 things would change
3) taiwan’s electronics company, another case of riding the growth wave and out-competed.
4) VW’s case just represents increased competition in China from an articlely high market share of 50%, and shows how tough competition in China could be. this also could mean the toughest competitor will be emerged from participating in the China market (though most likely it is MNC who learned most and apply it to other market — McDonald’s “I m loving it” is originated in China)

in other words, everyday there are companies entering and exiting. the moral of the story is, you should not expect you will win in China market just because you entered early. it is very tough to compete and survive. and as far as the examples were quoted, it tells us nothing about the slow down or change in macro-environment (even though such prediction may be true)

December 1, 2005 @ 2:38 pm | Comment

I did not read that story. But I feel that many people here almost “wish” that China would collapse, and feel very uncomfortable that China continues to rise everyday. This pscyhology is called “denial-anger-rage-denial again”. People simply cannot stand others’ success and therefore have to justify for themselves that either: 1) They are not really that successful 2) Their success is due to “unfair” reasons.

Which reason did you choose?

December 1, 2005 @ 5:44 pm | Comment

I saw this article in the newsweek in bj’s foreign language bookstore – with the words ‘taiwan’ and ‘massacre’ blacked out. hehe

it is hard to say isn’t it? i think george chang’s the coming collapse… is still a persuasive read. the logic makes a lot of sense. you can’t have an export economy if no-one is buying…..

December 1, 2005 @ 6:25 pm | Comment

And honestly…it’s not “anti-China” for an economist to speculate on weaknesses in the economy…by that measure, Paul Krugman is anti-American, along with a lot of other economists warning of structural problems in our economy.

December 1, 2005 @ 7:29 pm | Comment

Well, economists can be all right on this one. However China won’t collapse just because economy cools off a little. In fact, cooling-off may be helpful in the long run. If China still has the 5-7 year- long business cycle as usual, it’s close to the point next year. In 2000, we have seen drop of FDI. So what? Surprising? No! Collapse, continue dreaming!

Second Sun Bin’s comments. If trash grading GM can make money in China, while you can’t, blame yourself.

By the way, patel, main stream economical policy won’t do much in term of China’s situation. Central government can’t reach far. Economical signals are all mixed up. Party commands are more efficient than economical policy, thanks to the weird system of China.

December 1, 2005 @ 8:25 pm | Comment


china is not going to collapse just becuase these people wish so.
instead of reacting to the supposedly malicious intention, why don’t we take them as warning and try to prepare ourselves against such possibility, even if it may be unlikely.

let me put this in a simple analogy.
you are walking, there is (maybe) a small pothole in front, you may see it or you may not.
some malicious kid shouts and laughs at you. what do you do? look around and check if there is indeed a pothole, and try to walk safely.
instead of blaming the kid, you could thank him for alerting you.

December 2, 2005 @ 12:27 am | Comment

No one is talking about collapse. I mentioned Andy Xie’s quote as an example of two possible extremes and how China in the past has normally muddled on through.

It constantly amazes me how any talk of a slowdown or reallignment of China’s economy provokes accusations that some people wish to see a total economic collapse. Amazing. Let’s play spot the braincell.

It’ll be interesting to see how China does reallign its economy to take on board changes and new circumstances. It’s fairly certain that China will have to move away from its past formula for growth. The uncertainty is in which direction it will go and at what cost.

Also, as commenter Lin said above: “main stream economical policy won’t do much in term of China’s situation. Central government can’t reach far. Economical signals are all mixed up”. That’s a good way of summing it up. It’s debatable how much influence the govt has over the future direction of China’s economy – particularly if difficult decisions have to be made and/or a slowdown brings a degree of economic stagnation.

People may note that industries like steel that the govt tried to ‘cool’ are now producing an excess of 100 million tonnes on top of a huge domestic demand of 350 million tonnes.

December 2, 2005 @ 8:12 am | Comment

People may note that industries like steel that the govt tried to ‘cool’ are now producing an excess of 100 million tonnes on top of a huge domestic demand of 350 million tonnes.

If only The Great Helmsman could see what those backyard smelters eventually led to. :-0

December 2, 2005 @ 8:26 am | Comment


(and Andy Xie is not a hostile force against China. he is from mainland China himself)

December 2, 2005 @ 3:40 pm | Comment

Actually I was the one who mentioned collapse. The government says that hey need 8%+ growth in order to find jobs for people entering work. Chang’s argument is, as I recall, as China’s economy cools you have more layoffs, which in addition to the social problems it currently faces leads to greater social unrest. the govt needs money to reform china. if the economy cools, where do they find it?

in saying this, i am not saying that i hate china or want this to happen. i am saying it is a possibility

December 2, 2005 @ 7:54 pm | Comment

People like to use the term “unneeded” to describe china infrastructure buildup. The problem is that, infrastructure has to be built when unneeded. It will be way too late to build when it is needed.

When Three gorge dam is built, one famous argument is that, with oil at $10 per barrel and electricity in excess in China, the electricity will not be sold at profit.

In business, track record is the key. When you buy a stock or a mutual fund, you are buying its management.

The track record of CCP in last 15 years is fantastic. When I was on the street protesting in 1989, I have no idea things can turn out this good.

December 3, 2005 @ 5:44 pm | Comment

the spirit of ’97

Martyn at the Peking Duck points to a Newsweek item that caught my attention earlier this week. Arguing that China is not necessarily the place to be putting your money right now.: Recently words such as ‘collapse’ have been

December 4, 2005 @ 4:36 am | Comment

Well put Si.

Steve, true, infrastructure is needed where it is needed. However, when every fly-speck small town in Zhejiang (for instance) is building an airport and when said towns are already dotted with more industrial parks than you can shake a stick at in an effort to attract investment – it becomes excessive. Every local cadre in China wants their own share of the economic pie.

Same goes for office and residential blocks. It’s all about making money. Note how many new buildings fit into the ‘luxury’ category.

December 4, 2005 @ 5:48 am | Comment

Agree with Steve again! China’s over investment in infrastructure is not a bad thing in the long term. If you want to built a house you need to built the foundation first! Look at London Dockland Developement, in the early days they build load of office blocks but failed to build any infrastructure and the project was a flop, it took them years to realised their cock up and it only survived after they started building road etc.

December 6, 2005 @ 12:41 am | Comment

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