Chinese Economy Faces a Battery of Problems, Says Economist

Major economic and social crises may break out in China in the next few years as a result of withdrawal of investment, high unemployment, and resource exhaustion, according to a prominent Chinese economist.

In a recent article published in the state-run First Financial Daily, economist Sun Mingchun said China will very likely lose its edge in low-end manufacturing as labor costs increase, which will cause a severe unemployment crisis in five years.

At the same time 106 million peasant workers will be seeking urban jobs, said Sun, greater China chief economist at Daiwa Capital Markets Hong Kong Limited.

The service industry will generate 71.4 million jobs during the same decade, far from mending the gap, Sun estimates.

Investment Withdrawal

Sun believes the investment-driven development model is not sustainable. He says that decreasing investment may cause the country’s gross domestic product (GDP), or growth, to drop by at least five percent.

In the past decade China’s economic growth has relied heavily on investment. In 2009, capital formation, including infrastructure investment and total stock, reached US$2.4 trillion, accounting for 48 percent of its GDP and contributing 92 percent of its 8.7 percent GDP growth, according to official statistics .

Sun predicts that investment will slow down or even decrease after 2016 due to the outflow of manufacturers and a reduced need for infrastructure investment. This reduction in investment, accompanied by unemployment-weakened demand from consumers will “cause a domino effect in asset prices, the banking system, the exchange rate, and even social stability,” Sun warned.

Resource Exhaustion

Sun is also concerned that China is consuming natural resources too fast. Its rate of consumption is already disproportionately large relative to its GDP. This will push resource prices up and thus hinder its growth.

At the current economic growth rate, China’s energy consumption will increase by 40 percent by 2020, Sun said. That growth in consumption alone equals the total consumption of Japan and Canada in 2009.

The most troubling issue is the extensive environmental damage already caused. In the past few decades, the nearly-uninhibited spewing out of industrial waste has polluted China’s air, soil, and bodies of water.

At a recent press conference, Chinese environmental authorities admitted “the overall environmental situation is still very grave.” One-sixth of China’s major rivers are too polluted even for irrigation, and only 17 cities of the 471 cities monitored got top ratings for air cleanliness, the authorities said.

Environmental disaster could well ruin the economy, experts say. Singapore-based investor Jim Rogers asserted China’s water crisis will end its economic boom. “I don’t mind if China has a civil war, epidemics, panic, depression, all of that. You can recover from that. The only thing you cannot recover from is water,” Rogers recently said to BBC’s HardTalk. “If China doesn’t solve its water problems then there’s no China story.”

Weak Regulation

Beijing has disclosed little of its strategy to handle these challenges. Some measures have attempted to address environmental problems, but bureaucratic squabbling and entrenched corruption have caused policies to be only partially implemented.

For example, central government emissions regulations drove down the growth of heavy industry at the end of 2010, but growth soon rebounded in the first quarter of 2011. This rebound caused a surge in power consumption and an electricity shortage, according to Chinese media.

A Securities Market Weekly article published in May criticized the GDP-oriented system as the root cause of local governments’ acting to resume the pattern of high energy consumption development, despite Beijing regulations.

In addition, corruption surrounding the issuing of “environmental impact certificates” has hindered environmental regulation, according to state media. Official statistics say 487 officials in environmental authorities were investigated for corruption charges between 2002 to 2008. Many were found to be issuing “environmental impact certificates” to unqualified construction projects in exchange for bribes.

chinareports@epochtimes.com