The recent and significant reduction in China’s GDP has caught the attention of stakeholders in international markets.
A reduction in Federal interest rates and subsequent stock fluctuations over the summer of 2015 pushed the country’s stocks into a bear market (Hunter, Gregor Stuart, 2015).
China’s economy has been doubling in size around every eight years to be 22 times larger than it was 1978. China has lifted 600 million people out of poverty and transformed city skylines across the country (Kong, Vaesna, 2012). Based on current trends, China could overtake the US as the world’s largest economy by 2020. (Kong, 2012). In addition, in the decades from 2000 to 2010 China contributed to one quarter of the (Vaesna, Kong 2012).
While this is only slowing growth, it is a significant recession. In addition, China has failed to establish a clear comparative advantage in the world market. The current and post revolution advantage have been the growth of a country with over one billion people that supply a lower cost of labor and produce cheaper than market rate products. The rapid development to become fully industrialized and the opportunity for the establishment of a middle class has been a significant factor in growth. This slowing coincides with the ending of the construction of “Ghost Cities” and massive increases in the cost of labor (Patton, Mike, 2015). This is while U.S. and European countries are becoming more interested in Myanmar, Indonesia, and parts of Africa.
The slowing growth is effecting global markets and it is a serious issue for China to establish a clear comparative advantage. The government and business have attempted to reduce labor costs by automation and relocating labor inland but the costs are rapidly returning to previous levels. Some predict that China will lose cost competitiveness between 2015 and 2020 (Zhang, Simon, 2015). Many American businesses still rely on China for less expensive supply side manufacturing and many are relocating these jobs not only from China but Vietnam and other formerly low cost labor countries. The advantages in China’s strongest markets; electronics, food and beverage, energy, chemicals, auto, pharmaceuticals, machinery and industrial goods sectors are value based. China’s labor costs in 2010 reached $4,579 per employee per year, more than doubling from $1,534 in 2003 (Zhang, Simon. 2015). According to analysis by Inter China Consulting, China has reached the turning point at which it can no longer be considered a low labor cost production base, and it will likely never return to that status (Zhang, Simon. 2015).
Slowing growth effects investor confidence around the world. China’s economy effects multinational companies and the global market, the United States for example, that derives significant revenue from China. Slowing in China can cause stocks in many countries to decline or fail. Several periods since the 1980’s of over 10% GDP growth, growth that has not been directly matched or exceeded by inflation has fallen to 7% growth (Patton, Mike, 2015). China’s Federal Reserve, the People’s Bank of China (PBOC) cut interest rates by 0.25% to 4.6% and reduced reserve limits leading to the Bear market (Patton, Mike, 2015).
China has specific federal city urbanization plans that have fueled expansion and development. In the past 15 years Shanghai has grown seven fold from 6.6 billion to 23 million (Kong, 2012). This could be a specific federal strategy to force and accelerate urbanization and industrialization
Much of this mandated construction based on projected growth is being called “Ghost cities.” The construction jobs have ended in many sites, and the towns are still below the projected population. In addition, many developments are miles from the nearest populated urban center (Daily Mail UK, 2010). There has been a significant movement from rural to urban living for the people of China and some of the towns do have increased population from several years ago, but there are numerous photos of these enormous cites with four lane streets and numerous skyscrapers but no inhabitants (Daily Mail UK, 2010).
The issue is not the government encouraging development and the people to transition from rural to urban living, it is the massive scale of these command project, the percentage of fixed asset investment, and the economic dependence as these projects end and the economy slows. Fixed-asset investment in China for these projects accounted for more than 90 per cent of its overall growth – with residential and commercial real estate investment. In addition, 64 million empty homes and 20 new cities being built every year (Daily Mail UK, 2015). The average property price in 35 cities was 30 percent above market value (Daily Mail UK, 2015). Many of these projects are built out of market pace and leave the economy at great risk of massive surplus in housing, enormous debt, and overstated economic growth.
Some explain this construction as the unique buying style of the Chinese but it is similar to planned project development. Many large American cities like Manhattan have experienced similar government mandated housing construction at a fraction of the scale. These developments have in later years be redeveloped and sold at market rate because the bubble cannot be maintained in the free market
China is attempting to establish a true market niche but has not secured a clear sustainable advantage in the markets or the system to create one. One area of development is a doubling of the global percentage of patents since 2005, particularly in the wind- and solar-power industries (Economist, 2012). The Chinese market also depends on patenting and selling products with less testing and regulation than American and European markets in an attempt to create an advantage in the markets. China has begun technology development centers similar to the California’s Silicon Valley but is hindered by lack of capability, training, education, and employee attrition (Orr, 2012). Some say improvements in human capital are augmented growth features rather than the true catalyst. Currently, China has relatively few product or technological innovations and invests in research and development at 42% of the United States investment (Yipp, George, 2014).
The slowing growth is important because China is still and developing country with no clear comparative advantage and is still transitioning into a free market system. The growth to a fully industrialized country is considerably different than maintaining that growth once it has reached full industrialization.