Economic challenges will slow China's bullet train

December 05, 2010|By Jay Hancock

The public library in Pingwen, a rural village in southern China, is also a Communist pantheon. Images of Marx, Engels, Lenin, Stalin, Mao and Deng look out from a plaster wall at shelves of multicolored agriculture literature.

But that socialist sextet wouldn't recognize what's going on outside.

Instead of working for the Communist state, the village's 643 families control their own land, choose which crops to grow and earn profits from their toil. Sometimes they lease hectares to private corporations. Capitalistic companies buy their rice and tangerine-like satsumas to resell in cities or export.

Instead of being anchored to the farms, Pingwen's young light out for work at electronics and vehicle factories in nearby Nanning. Or they find jobs in Chinese cities farther away, or even in Angola and the United Arab Emirates. Farm income is rising by more than 10 percent annually, but money sent home by emigres makes the village even more prosperous.

In 1990, Pingwen had no indoor plumbing. Now it has a health clinic, a library and plans for a six-lane main street. The dirt road across the rice fields will be paved within two years. People own motorbikes, cell phones and houses — really nice houses, of brick and cinderblock and three or four stories, with 12-foot ceilings, fridges, air conditioning, flat-panel TVs and broadband Internet.

Asked what the next five years will bring, one village leader says: "They will definitely have their own cars."

Powered by technology, trade and a government obsessed with investment, China has set development speed records, elevating millions from peasantry to petit bourgeoisie in the blink of history's eye. What took the United States more than a century to accomplish, China is achieving in half a generation.

On a 10-day trip last month sponsored by the China–United States Exchange Foundation of Hong Kong, I and four other American journalists saw endless evidence of the Chinese surge that has alarmed U.S. policymakers and pundits.

But behind the high-speed trains, mushroom megalopolises and warehouses of cheap exports was a subtler message: China can't keep this up. Not at this pace. All around were signs that the country that recently became the world's second-biggest economy is pushing the limits of its arc and is about to assume a flatter flight path.

"My concern is that a lot of what has been fueling China's GDP growth is a one-time event that may not necessarily be putting China on a path to future growth," said Patrick Chovanec, a professor at Tsinghua University in Beijing, who has extensive experience as a private-equity investor in China.

What China needs, Chovanec said, is a better banking system, less reliance on exports, companies that can compete overseas, a consumer economy and a fully convertible currency.

"Those are far more important indicators of whether China is readying itself for the future than another road or bridge — or glitzy but empty high-rise," he said. "But all too often, progress on these fronts has been either stagnant or actually sliding backwards, and that worries me."

China is starting to lose what may be the No. 1 factor in its success: its low-cost edge, which is eroding even as the central bank keeps the currency at artificially low levels.

Few people we talked to on our trip believed the official pronouncement that Chinese inflation rose only 4.4 percent in October from the level of a year before. Inflation of 10 percent or even 15 percent, as one investment manager suggested, appears more likely. Soaring wages mean that low-value manufacturing work such as apparel is leaving China for places such as Vietnam and Cambodia.

Even at the published rate, "inflation is the No. 1 problem" in China's economy, said Yu Yongding, an economist at the Chinese Academy of Social Sciences in Beijing and a former member of the central bank's monetary policy committee.

Chinese authorities responded to the threat Friday by announcing that they would tighten monetary policy next year to try to cool things off.

Higher prices came largely from monetary stimulus — a government lending bonanza to support the economy after the 2008 financial meltdown. But inflation may also be a symptom of China's longer-term challenges.

The country's one-child-per-family policy means it's running short on the young, productive workers who make America's smart phones and coffee mugs. Hundreds of millions of Chinese still haven't made the move from countryside farm to coastal factory, but many probably never will. They're getting older, and workers over 40 stay in their villages, said Cai Fang, a Chinese economist who has written extensively on labor and demography.

China faces the same challenge of supporting an aging population as the United States does, but with far fewer resources. In a recent paper, Wang Feng, a senior fellow at the Brookings Institution, went so far as to call China's population trend "a looming crisis."

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