Excess Capital investment. Beijing rewards provincial and local government officials with promotions if they manage their regions well. For decades, the chief measure of progress was success in providing jobs for a rapidly growing urban workforce. That usually meant building factories or adding infrastructure, whether needed or not. Such overcapacity leads to waste of scarce resources, deflation and dumping of excess production abroad.
Financial mismanagement. Local officials force state-owned banks to finance that construction at next-to-nothing rates, with no regard for borrowers’ suitability. Inevitably, nonperforming loans pile up on the banks’ balance sheets. Beijing already recapitalized the four largest state banks once, forcing ordinary depositors to foot the bill, which hurt consumption. Now bad loans are once again on the rise, a result of the $586-billion stimulus China poured through banks last year. Though Beijing could manage another bailout, it certainly can’t go through this cycle endlessly.
Inefficient Banking Sector. In particular the Chinese banking sector has a bad reputation for making bad loans. Many loans are not repaid back. This is a legacy of the Communist intervention in industry. Banks often made loans to large government business’ with little regard for free market principles. As a consequence it is difficult for genuine new starts to get sufficient capital funding. But, much investment is squandered.
Flawed education. Chinese colleges graduate many times the number of engineers and scientists that American universities produce, but such statistics are misleading. To meet the quotas for graduates set by Beijing, academic programs dilute their standards. They further inflate their count by counting as engineering students those studying to become mechanics or industrial technicians. The result, is that many of these graduates fall far short of the standards and when they graduate, many are unable to find work in their professions.
Stifled innovation. Those engineers and scientists who do measure up -- the cream of Chinese universities or those who study overseas and return home -- often have little freedom to explore. If they work for state-owned firms or universities, Beijing dictates the direction of research and development. Many gravitate to the more open atmosphere at private firms, but these companies can’t get loans to grow because state enterprises gobble up the capital. Beijing aims to compensate by forcing multinationals to transfer advanced technology as the cost of doing business in China, but foreign firms are fighting back hard.
Environmental degradation. Water pollution and water shortages pose the most serious problems. They cause health ailments, damage agriculture, jam up hydroelectric dams, interfere with manufacturing and limit urbanization. The resulting dust storms add to the country’s already horrendous air pollution. Beijing’s preferred solution to the problem is a massive south-to-north river diversion project. Odds are, that will make matters worse, draining water from already overtaxed southern supplies. Pollution is a major problem in many industrialized cities. Increased car ownership has led to problems of smog and worsening air quality. Pollution also occurs from China’s vast industrial sector. Often regulation of pollution is very limited with untreated sewage often been poured directly into rivers.
Corruption. One of the major reasons Beijing has such a hard time dealing with all the problems mentioned above is that so many individuals have a vested interest in keeping things exactly as they are. Communist Party officials pay for their advancement, then aim to earn back their investment. Local governments seize houses and land, sell it to developers with little compensation for those displaced, then take kickbacks from the construction companies. But the problem of corruption is endemic, the cost of corruption amounts to about 10% to 13% of annual GDP and in absolute terms, that’s a loss of $500 billion to $700 billion every year.
Demographics. As the generation of the Cultural Revolution retires, the burden of their care falls heavily on the smaller generation of the one-child policy. The Chinese population is simply growing older faster than it’s getting richer. As fewer workers support more retirees, competitiveness will suffer.
Shortage of Power. The growing demand of the Chinese economy has placed great demands on China’s creaking power infrastructure.
Growing Income Inequality. China’s economic growth has benefited the south and eastern regions more than anywhere else. This has created a growing disparity between north and south. The agricultural north has, by contrast, been left behind. Many farmers struggle to make a living. Therefore, this has encouraged a migration of workers from north to south.
Property Boom. There are fears that China has been caught up in its own speculative property bubble. Especially in Beijing and the south East, house prices have increased significantly. There are concerns that this property bubble could burst, creating negative equity.
Unemployment. It sounds a paradox that the Chinese economy can grow at 8% and yet unemployment is still a problem. The reason is that there are still many state owned enterprises which are grossly inefficient. Therefore, in the process of privatization and modernization many surplus workers are being made redundant. There is also a lot of unemployment (and disguised unemployment) in the agricultural sector.
Undervaluation of Yuan. The Chinese Yuan has been tied to the dollar. As the dollar had devalued the Yuan has also devalued. However, it is argued by many (especially in the US) that the Yuan is undervalued against the US dollar by up to 40%.
This is particularly a problem because of:
Financial mismanagement. Local officials force state-owned banks to finance that construction at next-to-nothing rates, with no regard for borrowers’ suitability. Inevitably, nonperforming loans pile up on the banks’ balance sheets. Beijing already recapitalized the four largest state banks once, forcing ordinary depositors to foot the bill, which hurt consumption. Now bad loans are once again on the rise, a result of the $586-billion stimulus China poured through banks last year. Though Beijing could manage another bailout, it certainly can’t go through this cycle endlessly.
Inefficient Banking Sector. In particular the Chinese banking sector has a bad reputation for making bad loans. Many loans are not repaid back. This is a legacy of the Communist intervention in industry. Banks often made loans to large government business’ with little regard for free market principles. As a consequence it is difficult for genuine new starts to get sufficient capital funding. But, much investment is squandered.
Flawed education. Chinese colleges graduate many times the number of engineers and scientists that American universities produce, but such statistics are misleading. To meet the quotas for graduates set by Beijing, academic programs dilute their standards. They further inflate their count by counting as engineering students those studying to become mechanics or industrial technicians. The result, is that many of these graduates fall far short of the standards and when they graduate, many are unable to find work in their professions.
Stifled innovation. Those engineers and scientists who do measure up -- the cream of Chinese universities or those who study overseas and return home -- often have little freedom to explore. If they work for state-owned firms or universities, Beijing dictates the direction of research and development. Many gravitate to the more open atmosphere at private firms, but these companies can’t get loans to grow because state enterprises gobble up the capital. Beijing aims to compensate by forcing multinationals to transfer advanced technology as the cost of doing business in China, but foreign firms are fighting back hard.
Environmental degradation. Water pollution and water shortages pose the most serious problems. They cause health ailments, damage agriculture, jam up hydroelectric dams, interfere with manufacturing and limit urbanization. The resulting dust storms add to the country’s already horrendous air pollution. Beijing’s preferred solution to the problem is a massive south-to-north river diversion project. Odds are, that will make matters worse, draining water from already overtaxed southern supplies. Pollution is a major problem in many industrialized cities. Increased car ownership has led to problems of smog and worsening air quality. Pollution also occurs from China’s vast industrial sector. Often regulation of pollution is very limited with untreated sewage often been poured directly into rivers.
Corruption. One of the major reasons Beijing has such a hard time dealing with all the problems mentioned above is that so many individuals have a vested interest in keeping things exactly as they are. Communist Party officials pay for their advancement, then aim to earn back their investment. Local governments seize houses and land, sell it to developers with little compensation for those displaced, then take kickbacks from the construction companies. But the problem of corruption is endemic, the cost of corruption amounts to about 10% to 13% of annual GDP and in absolute terms, that’s a loss of $500 billion to $700 billion every year.
Demographics. As the generation of the Cultural Revolution retires, the burden of their care falls heavily on the smaller generation of the one-child policy. The Chinese population is simply growing older faster than it’s getting richer. As fewer workers support more retirees, competitiveness will suffer.
Shortage of Power. The growing demand of the Chinese economy has placed great demands on China’s creaking power infrastructure.
Growing Income Inequality. China’s economic growth has benefited the south and eastern regions more than anywhere else. This has created a growing disparity between north and south. The agricultural north has, by contrast, been left behind. Many farmers struggle to make a living. Therefore, this has encouraged a migration of workers from north to south.
Property Boom. There are fears that China has been caught up in its own speculative property bubble. Especially in Beijing and the south East, house prices have increased significantly. There are concerns that this property bubble could burst, creating negative equity.
Unemployment. It sounds a paradox that the Chinese economy can grow at 8% and yet unemployment is still a problem. The reason is that there are still many state owned enterprises which are grossly inefficient. Therefore, in the process of privatization and modernization many surplus workers are being made redundant. There is also a lot of unemployment (and disguised unemployment) in the agricultural sector.
Undervaluation of Yuan. The Chinese Yuan has been tied to the dollar. As the dollar had devalued the Yuan has also devalued. However, it is argued by many (especially in the US) that the Yuan is undervalued against the US dollar by up to 40%.
- The impact of an undervaluation of the Yuan is that:
- Increase inflationary pressure in the Chinese economy.
- Make it expensive for Chinese to buy foreign goods.
- Give an artificial advantage to Chinese manufacturers.
This is particularly a problem because of:
- relatively loose monetary policy
- undervalued exchange rate
- Property Boom.
- Inflation is currently 3.8%, but, there are upward pressures.
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