Changing China

Recent news stories from China have focused on how the world’s third largest economy by GDP is coping with the effects that its fast-growing economy are having on living conditions within and relations outside the country.

Writing in China Daily’s Europe edition Yu Yongding, president of the China Society of World Economics and a former member of China’s monetary policy committee, notes that the country’s income per capita has reached $3,800, surpassing the threshold for a middle income economy. But the article also outlines concerns about the unbalanced and unsustainable nature of growth there. What might be a surprise, though, is that these fears were expressed by China’s Premier, Wen Jiabao.

China’s success in growing so fast has been based on an export-led model based on a planned socialist system. Many senior analysts and policy-makers recognise that the potential for future growth along similar lines to that experienced in the past 30 years is exhausted. Yu Yongding says that dependence on exports, local government spending and real estate investment to fuel the stellar growth seen in recent years has become a structural problem in China. It has brought with it problems of pollution, desertification, resource depletion and income inequality.

As this blog noted in an earlier posting, wages have begun rising in China in response to increased industrial unrest. The country’s national trade union federation called today for collective wage negotiation in all businesses within three years in order to quell labour disputes and raise workers’ living standards. At present there is no legal requirement for companies in China to sign collective agreements with staff. This article cites data from China’s national statistics agency indicating that 80% of businesses in the country are foreign-funded or privately-run.

We have already seen interest rates rise in China in an attempt to choke off inflation. Will higher wages only add to inflationary pressures? More tomorrow on another aspect of change in China: the country’s exchange rate policy and its impact on business and the general economy in this fascinating country.