In light of China's crashing stock market and economic uncertainty, some might say that my question above is inane. But the following questions with regards to China's future really should be asked. If China's economy were a car, would it be a brand new model or a used one? And, will it be able to go faster than before?
There are many who liken the China's economy to a brand new car, those with close ties to China or who are frequent visitors. These people are in awe of China's huge size as well as its record of growth. They also give China credit for being the only one-party communist regime that opted for a successful market economy, for wasn't market economy supposed to be most compatible with democracy? They called this brand-new economic model "the Chinese Model."
Believers in the Chinese Model have no doubt that China can manage any crisis and continue to grow. They point to the incredible double-digit annual economic growth China has achieved in the past 35 years following the reform-minded and open-door policies of 1978. They tout the fact that the regime even survived a near-catastrophic event such as the Tiananmen Square massacre, as well as praising the smooth, once-a-decade transition of power which the ruling elites have achieved without bloodshed. In effect, they believe that the Chinese Model will be able to continue to fuel the country's economy and that minor crises will be ably dealt with.
Personally, I don't have such faith in the Chinese Model. If I were comparing China to a car, I'd go so far as to call it a used one. It's a model that conspicuously mirrors those of other East Asian nations, including ours (Korean) where the economy is driven principally by exploiting the maximum number of humans and resources as inputs. Korea, too, until it was faced with the foreign exchange-induced economic calamity back in 1997, had boasted nearly 35 years of uninterrupted growth that averaged 8 percent annually, and probably the only reason China was able to grow at a faster pace than South Korea was that its communist regime was more efficient in gathering the necessary resources to stoke its economy.
But when resources have all but been depleted, such input-driven economies hit a wall. Ideally, through productivity gains, China's economy should have reached a higher caliber status, but that's easier said than done, for it's not merely the economic factors but the overall society including the political, social as well as cultural systems which need to be transformed in order to attain such a goal. As such, an overhaul of a nation's economic model necessarily risks an economic crisis, a growing pain, if you will, that visited the likes of the East Asian nations in the late 90s.
In 1994, Princeton University economist Paul Krugman, in an analysis called "the Myth of East Asia's Miracle" written for the inaugural publication of Foreign Affairs, observed that East Asia's growth was a mirage. And just like that, an economic crisis actually broke out a few years later in East Asia and made his ominous foreboding a reality. Krugman is now making similar observation about China: that China has run out of fuel for its jet engine, that an accident is inevitable, that only thing remaining to been seen is not whether there will be an accident but the extent of the damage. So, in light of all this, can one predict that China's economy will still soar?
China's real crisis isn't the collapse of its stock market that we've witnessed in the past three weeks. That's only a prelude to the real disaster. The share prices dropping more than 30% in the past several weeks is merely a correction to its having climbed too high, too fast. In one year, China's bourse had jumped an incredible 155% with the Chinese government fueling the run by continuing to administer policies advantageous to investors. By increasing share prices, the government's intention was to bolster consumer spending while paring down the out-sized debts financial entities and local governments carried on their books. And toward this end, the Chinese government has even shown that, if necessary, it will forcibly stem the stock market collapse. During the diciest moments in the last few weeks, Chinese government, like a true ringmaster, stepped in and ordered that nearly half the listed shares be halted from being traded.
So it's not the stock market. True danger in China lies in the slowdown of the real economy. After hitting a high of 13% growth in 2007, China's growth forecast is now at 7%. That might be considered a natural rate of decline, but any worse, it could spell a disaster for the country. That's because China will begin experiencing problems with job creation. China can point to the fact that it achieved a 7 percent growth last quarter despite the negative forecasts by Western analysts, but when one takes into account that much of that growth was due to stock market gains and financial windfalls, the result is much more pessimistic.
The question is: Can China overcome growth challenges by remaining an input-driven economy? There are also various internal issues that it has to deal with. People yearn for political democracy and ethnic minorities for independence. Division within the ruing elite cannot be completely discounted, and sudden economic slowdown could exacerbate all these problems. Even if the worst is avoided, as China transforms from an input-driven economy to a productivity-driven one, certain dangers and crises lurk. That's because no matter how fast one drives a car, it's unlikely to be able to fly. And when you drive a vehicle too fast, the chance of getting in an accident only rises. Therefore, when considering the future of China as a vehicle, one would be wise to prepare for a crash, especially as the car representing South Korea's economy is in a lane right next to it.