Since 1978 the Chinese economy has maintained economic growth at an average of nearly 8%. By western standards this is remarkable. The UK, by contrast, has grown at an average rate of 2.5%. However, despite the impressive figures, there are many serious economic problems resulting from economic growth.
In particular, the growth rate combined with a population of over 1 billion has caused serious environmental problems. These are a good example of negative externalities of growth. A negative externality is a cost imposed on the rest of society as a result of receiving the benefits from growth.
Problems of Chinese Economic Growth
Pollution is a major problem in many industrialised 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.
2. Shortage of Power
The growing demand from the Chinese economy has placed great demands on China’s creaking power infrastructure. This has led to the creation of projects like the Three Gorges Dam. This has been criticised for creating environmental and social problems. Environmentalists fear that the dam will severely impact on the natural habitats of many species.
3. 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. China has struggled to deal with this regional inequality.
However, there has been a marked decrease in absolute poverty as the strong economic growth has lifted people out of the very low-income bracket
4. Property Boom
There are fears that China has been caught up in its own speculative property bubble. Especially in Beijing aSouth South East, house prices have increased significantly. There are concerns that this property bubble could burst, creating negative equity.
5. 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.
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 privatisation and modernisation, many surplus workers are being made redundant. There is also a lot of unemployment (and disguised unemployment) in the agricultural sector.
7. 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.
8. Overheating Economy.
Because the Chinese economy is growing so quickly there are concerns that this could easily lead to inflationary pressures. This is particularly a problem because of:
- relatively loose monetary policy
- Growth in consumer debt.
- undervalued exchange rate
- Property Boom.
- Inflation is currently 3.8%, but, there are upward pressures.
9. Huge Balance of Payments Surplus
Maybe not such a serious problem for China. But, the US sees it as creating a great disequilibrium. The US, if not anyone else, would like to see China use its balance of payments surplus elsewhere.
10. Demographic trends
China’s one-child policy means that in future years, she faces a demographic bulge. Already the % of the population over 65 has doubled in a short-time, but this is likely to continue to increase over the next 20-30 years.
Problems of Chinese economic growth for the rest of the world
Readers Question: How should we respond to the Economic Impact of China’s rapid economic expansion.
Firstly, I am not convinced that China’s economic growth is a problem for the UK and western economies. I would argue China’s economic development has many benefits. (see: how Chinese economy has affected UK Economy)
However, China’s growth is causing some problems for the rest of the world
Rising Oil Prices. We can’t blame just China for rising oil prices. But, it is a factor. There is not much UK government can do about that. Higher oil prices increase the incentive to reduce consumption of oil and also develop alternatives. See: Dealing with higher oil prices.
Decline In Manufacturing Sector. The growth in Chinese manufactured goods industry has led to a relative decline in UK manufacturing. The government can always try to implement better supply-side policies to improve the productivity of industry, but, there is a limit to how much they can do. Governments may need to just accept the changing structure of the economy. We might be better focusing on the potential of service sector industries, such as education.
Environmental Problems. A problem of Chinese growth is the increase in carbon emissions. Growth from China can easily dwarf any savings the UK make in global emissions. This raises the importance of creating global agreements to limit environmental pollution.
Current Account deficit. The US and UK both have a large current account deficit with China. But, I would say that blaming China for the current account deficit misses the point -most of the deficit is caused by a decade of high consumption and low savings. It is also a reflection that the economies are at different stages of development.