China - Progress report

This is a review of the Chinese economy which I will update as snippets of information become available. It will initially be a conceptual overview, but I will add statistical evidence for my views (from other sources) as I integrate them.

Background
Since the 1990s the Chinese economy has expanded with increasing momentum as western companies gained increasing evidence that the Chinese government was adopting pro-market reforms. Despite a decade of very strong growth, the Chinese economy is still relatively small and export-orientated. With a population of 1.3billion - there is considerable potential for market expansion, but thats only as long as western companies have confidence in the stability of the region.
There is strong evidence to suggest stability will be maintained. Citizens in the poor rural western provinces are prone to move to the east coast - the centre of investment - rather than protest against the disparity between city & rural incomes. The problem however emerges in future - when China`s export-based industries can no longer expand and those millions of rural farmers migrating to the cities cannot get a job. They might be joined by homeowners unhappy with the collapse of the property bubble. Will they resort to protests? This seems likely, but with a 10mil strong military force, the Chinese government is well-positioned to suppress it.

Political Organisation
China is a country in transition from a communist regime to a market economy. That is a long path requiring a change in values - foremost in government, but since the government has the power, it usually takes much longer for market participants to assert their individuality. The Communist Party has moved from its hard-core socialist values. Today the Communist Party is different because free markets have demonstrated their practicality, foremost to party leaders at local & provincial levels, who are able to earn significant bribes for state approvals and licences. The argument is often made that China does not permit democracy because people don`t have the right to form opposing political parties. True. But the party is no longer an ideological entity it once was, rather an political organisation in which various factions fight for power. There is some value in this. We don`t see the appeals to populism evident in western democracies which undermines political integrity in favour of short term expediency. China is playing catch-up, economically and philosophically. Participating in a market economy implicitly changes values. People develop a sense of ambition, their own autonomy and values, and when they have achieved a level of comfort, they seek to express themselves.
There are alot of expatriate Chinese in Australia, Canada and the USA, which will similarly play an important role changing values in China.

Chinese economy
The Chinese economy is booming - largely because its cheap labour, potential market and technical skills make it a compelling proposition for western investment. The country is appealing for raw material processing, assembly, but increasingly companies are shifting all their manufacturing capacity there. The country is growing so rapidly that there are severe capacity bottlenecks on infrastructure and raw materials, leading to slowing productivity and higher prices. For these reasons some companies are reluctant to make China the centre the focus of their manufacturing.

China is undergoing a boom in foreign & domestic investment, but most of the activity relates to just 3 sectors:

1. Property: Higher incomes earned by Chinese people, mainly working in foreign JV companies or those offering technical skills or self-employed successful business people are fuelling a property boom. In addition, expatriate Chinese are reinvesting in Chinese real estate.
2. Export industries: There is a huge influx of foreign investment in factories, assembly & processing plants.
3. Infrastructure: All this activity is stimulating a demand for basic services, eg. Power, roads, highways, railways, gas, water & sewage reticulation systems, etc.

The consequence of these activities is that fixed capital investment accounted for 50% of GDP in 2004. This causes an immense disparity between income capacity and spending. The problem with this is that capital spending is servicing export markets, making the Chinese economy highly vulnerable to a slump in global activity. The problem is that there is a serious risk of a slump because:

1. Asian countries have adopted japan-style mercantilist policies at the expense of western interests, as well as the well-being of their own people.
2. The United States has propelled its economy by adopting an overly-stimulatory monetary policy that has sparked a property boom on top of an equity boom. This has placed US finances in jeopardy, requiring higher interest rates and undermining its currency.