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by Fred Schmid
Tuesday, May. 08, 2018 at 1:24 PM
China has brought hundreds of millions out of poverty in only three decades thanks to the opening of the economy. In 1978, 90% of the population lived below the absolute poverty line of .90 a day. Today, there are `only' 43 million, three percent of the population of 1.4 billion.
CHINA'S 6.9% GROWTH: THE SUPERIORITY OF THE PLAN
By Fred Schmid
[This article published on January 28, 2018, is translated abridged from the German on the Internet, www.isw-muenchen.de.]
The China astrologers know exactly. At the beginning of 2017, they predicted "depressing prospects for China's economy," the title of Handelsblatt newspaper (1/13/17) and ZEIT weekly (1/13/17): "Prospects for China's Economy Darken." A year later in January 2018, the Chinese statistical office announced an annual growth of the gross domestic product (GDP) of 6.9%. The SZ journal summarized this with a dry one-liner "Surprise from Peking" (1/19/18). John Litwack, leading economist for China at the World Bank, also exclaimed: "China's GDP Growth Surprises Us Positively."
China's growth accelerated again since 2010. With its 6.9% growth, China contributed a third to the global economic growth. Calculated in dollars, the 6.9% growth amounted to 0 billion which is more than Switzerland's totals economic output (0 billion) achieved in one year. 
In 2017, the growth rate was three times as high as Germany and the US…
Measured in the GDP per capita, China is still a threshold country. In 2016, China was in 74th place in the comparison of countries with 13 behind Mexico 55 and Brazil 27. In comparison, the US GDP per capita is ,436 and Germany ,902.
The high Chinese growth is all the more astonishing since the country is in the midst of remodeling its economic model in an intensively expanding reproduction combined with the successive dismantling of overcapacities (coal, steel, cement, and others) and environmental-friendly closures or decommissioning or restrictions of industrial production.
In 2017, the growth-drivers were consumption, services, export (the first positive effects of the Silk Road strategy) and rapid expansion of the high-tech branches.
Consumption: Available per capita income rose 7.3% - after adjusting for higher prices – to ,033 annual income (city: ,651, countryside: ,086; with the 180 million itinerant workers per capita income amounted to 00) (cf. China Daily, CHD, 1/19/18; Global Times, 1/18/18).
Inflation: In 2017, the consumer price index rose 1.6% (2016: 2%). The 1.4% decline in food prices was very important for the purchasing power and livelihood of families with low household income.
Retail Sales: Retail sales increased 10.2% owing to higher purchasing power – around 8.6% corrected for inflation. "Retail sales contributed significantly to China's growth since the country is changing from an export-driven economy to a consumer society" (CHD, 1/18/18). Consumption amounted to 58.8% of the economic expansion (CHD, 1/25/18).
Tax Revenues: In 2017, China's tax revenues rose 7.4%, .7 trillion in US dollars.
Services: China's service sector expanded 8% in the yearly comparison and now amounts to 53% of the GDP.
Foreign Trade: In 2017, China's exports increased 7.9% over 2016 and imports increased 15.9% (FAZ, 1/19/18). China profited from the robust world economy with a 3% growth of the world GDP.
Industry Output: Industrial production rose 6.6%. The National Statistical Office ascribed the strong output to the sharp growth of new industrial sectors like industrial robotics, new energy vehicles, new technologies for using solar energy and the production of integrated circuits (CHD, 1/18/18). Digital services have also grown dramatically. In 2017, sales in telecommunications, Internet, and software catapulted 50, 30 and 13% (BRS, 12/27/17).
A restructuring is occurring from the "old economy" (heavy industry) to the "new economy" (services and high-tech industries), China's chief statistician Ning Jizhe said (GT, 1/19/18). The Global Times close to the government writes: Analysts believe China is going through a phase of "creative destruction" in which bustling new sectors coexist with still dominant old sectors" (GT, 1/19/18). Xu Hongcai, acting director of the Chinese Center for International Economic Relations chose a more drastic picture: "The old industries are stuck in the mud of their own overcapacities" (BRS, 1/8/18). Discovering and promoting new growth generators is now vital.
In this connection, a change has also occurred in the structure of direct investments. In 2017, direct investments reached an all-time high of 6.4 billion: +7.9% (CHD, 1/17/18). Direct investments in which the high-tech industry skyrocketed: +61.7. Foreign firms profit from China's catch-up race with new technologies and promote this process. "China invests more in Germany than ever" (FAZ, 1/25/18): billion. In its direct investments, China concentrates on German businesses in strategically important high-tech branches.
In 2017, high-tech industry (including the genesis of new industries and economies like E-commerce, 4G and 5G technologies, "mobile payment, virtual reality and the sharing economy") and machine and structural engineering/ arms industries generated a higher output growth of 13.4%, respectively 11.3%. The mining and cement sectors posted an annual decline of 1.5% and the textile- and coal industries grew only 4 or 3.2% (CHD, 1/19/18). The fundamental characteristic of the "new era" is a "shift from a high-speed growth to a high-quality development" (ibid).
Altogether the "Made in China 2025" strategy has had positive effects. Wang Peng, acting director of the Chinese Center for Developing Information Technology, said in December 2017: "The expected strong momentum (of growth0 lies mainly n the structural reform in the supply-side in the industrial sector. Reducing the overcapacities drives the vitality of industry and improves economic quality" (BRS, 12/27/17).
2018 CHALLENGES: THE "THREE HARD BATTLES"
The 2017 goals for reducing overcapacities were reached. Steel capacities were scaled back 50 million tons, coal 150 million tons and the capacities in cement production were also reduced. Since 2016, steel capacities were reduced 115 million tons and coal capacities over 500 million tons, according to Liu He, China's representative at the World Economic Forum (WEF) (CHD, 1/25/18).
A capacity reduction that will continue in 2018 is part of a so-called supply-side structural reform and is now in the center of the reforms 40 years after the "policy of opening" of the Chinese economy to the world market. An acceleration of innovations, higher productivity and improved cost structures and qualitatively high economies are sought.
The goals for 2018 to 2020, the last year of the 13th Five-year plan (2016-2020) were set at the annual central conference for the economy and work from December 18-20, 2017. In the future, the economy of the country should be characterized by innovative manufacturing, a better safeguarded financial system, a more open and sustainable economy, state provisioning of far more affordable living space and improved living conditions for people. The doubling of per capita income between 2010 and 2020 is almost assured.
China's "three hard battles," defusing and avoiding great risks, particularly in the financial realm, combating poverty and the serious reduction of air- and environmental pollution (BRS, 1/8/18 and 12/18/17).
Blue Sky over Peking: advances in combating air pollution are the most concrete advances. Even the western media admit the air quality in Peking and partly in other cities of millions has improved. "Peking residents experience their blue miracle: the most beautiful winter sky in years, the SZ journal writes (1/17/18). According to Greenpeace, pollution in Peking fell 53.8% in the last quarter of 2017 compared to 2016. The smog concentration was a third less in 27 important northeast cities. Countrywide, there is a 5% smog reduction… The authorities managed a reconstruction that could be called a "breakthrough."
Mitigation of Poverty: The successes of the Chinese leadership in combating poverty are unparalleled. Frankfurter Allgemeine Zeitung newspaper co-editor Holger Stelzner admitted: "China has brought hundreds of millions of people out of poverty in only three decades thanks to the opening of the economy. There is no greater success story in the global battle against poverty" (FAZ, 1/7/18). In 1978 at the start of the opening policy, 90% of the 800 million Chinese at that time lived below the absolute poverty line of .90 a day. Today, forty years later, there are "only" 43 million (Spiegel, 10/21/17), three percent of the population of 1.4 billion… Thus, the goal of completely removing absolute poverty in China by 2020 – the 100th birthday of China's KP – is very realistic.
But people are not content. People are not only satisfied with basic provisions in food and clothing, Xu Hongcai explains. The gap between poor and rich in China has become greater. China (including Taiwan, Hong Kong, and Macao) has the most billionaires in the world (609) according to Huron's list. The social explosiveness of the crassly unequal income- and wealth distribution does not lead to great social explosions because the rising social domestic product high tide lifts all boats in the harbor even if unequally. There is no system-endangering social unrest as long as unemployment in the cities is low – 2017 3.9% in the cities. 13.5 million new jobs were created in 2017 (CHD, 1/26/18) – and real wages rise every year (6 to 10%).
"The hourly wage of workers has tripled since 2006 from .20 to .60 (corrected for inflation)," Spiegel writes (10/21/17) and "is higher than in most threshold countries and will soon reach the level in Portugal (.50)."
WILL THE FINANCIAL BUBBLES BURST?
The most important mega-risk doubtlessly starts from the financial bubbles that formed in the Chinese economy in the last years, particularly in the real estate area, financial speculation and through the increasing indebtedness of the country.
The extent of the real estate bubble is still alarming. In 2017, real estate prices rose 42% in the largest 33 cities (cf. FAZ, 1/12/18)… The Chinese middle class – the largest in the world with 400 million people – invests its savings in real estate and speculates in the continuing real estate boom.
One of the greatest challenges in China, according to the central conference, is maintaining robust growth and simultaneously reducing business indebtedness (business indebtedness – 115% of the GDP – FAZ, 10/15/17)…
The reforms seem to be paying off. The state operations are by no means ramshackle as sometimes represented in the western media but have respectable rates of return. So the profits of 98 centrally administered state companies showed an increased profit of 15.2% to 8 billion…China's industrial enterprises recorded a 21% growth, the highest in 6 years, .19 trillion in profit.
On balance in 2017, the centrally administered state enterprises slightly reduced their indebtedness 2$ and did not increase their indebtedness. They are now again urged to reduce their indebtedness. At the 19th party Congress, the Chinese leadership promised state enterprises would be "stronger, better and bigger" through further reforms and would be world-class competitive firms (CHD, 1/2/18).
The uncertainties in the financial markets will be countered with tightening and additional regulations, speculation-restrictions (for example, prohibition of mining and trading with Bitcoins) and currency controls.
Despite these reforms, it is only a question of time until China experiences a financial crisis according to some western economists. The Chinese central bank governor gave an unusually harsh warning of a "Minsky moment" during the KP convention (cf. FAZ, 10/20/17). DIW-president Marcel Fratzscher said: "Economics calls a situation a Minsky moment when excessive optimism contributes to an unsustainable economic boom ultimately ending in a crisis" (HB, 1/10/18). The "imbalances in China's political economy" multiplied. Fratzscher refers to the main rotten credits for state enterprises with banks and the total debt and real estate problem. A Chinese financial crisis would have tremendous effects on the real economy and on the world economy since China has become a "central turnstile in the real economy" (Fratzscher). There are many signs "that China will ultimately experience a financial crisis." At the same time, he restricts his forecast and emphasizes "China's economic policy has great strengths and safety mechanisms." The country has to avoid opening its capital markets too quickly and liberalizing its currency. The economy could be supported by targeted awarding of credits as during the global financial crisis. The central bank holds enormous currency reserves that rose continuously in 2017 and again surpassed the trillion mark (,100 billion).
On the other hand, the Asia expert and Yale professor Stephen S. Roach regards the warnings as "loud false alarms" (HB, 8/24/17). "According to the International Monetary Fund, China's political-economic savings rate in 2017 was 45% of the GDP and above Japan's 28%. As Japan circumvented a state debt crisis with a state indebtedness of 239% of the GDP, China is much better positioned with greater savings and lower state indebtedness (only 60% of GDP) for preventing an implosion." He considers the danger assumption exaggerated with regard to the Chinese real estate market because the advancing urbanization and growth of the urban middle class guarantee a persistent demand on the housing market.
"THE TIME OF THE TRADE WAR"
Geopolitical conflicts and imponderabilities remain as great risks for the Chinese economy, particularly in relation to the US. The dreaded trade war avalanche did not descend on Davos. US President Trump pretended to be conciliatory at the World Economic Forum (WEF) and only held court with world economic leaders. However, an acute avalanche danger exists for the world economy as a "global village." The first skirmish of a trade war was staged with punitive trade duties on Chinese washing machines and solar panels. In Davos, the Trump administration developed a threat scenario. Before the arrival of the US president in Davos, US Treasury secretary Steven Mnuchin and trade secretary Wilber Ross were invited to a small conference room of the Davos Congress headquarters and pretended to be the vanguard of their supreme general or strategist. Trade wars could be carried out in the world day after day, Ross said. Only the "US troops standing at the wall" is new (quoted according to SZ, 1/18/18). "We have been living for some time in a trade war. Now the American troops are challenging the fortresses," Ross said (FAZ, 1/25/18).
The export-surplus countries Germany, Japan and China are criticized by the US trade warriors for unfair trade practices and "theft of intellectual property." There can be no talk of a "trade fortress China." Chinese foreign trade developed more strongly than expected. While exports rose 7.9%, imports rose twice as fast at 15.9%. The reproach of "screening" is also unfounded since foreign direct investment in China set an absolute record in 2017 and thousands of new firms invest in China.
Trade with the US is not running as Trump wants. The US deficit toward China grew enormously in Trump's first year in office. China's balance surplus rose 9%. More goods worth 0 billion were exported by China to the US than conversely, a personal humiliation for Trump.
In his "State of the Union" address (1/30/18), Trump may have put more coal in the fire with the motto "building a secure, strong and proud America" and started a larger trade war. Decrying China's plagiarism, Trump threatened fines of unexpected dimensions. "We speak about a high compensation. We speak about numbers that you never heard before" (quoted according to FAZ, 1/19/18). He wanted to concretize his numbers in his address to the nation. "Fines up to a trillion dollars are now floated in Washington," FAZ reported (1/19/18). Chinese countermeasures could come soon.
A year ago, China's president Xi Jinping emphatically warned of new confrontations and trade wars at the World Economic Forum in Davos. "No one can come out of a trade war as a winner." Rather, everyone will lose. "We must say No to protectionism. Protectionism means locking oneself in a darkroom where there may be neither wind nor rain but also neither air nor light."
BRS – Beijing Journal, Chinese weekly in several languages
CHD – China Daily, China's largest English-language daily newspaper
FAZ – Frankfurter Allgemeine Zeitung newspaper
GT – Global Times, China's English language daily newspaper close to the government
SZ - Sueddeutsche Zeitung journal
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