China's Glass Ceiling

 

                China has seen roughly 32 years of economic prosperity brought in by governmental reform under the leadership of Deng Xiaoping. Considered to be the architect of the Chinese economy after the death of General Mae Zedong, Xiaoping adopted a policy under the idea that, “Black cat, white cat, what does it matter what color the cat is as long as it catches mice?” With such a metaphor in mind he brought an average annual 10% growth in GDP from 1979-2010. Unfortunately, 32 years later from Xiaoping’s reforms, the cats have grown old and tired bearing the weight of old economic practices.

                In 1979, Xiaoping pushed through new economic policies that would initiate ownership incentives for farmers, establish economic zones to attract foreign investment, boost exports, import high technology products, encourage citizens to start their own business, and decentralize economic policy making. Prior to 1979, China’s real annual GDP growth was estimated at 5.6%. After these economic reforms were enacted China was able to double in real terms the size of its economy in real terms every eight years. The biggest factors in this were its large capital investment from foreign investment, savings percentage, and rapid productivity growth. Chinese foreign direct investment (FDI) grew from $2 billion in 1985 to $92 billion in 2008 while Chinese gross savings as a percentage of GDP rose to 53.9% in 2010. As a comparison, the United States gross savings as a percentage of GDP in 2010 was 9.3%. With the influx of foreign investment and the savings rate kept so high it’s not difficult to see how their economy grew so quickly. But what made it fall?

                Economic policy has changed in the 21^st century. Innovation and entrepreneurs are now at the forefront of economic sustainability and that’s unlikely to change anytime soon.  China’s major problem lies in their state owned enterprises (SOE). SOEs make up roughly 45% of the country’s economy; however, they act as a major barrier to innovation and entrepreneurs. With the state controlled system it increases the real estate values and deters foreign investment: two factors that can easily destroy a small business starting out. China was always known for importing parts and they’ll export the whole since labor was so cheap, but this is not how a small business works. China has recently made a push to encourage entrepreneurs by creating a $2.5 billion fund to lend to small and medium sized businesses along with relevant tax breaks. This is a great stride for small businesses but the struggle still comes with the looming real estate inflation bubble that could pop at any moment. 

                “China 2030,” an economic report produced by the Chinese bank and a government think tank, is due to be released on Monday, February, 27^th.  This report will hopefully contain guidance on economic sustainability for China.  This comes at a crucial time as their 2011 Q4 GDP was at its lowest in two and a half years at 8.9%. 32 years of strong economic growth have finally started to cool off. It’s time for the Chinese government to move in a different direction to get pass their current economic barrier.