In the past two years, China has risen quickly in the world. Its economy overtook Germany and became the third largest in the world in 2009 according to data released in early 2010 by IMF. In 2010, China became the second largest, overtaking Japan. With China’s fast growth, many people are wondering if China will overtake the US.
However, many economists inside China feel uneasy about China’s “on-paper” improvement. The Chinese government, recognizing the fast growth of the country, has always maintained long-term economic goals. To achieve these goals, the Chinese government sets minimum production requirements for all cities, provinces, and towns. Many local governments try to achieve these goals through any means. For example, after the 2008 financial crisis, the central government commanded local governments to spend money and increase the GDP. Some city governments spent money on road maintenance by destroying the roads and then paving the roads again. Since all land is owned by government, some local governments made multiple transactions on one piece of land to increase GDP.
According to Chinese economists, the government cannot expect their economy to keep rising as the world’s economy suffers since the Chinese economy relies heavily on foreign consumption. Also, even though China has become the second largest economy, its GDP per capita is still one tenth of Japan’s. Lastly, China’s large GDP growth is matched by heavy sacrifices in other areas. Pollution, corruption, and unfair competition by SOE’s (state-owned enterprise) have become grave. The Beijing think-tank has advised the government that China’s economy is on the verge of falling into the “middle-income trap.” The argument says that because China was already a lower-middle-income country last year, with a GDP per person of around $4,400, it might go through the same stagnation and turbulence as Latin American economies did in the 1980s and 1990s. The think-tank also argues that China follows extensive-growth, which is based on the expansion of the quantity of inputs in order to increase the quantity of outputs. Without innovation and technology, the extensive-growth in China is likely to experience diminishing returns and eventually reach stagnation.
However, even if the government wants to slow down, it needs to be done carefully. Due to the extensive-growth pattern, if the Chinese government decides to slow production, all economic activities, driven by investment, will also slow down. Additionally, the social conflict, especially the conflict between people and government, has been getting more and more serious. If economic development slows down, employment and social security problems will become even more severe, potentially causing social turmoil.
