China Prospects

OVERVIEW OF THE CHINESE ECONOMY
Chairman Jim Saxton (R-NJ),
Joint Economic Committee, United States Congress,July 2005
http://www.house.gov/jec/publications/109/07-26-05china.pdf

The Report is an excellent Read, but suffers from the Western economic viewpoint. The focus was on the nonperforming loans (NPLs) held by the Chinese banks. Roubini and Setser(2005) probably provides the best evaluation of the Cost of a bad loan problem resolution. China, or its Government, maintains the climate needed to prevent such a crisis resolution. How? Through prevention of alternate forms of investment other than investment. The lack of high levels of Corporate stock, annunities, insurance, and lack of genuine retirement benefits ensure a huge level of Savings--as self-insurance against adversity. This Savings, which is only slowly dissipated, covers the lost revenue of the NPLs.

Why won't the Government or the four major Banks change, and reduce the NPLs?

The answer is contained in the last of the Report:

However, Jinghai Zheng and Anagang Hu (2004) found that the growth in PRCÂ’s total factor productivity68 decelerated dramatically from 3.2 percent a year for 1978-1995 to 0.6 percent a year for 1995-2001.69 Total factor productivity measures the growth in output that is not attributable to increases in factor inputs such as labor and capital assets. Thus, total factor productivity represents the gains from efficiency improvements and technological innovation.

The combination of a high rate of labor productivity and a dropping rate of total factor productivity means that the marginal productivity of new capital assets is falling. This is further evidence that domestic firms are investing in too many capital assets or the wrong types of capital assets given the PRCÂ’s comparative advantage in plentiful, low-cost labor

The Report does not go into the fact that SOEs(State Owned) and SIEs (functionally State-controlled) enterprises employ about 99 million Workers(2004), produce 53.9% of Chinese GDP(2003), and accounts for 76.7% of total PRC capital investments (2003). This information was all in the Report. Also mentioned was the fact that Chinese affiliates of multinational business firms employed 10 million Workers(2004). Now comes that left unsaid:

The Chinese domestic economy has not been stagnant since 1982, but growing much slower than Export Production sectors. The Later provides a huge nominal production, but with relatively slight employment per total size of the Chinese economy. Some 35% of the SOEs were unprofitable in 2004, yet they employ a huge labor force. Elimination of the NPLs would demand shutter of SOEs employing a much larger labor force, than that employed in the Export Production sectors. China already suffers from intense rural migration to the Cities in search of employment. It cannot endure the loss of 30 million Jobs, even if they come from SOEs which are unprofitable.

The Report also implies China has benefited greatly from integration in the global economy. This Author is not so sure. Production for the Global economy is not sufficient; an economy must also assume a comparative consumption from the global economy. This does not necessarily mean consumption of Imports, but can mean a development of a domestic market for the Products currently being produced for Export; the growth actually impacting the domestic economic growth positively, not with the simple negative of domestic inflation. There is still no sign of a effectual domestic market for such technological progression. lgl