For centuries, China has been hailed the last great untapped market in the world. One enterprising Englishman in the 1850s famously said that if he “could add an inch of material to every Chinaman's shirt tail, Manchester weavers would go forever.”
In order to reach their goals of breaking into the Chinese market, Britain flooded the country with opium through India, sucking money out of the hands of addicted Chinese, and then in 1848 finally defeating China in the opium war and forcing open its doors to the West. Most of the western European powers, on the other hand, were initially willing to swallow their pride and kowtowed before the Chinese in order to gain limited access to China’s coastal ports and engage in trade.
Many Western businesses, like their counterparts centuries ago, seem just as willing to engage in all sorts of ungentlemanly acts and have often discarded their own principles in order to wrest market share of the Chinese economy from their competitors. But what has almost never been discussed is the dark side of China’s economy—one that prompts the question of why China’s market has been “untapped” for so long.
The GDP Myth
So, just what is it that makes the Chinese economy so irresistible to investors and Western businessmen that they would be willing to toss integrity out the window? Frank Xie, an assistant professor of marketing at Drexel University in Philadelphia and an expert on the Chinese economy, says that foreign investors are lured to the Chinese economy by the steady growth rate the country boasts every year of 7 to 8 percent GDP annually.
But Xie, like many other China scholars, warns that there may be more to China’s budding GDP than meets the eye, pointing out that “there exist many puzzling contradictions, inconsistencies, and even deceptions in Chinese economic life.”
One of the more anomalous inconsistencies in the Chinese economy was revealed by Dr. Thomas Rawski, a professor of economics at the University of Pittsburgh. Dr. Rawski studied the Chinese economy from 1996 to 1999. During that period of time, accumulated GDP of China grew by 25.6 percent. One would expect that the rate of energy consumption would increase correspondingly. However, despite the 25.6 percent GDP growth, energy consumption during the same three year period actually dropped by 12 percent.
Obviously, says Xie, these numbers don’t add up.
Neither do provincial reports on GDP growth. During last year’s People’s Congress, officials from within the central government confessed that the GDP numbers from local and provincial governments, when tallied together, were inconsistent with the national GDP. In fact, the numbers were off by difference of 3.9 percent.
“A percentage of 3.9 percent may not sound like a big number, but when talking about GDP growth, it represents a huge difference,” says Xie.
Similarly, in 2001, Dr. Rawski’s research notes that all but one of China’s provinces reported growth rates higher than that of the national average. Upon further investigation, the bureau of statistics found 62,000 false reports on growth had been filed between the months of May and October of that year alone.
If indeed China’s reported GDP growth is inaccurate, this would explain China’s reluctance to appreciate the value of the Yuan. It wasn’t until pressure from countries like the United States and the EU reached a critical mass that the Chinese government finally unpegged the Yuan from the American dollar and allowed it to appreciate marginally.
One also has to wonder how, despite China’s claims of consistent GDP growth, it continues to account for less and less of global GDP.
During the reign of the Qianlong emperor (1711-1799) in China’s last dynasty, China’s GDP accounted for 51 percent of the world’s total. In 1911, when Sun Yat-Sen founded the Republic of China, that number was at 27 percent. By 1923, it had dropped further to 12 percent. When the Communist Party took power in 1949, China’s GDP accounted for only 5.7 percent of the world’s total. In 2003, the number was even lower at just 4 percent.
Finally, if indeed China is enjoying a booming economy with its GDP growing at such an impressive rate, it should naturally follow that the country is full of employment opportunities.
Unfortunately, as professor Xie points out, that’s not the case.
“When the United States experienced recession in the early ’90s, the unemployment rate was around 7 percent, and we were screaming like crazy. Prof. Hu Xingdou of the Beijing University of Science and Technology said that the Chinese unemployment rate is at least 20 percent, and it could be as high as 30-40 percent. This is higher than that of any Western countries.”
Of course, determining the actual unemployment rate in China would prove a nearly impossible task. The Chinese government claims unemployment is minimal. That’s because in China, being unemployed is not called being unemployed; instead, it is referred to as temporarily stepping down from duty.
Banks on the Brink
Many who have been to major Chinese cities in recent years have seen half-completed construction projects and empty, shabbily-built buildings with no developers in sight dotting the landscape. In some cases, developers take out huge bank loans, begin a project, and then jump ship, carrying the rest of the cash off with them.
It’s just one example of why China’s banking system has become one of the most vulnerable in the world.
According to the international rating agency Standard & Poor’s, 45 percent of loans from Chinese banks turn out to be non-performing loans (NPL). Some scholars have estimated that the number may be closer to 50 percent. By Western standards, China’s banks should have collapsed several times over already.
It wouldn’t be so bad if it weren’t for the Chinese Communist Party forcing the banks to loan money to failing state-owned enterprises.
The banks, in turn, are supported by the savings of China’s middle class. With no other banking options, China’s citizens have no choice but to park their cash in the country’s unstable banks, putting their savings at great risk.
So what happens when the Chinese people realize that their money is parked in money-losing banks? If they withdraw their money en masse, China’s banks and the state-owned enterprises they support are doomed to collapse. That day may not be far off. As a part of the conditions of China joining the WTO, in 2006 it will be forced to open its doors to foreign, more stable banks.
Adding to the crisis is the fact that thousands of Chinese officials have fled China, taking with them countless millions in hard currency. Professor Xie says that as of June 2003, some 8,362 Chinese officials had fled the country.
The moral issues surrounding investing in China don’t end with the obvious ethical questions of slave labour, or of fuelling a totalitarian regime that denies its citizens the most basic of human rights and is willing to use violence to control its people. It also involved the question of environmental degradation.
China is home to 7 of the world’s 10 most polluted cities. In its seven major river systems, 40.9 percent of the water is unsuitable for consumption by humans or livestock. The amount of wastewater produced in China is 43.95 billion tons—82 percent more than the environment can withstand. The pollution in some areas is bad enough to prompt uprisings and protests by local citizens. In suiting with the Communist Party’s early mantra to fight and struggle against nature and the earth, China is currently teetering on the brink of a full-blown environmental disaster.
A large part of the blame for China’s environmental problems rests with the manufacturing industries, which are among the most inefficient energy users in the world.
Mr. Niu Wen Yuan, Chief Scientist of the Chinese Academy of Science, estimated that China contributed to less than 4 percent of worldwide GDP, but consumed 1/3 of world’s material and energy in coal, steel, and cement. For every dollar worth of goods that China produces, it consumes five times as much energy and water as other countries would to produce the same thing. For example, China uses between 7-10 times as much energy as Japan would to produce the same product.
Echoing the 19th-century English businessman’s dreams of China riches, Coca-Cola said in the 1980s that if it could sell two cans of Coke to each Chinese it would “make a fortune.” Perhaps Coke should take a hint from its top competitor on how difficult that can be. Pepsi went for twenty years in China without earning a profit, not because the Chinese people were uninterested in its product, but partially because it was taken advantage of by an unscrupulous business partner in Sichuan, China’s most populous province, and because the Chinese government and legal system did not give it any opportunities for fair treatment.
Businesses speak of the Chinese economy and market in glowing terms, seeing not only potential but also certain success. Yet many companies are finding that the price of doing business in China’s ‘miracle economy’ just isn’t worth it.
Brian Marple in Washington, DC also contributed to this article.