Why do I sometimes hear that China has a freer economy than the United States? Especially since China's economy is considered communistic and their tax rates are so high (it looks like the top tax bracket is ~$15,000), how can they have such wealthy[-looking] cities?
It looks like they're the largest exporter, so is it just the fact that they have no tariffs or protectionist measures that makes them rich, or am I off-base? I wouldn't really know where to find this information besides Wikipedia, so I figure someone on here will know. Thank you.
China's high levels of economic growth are found primarily in their Special Economic Zones (SEZ). An SEZ, as its name suggests, operates quite differently from the rest of mainland China. An SEZ has low government regulation, low taxes, and a very prominent market economy. This is why the standard of living in an SEZ is dramatically higher compared to a non-SEZ province or city, where the economy is much more socialistic. Shanghai, the city in the picture you posted, is a popular example of what an SEZ can do in terms of economic growth.
It is important to note that China's rapid economic growth could be the "boom" described in the Austrian business cycle. China has been forcing interest rates very low through credit expansion, a policy that will lead to disaster in the long run. Another point of interest is that most information economists have on economic growth in China comes from the Chinese government itself, so there is certainly a high possibility that the Communist Party is and has been cooking the books.
China is certainly a practioner of economic protectionism and general hostility to foreign businesses. China's policy of keeping the renmenbi/yuan (China's fiat currency) artificially weak through the practice of buying large sums of United States dollars to keep the USD strong and flooding the "currency market" with renmenbi/yuan to keep their own currency weak is a common example of protectionism. If you want an example of hostility to foreign businesses, the Chinese government shut down all screanings of the film Avatar for a certain period of time because of how much it was out-competing domestic Chinese movies.
This is kind of off topic, but a friend of mine who has been taking an AP Geopolitics course told me about how there's a fear among many Chinese politicians that because of much the SEZ's are outpacing the rest of China in terms of economic growth the country could end up fracturing politically.
Hope this helped.
It definitely did. I didn't know about the SEZs. Thank you for the information.
Low costs of regulation compliance, no unions, no social security taxes. Public officials that even a regular person can afford to bribe.
Perhaps this sounds a bit simplistic, but considering where China came from (The Great Leap and Cultural Revolution), the freeing up of the economy by Peng meant that the economy could only get better, remember that historically China was the wealthiest region in the world before the industrial revolution.
China is communist in name only, the CCP is not really interested in communism it just wants to maintain power, so although it still maintains oversight of big companies, the micro management of these companies has lessened and thus allowed for world class companies to emerge. China however will have to make bigger reforms, its growth is already distorted by inefficiencies and will only get worse if it does not allow for greater freedom.
Excellent answers chaps.
I may also add a couple of things. China's building boom is what had some analysts review at least in part their predictions about future growth. A few, like Edward Chancellor, decided to take an even deeper look at China as a whole. The results were very mixed and, in my opinion, not encouraging.
All the major Chinese banks are State-owned or State-controlled. This has led to "a history of poor lending decisions" as banks are directed by the State to open their "credit spigots" to fuel growth. This came particularly true in 2009 when, to counter the effects of the world economic downturn, banks were directed to increase lending as never before: in 2009 new bank loans amounted to a monster 10 trillion renmimbi (RMB), equivalent to 29% of China's GDP. This sum went to fund infrastucture projects, property developments and State-owned and State-partecipated enterprises. Chinese banks pulled a similar stunt before and it went real bad: in 1999-2000 50% of total outstanding loans were "non-performing". Beijing recapitalized the banks and moved the non-performing loans into "asset management companies". To this day nobody knows how much money was lost. And it has got worse since Chinese authorities have become even more secretive about non-performing loans starting about 2006. How robust are China's banks then? The answer is "we don't know".
As said, a good chunk of this immense sum went into infrastucture projects and property developments: the Chinese seem to have gone "building crazy" in recent years. The are a few reasons for this. First of all China has legalized property of land by private subjects. Second, the main source of income for "local authorities" is now the sale of land. Third, it is said that China will have need for all of these airports, high-speed railroads and office buildings as her economy expand at a record pace and that the investments will pay themselves of in the not so distant future. There's also an "unofficial" reason: leading bureaucrats are given growth target for their area by Beijing. Meet or exceed these targets and you will be richly rewarded, fail and you will be harshly punished. As you may have guessed local authorites have become enthusiastic to say the least about promoting and encouraging building projects since this means they'll meet or even exceed the targets set by Beijing. When there are news of whole towns crumbling like a house of card or being swept by a landslide that's a result of this policy. It doesn't matter if apartment blocks or factories are built with cheap concrete or on unstable soil: the important thing is build and build quickly. As you may have guessed things aren't very rosey at the moment: in urban areas ownership ratio is now already about 70% according to Deutsche Bank. New immigrants simply cannot afford to buy a house as prices keep on rising so luxury flats and even cheap units stay empty. Yet new housing is being produced at record pace. To mask this, "ghost" societies have been set up as nominal owners. Commercial property is even worse, as thrifty Chinese aren't exactly rushing to shops to buy big screen TVs and designer clothes.Yet building continues at record pace, with new high-rise complexes built right next to wholly empty ones on a seemingly monthly basis.
To make things worse China suffers from an immense "overcapacity" in infrastructures. While large traffic jams are reported by the Western media, reality is much different. Highways run at about 12% capacity and tolls collected are nowhere near enough to cover costs. Airports outside the great cities run at less than half capacity. The projected 18000 km of high speed railways are already running into troubles: simply put they would never reach the minimum passenger volume to break even and even bureaucrats in Beijing are starting having second thoughts.
Similar problems afflict China's heavy industries. Overcapacity is being reported in critical industries such as steel, cement, glass, shipbuilding and, curiously, wind power. Despite the present construction boom cement industry run at about three quarter capacity. Would you invest in an industry which, in a time of boom, has such overcapacity? No, because returns would be negligible (and Krugman won his Nobel prize for his analysis of a similar situation in Pacific Rim economies. Yes, he fell that low recently).
Kakugo,
The "ghost societies" you talk about have actually become "ghost cities'. China's infrastructure policies have pumped billions into building massive skyscrapes that no one is occupying. China consumes somewhere in the area of 50% of the world's steel output, and most of that is probably malinvested in "ghost city" projects.
And one quick thing about the Special Economic Zones, in particular cities like Beijing and Shangai; pictures like the one you posted are very misleading. While those aerial shots are nice at showing the impressive and beautiful architecture of China's cities, what they don't show you are the one-room shacks made of cardboard and tin that many people live in in those cities. Things are certainly looking up standard-of-living wise for those Chinese lucky enough to live in an SEZ, but the average person living in an SEZ isn't nearly as wealthy as the average person living in America or Canada.
This is completely off-topic, but I'm learning Chinese and I went to Beijing for two weeks last summer and plan to go back again this summer. I'd definitely recommend visiting the country at least once, and learning the language if you have the time. That's my little promo for China.
Brian,
If you have any other questions, feel free to post them.
Rcder, so we can talk about "ghost societies owning ghost cities"? I personally have a penchant for building bubbles, for no other reason the areas I have lived in all experienced at least one. It's always sobering to see construction cranes right next apartment buildings nodoby's interested into or strip malls sprouting up like mushrooms after August rain.