Is the Chinese miracle over?

Let’s watch first this cogent reportage made by Financial Times about the state of the Chinese economy.

Assuming you watched it until the end, I have a few points to add.

There has been a persistent problem with the economic models that predicted the success of China. Almost all of them considered the growth rate to be constant over time. But as we all know, economies that get bigger at an accelerated pace, as China did, will face structural problems that initially didn’t appear to be a nuisance. One of those structural issues is, what I call, the “demanding more” principle. The Chinese economy’s initial boom was fueled by the unprecedented migration from the agricultural areas to the cities. The factories benefited from the extremely cheap labour and the relative jump in the personal wealth of the employees. But this relative increase in personal wealth was diluted over time due to the increase in living costs, forcing employees to demand higher wages and the employers to give in to the demands. By all means, there isn’t any form of unionisation in those factories, nor any desire to offer a just salary and a decent working environment! However, the influx of cheap labour lost steam at a certain point in the economic boom.

China is also facing increased inequality. People that benefit from economic liberalisation are few compared to the new working class. This adds to the pressure on the factory employees that are left without social security. This inequality will erode in the long-term the political and economic system.

I predict that China’s economy will slow down considerably due to the decreased demand for goods produced there. This can only be balanced by a sustained internal consumption and by facilitating a healthy middle class. This comes hand in hand with a responsible political system that will reform the public administration. But this will prove to be hard as we know how difficult it is to change a centralised system the size of the Chinese administration.