Can China Be China Again?

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Both China’s prime minister and its finance minister hinted that China’s growth of gross domestic product (GDP) may slow considerably this year, and perhaps the next. That has caused many analysts to believe that its expansion may drop as low as 7%. Although the number continues to be the envy of every other large economy in the world, the faltering could cause the People’s Republic dearly in terms of the rise of its middle classes, as well as the huge expenses and risks of a stimulus that might run into the hundreds of billions of dollars. Without a swift repair to China’s slowing growth rate, both its government officials and outside observers have to ask whether China can ever be China again.

Government officials in the People’s Republic do not have to say what is already known. Purchasing managers index (PMI) and trade numbers already have demonstrated China’s economic problems. So have its efforts to successfully balance how its banks loan money, or do not loan it. News reports are full of concern about the Chinese shadow bank system and whether the larger financial structure of the nation is stable.

The most obvious culprit for China’s GDP challenge is the slowdown of the economies of most other large nations, and the effects on demand for Chinese goods. Europe has nearly died as an importer. Japan and the United States are better off, but each still faces challenges to their economic recovery. India, Russia, the oil-producing nations and Africa are not large enough together to solve China’s export demand problem.

China also has to contend with the realization by its middle class that falling exports mean slowing wage improvements. As that becomes more of a reality, the kind of population mix that the United States has had for several decades may not arise in China. In other words, China’s economy may never been a consumer driven like America’s was. That, in and of itself, paints China into a corner.

What is very hard to tell about China’s challenges is whether the fact that its labor costs are no longer among the lowest in the world will hurt it. Mexico and Vietnam are often mentioned as competitors in that regard. However, neither has the infrastructure nor skilled workforces to become an export giant, and each is too poor to create them. China continues to have the pole position in the manufacturing race.

The Financial Times reported on the confusion about China’s growth rate, at least based on the comments of its leaders. The newspaper said: “But right now those targets are about as clear as the Beijing sky on a smoggy day.”

If these leaders believe that GDP expansion could fall to 7% or lower, the challenges to move the number back to double digits may be so difficult that China will never be China again?