While the world's mainstream media remains caught up in the new "Chinese miracle" of a massive consumer market and ever expanding economic growth, there are some more sanguine and cautious analyses about.
In fact the possibility of a crash of this increasingly bubble-like economy within the next decade is not an uncommonly discussed scenario.
China remains a country with enormous consumer income differentials - the gap between the industrialized East and agriculturally-based and occasionally newly-industrializing West is often over looked, especially by those who fly into Shanghai, Guangzong, and Beijing for a quick 3 or 4 day reconnaissance. In the Golden West, the privatization of government-owned enterprises is causing not only dangerous levels of unemployment but also requiring fast changes to social structures and expectations built up over much longer periods.
The Chinese government still controls information, and economic statistics are hard to verify against each other. In fact the enormity of the task of tracking economic fortunes in a country attracting so much FDI in a quick time and a domestic economy spread far and wide still characterized by a labyrinth of complex and usually secretive and undocumented distributor and agent agreements would test any country.
The International Herald Tribune weighs in with their own commentary in Hyping the China Story.
[extract] ...lost in the hype are the innumerable risks facing China.
Subsidized credit, distributed by the state, still dominates. If financial-sector debts continue to mount, China could face banking troubles reminiscent of those in Japan. Non-performing loans at the four-biggest state-run banks already are estimated at 40 percent or more of gross domestic product.
Since China lacks Japan's wealth and household savings, financial problems could slam the economy and lead to social instability. That could greatly reduce returns on investment.
The financial sector in China holds some Internet-era qualities that warrant attention. It is a huge, bureaucratic operation that's big on spin, small on transparency. Dodgy corporate governance is scaring away institutional investors. Creative accounting techniques go beyond economic data. Impenetrable Communist-era accounting covers up cracks.
Beijing also is making a mistake venture capitalists did in the 1990s: Tossing money at the least-promising sectors of the economy. Credit is going toward huge public works projects like dams. Those efforts monopolize resources that would be better spent encouraging entrepreneurship.
The excitement over China's promise blurs the risks, just as excitement over the Internet did a few years back. What if the waves of foreign direct investment pouring into the economy - $52.7 billion in 2002 alone - create a bubble in the economy? Or if investors narrowly focused on the future rush into Chinese stocks, creating a mismatch between the economy and stock values?
Just as the Internet promised to change everything, and has not, China's potential may fall short of expectations. Far short, perhaps. [end extract]
On the domestic consumer side, it is still far from sure that the Chinese consumer will mirror the affection for global and international brands that characterized previous smaller tiger and tiger economies, even though that seems to remain a widely held assumption. Traveling to the West and North however reveals a different side to the glitzy and increasingly alienated high society in Shanghai and other new glamor cities. In the real heartland of China, the majority of Chinese consumers still lead lives of quiet desperation. Western style consumer items, previously the refrigerator and then TV's and now the high tech playthings of the Information Age are aspired to, but still far out of reach. And history has demonstrated to us many times that inequities in income have a breaking point.
Segmenting the market is the most obvious solution for international markets. For even if you target just small proportions of the population, says the argument, you are still targeting numbers that exceed around 80% of the total populations of other countries. We already know that China is now the largest country market for mobile phones for example, and the highest provider of inbound tourists to other Asian tourist markets of all Asian nations. Yet again this demand is limited to very specific consumer market segments.
Any internal political or social strife will surely affect consumer sentiment even in the relatively cloistered halls of the Shanghai and Beijing business elite. And that is why government policy is critical to the continued rise of the Chinese economy and concomitant consumer market. The worst assumption to make is that China is already a free market-driven economy with all the associated assumptions of free demand and supply. China as a whole remains very much a developing nation with all the associated risks.
While North American and European markets and economies remain moribund, China looks good by comparison. But that is a short term view. The longer term view needs more careful analysis, and the longer term, as companies find out every day, is what China is all about.
Published February 15, 2003 05:42 PM in China PRC
Asia Market Research News is available for syndication