SINARMAS WORLD ACADEMY Jakarta, Indonesia
COMMENTARY COVER SHEET
TITLE OF EXTRACT: “The Real Reason to Worry About China”
SOURCE OF EXTRACT: Schuman, Michael. "The Real Reason to Worry About China." TIME Business & Money. TIME, 28 Apr. 2013. Web. 23 May 2013. <http:// business.time.com/2013/04/28/the-real-reason-to-worry-about-china/>.
DATE OF EXTRACT: April 28th 2013
WORD COUNT: 650-750
DATE OF SUBMISSION: 28th May 2013
NAME: Monica Madelaine Santa
The Real Reason to Worry About China
lines are drying up — China’s one-child policy
By Michael Schuman
debt and too many factories, leading to wasted
made sure of that, by aging the population more rapidly. The workforce has already started to shrink. Even more worrying, the state-led, investment-obsessed system spawns too much
resources and a debased financial sector. The world is worried about China, but not for the right reasons. Global financial markets were roiled after the world’s second largest economy notched only a 7.7% boost to GDP in the first quarter — a drool-worthy performance for most nations, but a disappointment for a country that routinely jumped 10% or more over the past three decades. Economists are busily debating the usual: Will China have a hard or soft landing? Will the government step in and stimulate growth? Those questions miss the bigger picture. The reality is that China is unlikely to witness those astronomical growth rates, at least for some time. We may never see them again.
That’s what is happening in China today. Everywhere you look, the signs of rot are apparent. In a mad-cap quest to dominate green energy, China’s banks pumped billions into solarpanel manufacturing, creating hundreds of factories and vaulting China into the world’s largest producer. Now the sector has become a victim of its own excess: companies are failing, symbolized by the recent bankruptcy of market leader Suntech Power. Steel companies continue to invest in new capacity even though debt is rising and losses mounting. Each mill is backed by local officials eager to create jobs but dismissive of the larger costs. The investments
The recent slowdown is not a temporary cyclical
top up GDP, but not the health of the overall
blip or solely the knockoff effect of the tepid global
economy. Inefficient, subsidized state-owned
recovery. China’s growth model is broken and
enterprises gobble up credit while more nimble
can’t be so easily fixed. Since the start of
private firms starve. The froth on China’s booming
capitalist reforms in the 1980s, China excelled by
property market defies government efforts to calm
throwing tons of resources into a modernizing
it down. Facing meager investment options in
economy — mountains of cash to build factories,
China’s controlled financial markets, couples are
roads and apartment towers, and millions of poor
choosing divorce to sidestep restrictions and
people into making iPads, blue jeans and cars.
taxes on apartments deals. Most frightening, debt
Under China’s “state capitalism,” bureaucrats
has risen precipitously. Rating agency Fitch says
often directed the cash into massive infrastructure
credit relative to GDP reached 198% at the end of
projects or favored industries. However, this
2012, a startling increase from 125% in
growth engine can’t keep purring indefinitely. The
2008. Local government debt has escalated in
pools of idle labor that filled Foxconn’s assembly
recent years, to an estimated $2 trillion, or 25% of
GDP. The risks have been heightened by the
punishing them for saving. If anything, much
emergence of “shadow banking” — mysterious,
government policy has reinforced China’s old
unconventional sources of lending often kept off
growth model — including the heralded state-
the banks’ balance sheets — which George Soros
heavy stimulus program launched after the 2008
recently warned could be as risky as the toxic
financial crisis. Businessmen in China speak of a
subprime-mortgage securities that tanked Wall
“lost decade” of stalled reform.
Street. Even if China reforms more quickly, the economy Where is this all headed? “Panda huggers” (the
is likely to slow as it transitions to more
optimists) believe that China’s leadership is
consumption-heavy growth. But if China drags its
tackling these problems and there is no threat to
feet on reform, growth will likely be slower
economic stability. “Dragon slayers” (the
anyway, as its old model sputters and creaks.
pessimists) warn that similar surges of debt have
That means that under just about every scenario,
toppled other economies into financial crises.
the world can’t count on a supercharged China to
Everyone, however, agrees the current situation
hold up global growth while the U.S. and Europe
can’t last. The economy requires more and more
remain mired in debt and joblessness. But a
debt to produce the same amount of output. In
slower China may actually be a good thing. A
order for China to keep its current growth model
reformed, rebalanced Chinese economy will be a
running, therefore, debt levels must continue to
less risky, more stable force in the global
rise — to ever more dangerous levels.
economy. The much bigger risk comes from a China that doesn’t discard its failing growth
There is also consensus on the solution.
model. That could push China into a financial
Economists have been warning for years that
crisis. Now that’s really something to worry about.
China must decrease its dependence on investment for growth and “rebalance” to allow
Read more: http://business.time.com/2013/04/28/
consumption to play a bigger role. Government
the-real-reason-to-worry-about-china/
officials point out signs of progress — first-quarter
#ixzz2U5NKujOV
GDP was driven upward more by consumption than investment, for instance. But progress is, at best, at a crawl. Private consumption relative to GDP in China is still the lowest among major economies. The government has simply balked at the reforms necessary to change that. Feeble health care and pension systems force households to save; then controls on interest rates keep returns on bank deposits meager,
Economics Commentary
!
The article talks about China’s worrying economic situation after its GDP
only increased a disappointing 7.7% in the first quarter (the first three months of the economic year). GDP, short for gross domestic product, refers to the total value of goods and services provided in a country during one year and we can measure GDP to determine the health of a country’s economy and track its economic growth. In the last three decades, China’s GDP had consistently jumped 10% and over, but the new numbers are now causing economists to debate whether China’s economy is facing a crisis. !
According to the article, China is investing too much. These reckless
investments are accumulating debt and springing too many factories, resulting in wasted resources and a debased financial sector. An example is the billions of dollars China has invested into green energy research. It created hundreds of factories but producing at overcapacity, which gives the illusion of growth, had lead to less demand for the product. !
Contrary to some beliefs, China cannot be expected to lead in global
growth when the U.S. and Europe are still in financial crisis. This is because even though China is producing a lot, they cannot export as much goods because other countries cannot afford it. Exports refers to the goods a country sells to
another while imports are goods a country buys from another. Basically, China is making more debt than profit because countries are no longer importing their goods.
! As you can see from this graph, Chinaâ&#x20AC;&#x2122;s imports and exports have substantially decreased. The article claims that to solve this, China needs to build a new growth model based on a more consumption-heavy economy. Chinaâ&#x20AC;&#x2122;s economy boomed because it threw its resources into mass-producing products. This growth model is failing now because the products are not as sellable.
But China’s issues don’t end at malinvestment. The property market in China is bubbling and the high prices are putting pressure on the economy. An economic bubble is a surge in demand for a product. The more demand, the higher the price. Eventually the bubble will burst because inflation is too high. Inflation is the decrease value in money and the price rise in the product. Already China’s government implemented restrictions on lending and put taxes on properties. This “tight monetary policy” slows down the inflation but hurts the domestic demand. In some cases, Chinese couples are sidestepping taxes and restrictions by getting divorces to avoid it. !
There are many stakeholders (people of concern) in China’s economy.
Domestic producers are suffering because China is producing a lot but selling little. The government is also a stakeholder because they are in charge of preventing economic crisis. It is up to them to control inflation and ensure that the economy is balanced. Business and enterprises are stakeholders as well because they are affected by the market demand. Real estate and property will generate more profit because of the rising prices. However, if the bubble burst, prices will decrease and the sellers will be at a lost. People are also affected because the rising prices mean that only high-income consumers will be privileged enough to own homes. Meanwhile low-income consumers will struggle to make ends meet and pay off loans.
!
In conclusion, debt in China will continue to rise if they cannot control their
dependence on investments and Chinaâ&#x20AC;&#x2122;s growth model is in need of some serious updating. Still, the slowth growth may actually benefit China as a more balanced economy, driven by consumption will be less risky. Experts predict Chinaâ&#x20AC;&#x2122;s economic situation will improve but it is likely that we will never see the tremendous growth that China once witnessed.
Works Cited Jiang, Chengcheng. "Why Chinese Couples Are Divorcing Before Buying a Home."TIME World. TIME, 29 Apr. 2013. Web. 29 May 2013. <http:// world.time.com/2013/04/29/why-chinese-couples-are-divorcing-before-buying-ahome/>.
Rapoza, Kenneth. "China Housing Bubble Cools, But Prices Still Higher." Forbes. Forbes Magazine, 18 May 2013. Web. 29 May 2013. <http://www.forbes.com/ sites/kenrapoza/2013/05/18/china-housing-bubble-cools-but-prices-still-higher/>.
Setser, Brad. China's Import Export Graph. Digital image. Council of Foreign Relations. N.p., 11 Mar. 2009. Web. 29 May 2013. <http://blogs.cfr.org/setser/
2009/03/11/the-fall-in-chinas-exports-caught-up-in-part-with-the-fall-in-chinasexports/>. http://world.time.com/2013/04/29/why-chinese-couples-are-divorcing-beforebuying-a-home/