Professor debates economic power

In 1992, Chairman Deng Xiaoping uttered the famous phrase, “To get rich is glorious.” Since that historic quote, which was followed by market liberalizations, a wave of entrepreneurial activity and foreign investment, China has prospered.

With an economic growth rate in the double digits for the past 20 years, China recently surpassed Germany as the world’s top exporter, and many experts agree China will overtake Japan as the world’s second-largest economy by GDP by the end of 2010, second only to the United States.

With this unparalleled rise, China’s economy seems to be an unstoppable force. However, one IU professor says China might be overhyped and, more importantly, overvalued monetarily.

“I’m optimistic about China becoming the center of the new global economy in the long run, but there are still many problems with this transformation,” said Dr. Ho-fung Hung,
assistant professor of sociology and senior associate at the Research Center for Chinese Politics and Business. 

Hung delivered a lecture titled “China in the Global Crisis: Death Knell of the East Asian Development Model?” to a packed room Thursday at the City University of Hong Kong.

Hung predicted that a rapid rise of China would not follow the same path as in Japan, Taiwan or South Korea, where growth was fueled mainly by American debt-spending. After the global financial crisis and decline in worldwide credit, this opportunity of debt-fueled American spending will not exist for China in the coming decade.

Because China will not receive as much U.S. support as other Asian countries in the past, Hung looked at domestic Chinese consumption, possible currency fluctuations and the Chinese stimulus plan of 2008 to examine opportunities and to dispel current overly positive beliefs about the Chinese economy.

Despite China’s high savings rate, almost all are enterprise savings, not personal, so the businesses save and don’t necessarily pass this savings on to employees who can spend it to grow the domestic Chinese economy. Hung said it’s not feasible for the Chinese domestic market to reduce the current over-capacity in the system. In fact, using recently acquired statistics on Chinese consumers, Dr. Hung said “China’s private consumption share of GDP has dropped to an all-time low.”

Additionally, Hung reiterated the argument of 2008 Nobel Prize in Economics winner Paul Krugman and said that “China is trapped by the U.S. dollar.” Hung defended Krugman, saying that even if the Chinese yuan was to appreciate by 20 to 30 percent, little in China would change for the better. Actually, though China has been pushing the world to move away from the U.S. dollar as the de facto world currency, China increased its holding of U.S. Treasury bonds from September 2008 to September 2009.

The increase shows a conservative financial outlook on the government’s part. Even though China splurged to provide a domestic stimulus package to jump-start the economy, it has disproportionately favored urban investing, thereby leaving out more than 800 million rural Chinese who could benefit and bring growth to the country. As a result, Hung predicts “a ‘W’-shaped double downturn as a result of bad debt in China’s near future.”

Hung’s lecture helped dismiss the notion that China’s economy is a panacea for the world’s ills, especially the stagnant growth, slacking consumer spending and rising unemployment in the United States and Western Europe. As the world looks to the developing world for future growth, the analysis presented will have sweeping implications for future economic growth forecasting, not just in China but around the world.