China Misconceptions
Leave Tough Questions

Americans tend to harbor some misconceptions about China, notably that its overheated economy cannot maintain such an historic pace indefinitely. “All of this economic growth, in contrast to what most economists always thought, turns out to be pretty sustainable. China has grown by about 10 percent, and there is no obvious reason why that growth can’t be 10 percent this year and 10 percent next year,” Kuijs said.

Competitors around the world rue China’s low-paid workforce, yet it’s the country’s capital investment that has really fueled its growth. Government policies that promote development of industry and infrastructure at the expense of social programs such as health care and education, and state-owned enterprises that plow profits directly back into the business rather than paying taxes or investors, have contributed to an overall investment level that accounts for 44 percent of the country’s GDP.

“All this investment makes the pattern of growth very capital intensive, which is a bit odd for a country that’s supposed to have low labor costs as its main comparative advantage,” Kuijs said.

Another misconception, he said, is that China is facing an inevitable banking crisis, because when its breakneck growth slows its banks will be left with so much bad debt. Banks in China have had a far smaller role in funding its industrialization than imagined, he said, with much of the capital being invested and reinvested by the companies themselves.

Naturally, there are many downsides to China’s development, among them disregard for basic environmental standards and worker health and safety. Much of the country’s population remains poor and stranded in rural areas with few prospects. Creation of a prosperous Chinese consumer society that will buy up the world’s goods seems an impossibly distant dream.

Many U.S. executives seem to think that if China would just allow its currency to float freely, that would “level the playing field.” But Kuijs cautioned the steel industry about expecting either a sizable increase or a dramatic effect from any repegging of the yuan. “A stronger exchange rate by itself is not going to take away China’s large current account surplus,” he said. “In our view, a whole array of more structural measures are needed to change the way China is growing.”

It’s not surprising that U.S. trade officials have made so little progress in negotiating free-market reforms with China. As Kuijs pointed out, “The Chinese government is quite happy with the way things are going right now.”

Thus, change in China will almost certainly be slow and evolutionary, prompted more by the laws of supply and demand than any political shift in the laws of man. For those currently in the steel industry, the “China question” may well remain unanswered for the rest of your careers.