Economics 101 take 2

Although I never took an economics class I will try to give you a glimpse into the China economy and how it works.  For the past 30 years the China economy has been a direct result of their low wages and export opportunity.  As I am sure you know, they have really exploited this advantage to the point where the country was foreign cash rich.  So how do you keep your money and investment in your own country, you make your currency a soft currency making it worthless outside the country and then control how much is allowed to be converted and for what reason.  Anytime you want to buy a good or service outside the country you have to apply to the government to be allowed to convert the local currency into foreign currency.  You also have to justify why it cannot be purchased inside the country.  So if the government does allow you to purchase a foreign good, then the government keeps track of what the good was and if it sees advantage of producing it inside the country then it gives money to some internal company to copy it for future needs. 

The government also discourages imports and if it needs outside technology then it forces the outside company to build locally in China and to have a Chinese partner.  So if the foreign company then produces a good and popular product, then the government forces the Chinese partner company to produce a similar product to compete with the foreign partner’s product, thus keeping all the profits inside the Chinese company.  So as is the case with my company, you might wonder what happens to the profits, since the companies are not publically owned.  But you also have to realize that once the company becomes of a certain size, the government then takes it over, so as you can see, at some point all the profits go back to the government.  So what happens is that the companies are therefore forced to re-invest in itself so as to “hide” as much of the profit as possible.  This then fuels the economy because it of course purchases goods from other Chinese companies as it is too difficult to send money outside the country. 

The government has also been funding the infrastructure which makes the country more productive and more competitive.  But for the future it must transform itself into a country which sustains its own growth, and therefore it needs a strong middle class.  We are starting to see the emergence of this middle class with the growth in university graduates.  These highly schooled young people are now able to learn quickly and are becoming very technically capable.  This produces more and more people who are now demanding middle class wages and thus growing the middle class.  This will hurt exports but help local economic growth.  There are now more and more entrepreneurs who are starting their own companies and more and more people who are investing in the booming real estate market.

So now that we have the emergence of a middle class, the government will need to turn over control of the companies to the free enterprise system to be able to sustain the growth, this will be a difficult transition.  I say that because the government hierarchy is very powerful and very privileged.  So as the wages rise and China becomes less able to export, it will depend on it’s 30 billion people to earn wages significant enough to be able to continue to grown the economy.  I guess time will tell if this strategy will work but certainly the people are no strangers to hard work and do not seem to think that anyone owes them a living.  The only issue left to overcome is the same issue that I am trying to help them overcome, they have never focused on the future and do not seem to be able to envision what will be needed to compete.  Most people here have always been told what to do and have copied things that were invented in other countries.  The creative culture will have to become part of their DNA if they are truly to be a viable world competitor.