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Cheng Xiaonong: China’s Economy is at a Turning Point and Will Slow
By Chen Liming
10/18/2005



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KAOHSIUNG, TAIWAN - China’s recent rapid economic growth has been backed by foreign and capital investments. By the beginning of 2005, however, foreign investments had reached their high point, and have since begun to decline. Capital investments in China have neared saturation. In addition, over 90 percent of the people in the mainland have negligible purchasing power and therefore cannot be counted as a factor in the nation’s consumer market. Thus, China’s economy can no longer maintain its booming pace and will head for a recession, albeit slowly.

Dr. Cheng Xiaonong, a Ph.D in sociology at Princeton University, and former advisor to China’s past premier Zhao Ziyang, explained that the three pillars that have supported China’s economy--foreign investments, capital investments, and domestic consumption--are all problem-stricken. China’s economy can no longer keep its fast growth and will soon slow. Dr Cheng made these remarks during a speech at the Kaohsiung Medical University on Oct.1 at Insight into China from Scholars on Chinese Economy, a forum sponsored by a business association at the Kaohsiung Medical University.

According to Dr. Cheng, the social structure in China is like an upside-down letter “T”, with the poor at the bottom who have no purchasing power and account for 90 percent of the total population. The lower portion of the vertical stroke represents the middle class, composed of approximately 100 million people whose main concerns are retirement, housing, healthcare, and education, and who have little left for luxury. The wealthy sector of 40-50 million at the top are busy emigrating overseas as they have seen the imminent crisis in China; their numbers are therefore quickly dwindling.

The economic growth in China, lacking support from domestic consumption, will have to depend heavily on capital and foreign investments. Capital investments are currently well beyond saturation and have become wasteful. In China, many local government office buildings have been built as though they are for central government institutions; highways have been built but carry very little traffic; toll bridges are unable to collect funds from the few travelers they can find. Mr. Cheng cited an example of an international airport built in the southeastern Chinese province of Anhui that had only 40 passengers a day and could not generate any return on its investments, leading to numerous bad bank loans.

Foreign investments, however, gradually started declining at the beginning of 2005. Mr. Cheng stated that of the 500 billion yuan (US$62.5 billion) foreign funds, half have been withdrawn. Of the remaining half, only two thirds are put to use, and only about a half of that is profitable. He said that a German conglomerate had 100 companies that either made direct investments or held equities in China. The CEO of the conglomerate told reporters in private that investment in China is losing money. However, the investment climate is catching “China fever”, so they are trying to “make up the loss in business with gains from stock markets”. In fact, the group is silently pulling out its funds.

As for the continuing prosperity in cities like Shanghai and Shenzhen, Mr. Cheng explained that they are “showcases” the Communist government put up by squeezing rural interests. The countryside has been completely abandoned by the central government and has no financial system whatsoever. It can only look to high interest loans for productions. The meager savings of farmers were all used for capital construction in the cities.

Ten years after World War II, the Soviet Union had managed to build Moscow into one of the most modern cities in the world, winning confidence in communism from leftists in the West. Mr. Cheng explained that it is easy for a totalitarian regime to display some “showcases” by pooling national resources into building them, but it is unable to resolve its fundamental problems and will collapse in the end like a house of cards.

Mr. Cheng’s articulate and vivid speech drew applause from Kaohsiung City Councilman Mr. Chen Ying-Tsan. Mr. Chen told the audience that he had many friends who had investments in China. They all said it was good in the beginning but they later returned disappointed after they lost money. Mr. Wu, director of an arts agency, said that some of his friends were worried about their future applications for finance and did not dare to disclose their losses in the mainland; instead they told others that their investments had been profitable.

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