Is China's Economy a Boom or a Bubble?

Ann All

Like other observers, we have been watching China's burgeoning economy and its efforts to move up the offshore value chain, from a destination for low-cost manufacturing to one that performs software development and other sophisticated tasks for the likes of Cisco and Microsoft.


In a bullish blog from January, we speculated that China had a lot going for it in its quest to become the "next India." We took a more cautious tone in a post from May, noting that Western countries are still relatively reticent about locating business activities in China. The country finished third, behind India and Russia, in a silicon.com survey assessing its readers' interest in offshoring.


Despite such concerns, plenty of Western companies are expanding their activities in China, including outsourcing giant EDS, Microsoft and Cisco.


Now we are beginning to see stories questioning some of the financial statistics coming out of China and hinting that the country's stock market isn't exactly stable.


As the International Herald Tribune reports, 80 percent of China's market listings are former state-owned companies headed by Communist Party officials and their families. Even Chinese officials worry about a "bubble" in an environment in which these companies "are subjected neither to open scrutiny nor to the unmitigated market forces - not even to state regulatory agencies," notes the article.


Chinese firms appear to be badly in need of more oversight, as evidenced by an article about Chinese millionaires appearing in the Guardian Limited. The entrepreneur who appeared second on a list of China's richest folks compiled by Forbes magazine in 2005, with an estimated fortune of 495 million (U.S. $1 billion), is now serving an 18-year sentence for bribery and fraud -- and a number of his fellow millionaires have suffered similar fates.


Other possible economic problems mentioned in a recent piece by syndicated columnist Jonathan Power (that we found, oddly enough, in Pakistan's Daily Times) are China's rapidly aging population, a shortage of skilled labor and increasing disenchantment from foreign investors.

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Add Comment      Leave a comment on this blog post
Dec 6, 2007 7:51 PM Peter Wang Peter Wang  says:
Good post ......, Since eons ago, the China story is always about the coming collapse or the coming take-off, ..and it is consistently one-way bet...Foreign direct investment (FDI), the key driver in the China story, is an intra-Chinese affair. the US, Europe, Japan, etc, account for less than 20%, the rest are all from "international Chinese", especially in strategica sectors. So, next time, when in doubt, ......follow the Hongkongese, ..... Reply
Dec 10, 2007 10:01 AM Suranjan Suranjan  says:
What China lacks is to do business with free will. The purpose of business in creating wealth and make profit which is directly against their fundamentals. In such a senario, Foregin investors would always have a doubt investing in China. However we'll see many of them having their foothold in China as no one wants be be late in the game if everything goes well Reply
Dec 10, 2007 1:14 PM Bob Bob  says:
In visiting China, it was clear that creating wealth and making profits is a widely held point of view. Existing state owned enterprises, such as former leaders' retreats, had to make their own way financially.However, most people seemed primarily interested in short term gain rather than long-term growth. Further, supporting infrastructures are not always in place. One newscast I saw showed a wealthy Chinese man taking a sledgehammer to a high end car because parts and service were not available.I saw evidence of both boom and bubble. Reply
Dec 16, 2007 7:06 PM Deb Boyd Deb Boyd  says:
China not unlike some other countries is ruled by people who think they can shortcut development. Many of the people in control of the government do not have the broad International education to be effective. The best companies in China work very carefully not to make the government feel insecure. The Chinese smart businesses people are very patient. They feel it may take generations (not a few years) to get the government to "see the light". Examples of short sight are the dams & the road to Tibet. It reminds me very much of 50s in USA. Reply

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