Since the death of Chairman Mao and the reestablishment of Deng Xiaoping in 1978, the Chinese economy has been climbing at annual rate of 9.6 percent on average. In 2006, China's GDP shone at a stunning $2.67 trillion, making the Middle Kingdom the fourth-largest economy in the world. What accounts for this unprecedented growth? What does the Chinese economy look like? Is there a bubble in the Chinese stock market as suggested by so many Western pundits?
A closer look at the Chinese economy reveals the establishment of a functional market and momentum for further economic growth. This column focuses on China's labor structure and financial institutions as a part of special report series on the emerging economies.
China's labor market best explains its unique economic structure and challenges. Currently, there are an overabundance of college students. Of the nearly five million students who graduated last year, 1.45 million remained without a job in the fall, according to a study by the Chinese Academy of Social Sciences. The problem is expected to inflate in the wake of recent admission expansion programs that will allow more students into Chinese universities.
Why are there so many unemployed students in an economy that is soaring at 10 percent a year? Let us look at the daily routine of typical Chinese teenagers. Middle and high school students usually spend more than 10 hours a day in school. Then, they still have several hours of homework to finish after returning home. To get into a decent college, every Chinese student has to take the National College Entrance Exam, which usually lasts for several days. Universities evaluate candidates based solely on their performance on the exam.Consequently, the pressure to excel at school is tremendous, and the students who do attend college thus have cultivated a strong sense of entitlement. This translates into high expectations of their first jobs; however, people's appetite for higher-paying jobs far exceeds white-collar employment opportunities. ECON 201 students would readily recognize that the extreme competition among students locks the salary at a very low level.
In contrast, burgeoning Chinese cities increasingly demand more service workers and technicians. In China, people have strong negative cultural bias toward vocational educations. As a result, professional training programs are few; most high school graduates rarely even consider attending vocational and technical schools. What makes it worse is that the numerous rural immigrants have only very basic labor skills that get them jobs paying minimum wages. Thus, it is very hard to find enough qualified electricians, beauticians, factory workers and other professions in the services sector that booming Chinese metropolises demand. The lack of sophisticated skills of rural immigrant workers and the excessive supply of college graduates who only seek high-end jobs together precipitate an imbalanced labor structure. To alleviate this problem, the Chinese government has to either train the rural immigrants with the necessary skills, or convince college hot shots to expect less from their first jobs.
Furthermore, the growing stock market presents both an opportunity and a fallout in the Chinese capital markets. China's gross domestic savings is usually more than 50 percent of its income, the highest saving rate in the world. With ready cash floating in the market, many state-owned enterprises can raise huge amounts of capital from Chinese household savings. SOEs in turn utilize the collected capital for expansion and investments, which further accelerates economic growth. With a high savings rate and government restrictions on overseas investing, Chinese investors are left with the domestic stock market as the only means to invest. Changes in notable economic indicators, such the near tripling of the Shanghai Composite in 2007 and the market average Price-to-Earnings ratio surpassing 50, are signs of a drastic increase in stock valuation that has led many Western financial analysts to forecast a bubble in the soaring stock market.
While conventional Wall Street valuation analytics help add value in a well-developed market such as the U.S., these conventional Wall Street yardsticks may fail to provide meaningful information in a market heavily entrenched with central planning. In fact, the Chinese government still has a very strong influence in the financial system. With the astronomical amount of foreign reserves, China can pump in cash wherever and whenever the market goes bad. Furthermore, the Chinese equivalent of the SEC enforces strict monitoring programs among companies to prevent risky leveraged finance and speculation. Given the fact that the Chinese government vows to host a successful Summer Olympics Game, the Communist Party officials will likely to take every measure to ensure economic and political stability.
Paul Chen is a second-year economics and mathematics major. He can be reached at paulchenUVA@gmail.com.
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