STRATFOR: Here's Why China's Economy Is Far Worse Than It Seems

Research firm Stratfor has released a short video outlining their view on the Chinese economy. They basically explain how Chinese GDP growth has been achieved with very low profit margins using low cost manufacturing as a competitive advantage. Thus while there has been massive GDP growth, much of this could be simply products flowing through the economy, rather than substantial profit generation, etc.

Thing is, while a good refresher of one of China's major problems, and a valid criticism of much of China'd GDP growth, their view is a bit dated, yet highlights an important caveat for any international observer -- be careful not to view China through prism of the last decade.

The idea of China as simply a low-margin, low-cost competitor vs. the world probably painted a reasonably complete picture of the Chinese economy ten years ago, but today things are far different. China has actually begun to compete both at the high and low-end, internationally. Both Chinese companies and foreign multinationals based in China are producing some very high-tech and competitive products within China's borders.

Stratfor also expresses the view that China's economic growth model is unsustainable and headed for crisis, but again, this is a moot point. China's current growth model is obviously unsustainable, just as America's early growth model was, and that of any country which has developed rapidly within a short period of time. Economic growth comes in stages, and you can't just project a straight trend line out from whatever you see today. The more relevant question is 'How long can China continue with its current growth model, and to what degree is the nation transitioning to its next stage of growth?'. On this note, given that China still has a long way to develop itself, the current model can probably last another decade at least.

In addition, while China remains dependent on its old export-led growth model, it is increasingly becoming a driver of global consumption in its own right. Look at the exports or surge in Chinese tourists we've seen in neighboring Asian economies for a sign of things to come. Chinese demand saved much of the Asia-Pac region during the crisis, and I believe that the recent crisis actually highlighted the fact that China's role in the global economy has changed drastically.

So, it's not that China's growth path is all roses, or that it isn't at risk of a social or economic crisis, it's just that one has to look past the old view of China has a low-cost exporter full of repressive social tension. One also has to attach a timeline to any sustainability or crisis concern. There's still a long way for China to keep repeating its past formula, and rising prosperity can keep social concerns under wraps. Korea and Taiwan didn't become democracies until recently, let's not forget, and China is still nowhere near their development stage. Anyhow, without further ado, Stratfor:

Read more: http://www.businessinsider.com/china-2010-8#ixzz0x3HcOQ4m