Is Chinese growth sustainable or is it just another “flash in the pan” display of spectacular growth with shaky fundamentals? So far the rest of the world has taken it for granted that China´s export advance is inevitable and so has offered no resistance. However, the law of physics says that for every action there will be a reaction.

It is not the first time that an Asian country has dazzled the world only to fizzle out. Take the Japanese miracle in the 1970´s. This turned out to be the result of a centrally directed economy (MITI), life-time employment and Tokyo real estate speculation which eventually caused the crash of the banking system and of the stock market index from 40.00 points to 7.500 points. It was left to Taiwan and other neighbors to finish off Japan´s growth period. 

Is China another Japan?

If we look at the performance of the Shanghai stock index, there is an uncanny likeness. Private savers and institutional investors have seen chicken tracks in this under-regulated market.

A huge experiment is under way, which is to find how far authoritarian or centralized planned growth can go before it breaks down under its own weight for lack of a democratic structure or private participation (which itself involves relaxing the iron fist). Virtually all previous attempts have peaked out and then failed. Vale mining company says that Chinese demand and growth is not cyclical nor a bubble, but is structural, which indicates that it believes that sustainable growth is possible under the present political structure. That is not what the stock market (Vale´s share price is at about the same level as last year) says about Vale´s considerable sales skew towards China. 

A SWOT analysis on China (Strengths, Weaknesses, Opportunities and Threats) reveals that its main strength is in the form of a cheap hardworking labor force but it is a rapidly aging workforce. The main weakness is that China´s one-child-only policy means that China´s present 100 million over sixties will rise to almost 350 million. Also there is even cheaper low skilled labor in the region (Vietnam and India). 

The opportunities exist in the form of a large internal market once the rest of the world runs out of demand for cheap low level goods. China´s very success is the root of one of its main weaknesses. Growth brings affluence and affluent citizens want more than just a subsidence. 

The problem with the internal market is that per capita income is not going anywhere, at 109th in the world; the government´s whole emphasis is on re-investment and not internal consumption. At some point, Maslow´s hierarchy of needs will kick in, even if it takes a generation to see it. Most Chinese are in the bottom two tiers. How will the government handle this transition period to tiers four and five and, more importantly, will there even be a transition period? 

China has a massive infrastructure investment program which may underpin sustainable growth but it is already suffering cost inflation as it gulps down raw materials, commodities and steel as if they were infinite. This is clearly not sustainable and the choice between inflation versus growth problem has faced all emerging countries, including Brazil, opting for 10% annual growth based on export markets. 

Where will the reaction from other countries come from? The United States, which had a trade deficit of $ 232.5 billion last year, has said that China's currency controls amount to unfair, predatory trade practices. Critics charge that by keeping the Yuan undervalued, some say by as much as 40 percent, China makes its exports cheaper, creating an unfair price advantage that fuels its trade surplus. However, the USA has not yet adopted a hard-line with China, although the US Senate passed a bill that would make it easier to label China as a currency manipulator. In the meantime, the neglect of the value of the US dollar has temporarily relieved the tension.

China´s main threat comes from the environment; polluted air, rivers and lakes, all of which mean a drag of about 10% of the economy. The dilemma is clear in the rush to become self-sufficient in wheat and other crops despite the negative impact on the water supply from the irrigation its wheat fields. It is possible that China is using an old strategy: first of all create critical mass and then manage the problems. This does not work with environment which requires an immediate trade off: a slower growth.

This brief SWOT analysis shows that is difficult to identify any external threats to China except maybe for collective competition from all its low-income neighbors for overseas markets, to the detriments of Chinese exports. 

Traditional Chinese patience is completely absent. China is in a hurry to fulfill its economic destiny. The massive long-term potential of its internal market allows it to sustain any industry it may choose. 

The car industry is now in its sights (The super fuel efficient Chery is about to be exported to Brazil from Uruguay) and the government has already announced its intention to start a commercial aircraft industry which could be justified purely in function of its own internal market. The reaction from Boeing was that they think it is natural for China to produce planes for its own market. China is so large and well focused that it can dominate both any external consumer market it wishes to while at the same time selectively rationing out access to its domestic markets for foreign investors on Chinese terms. 

Concluding, China may suffer some form of setback in the form of economic indigestion. This would give a temporary chicken flight syndrome appearance and like the bird-flu last year, will not last for long. The main challenges are much more complex and involve China´s ability to handle the problems arising from its own impatient success. As they say, consequences always come afterwards and never before.