I posted no new blogs last week while I was in Beijing.  Not because I was too busy, or because there was nothing to say.  It was because the internet connection I was using in China blocked all access to wordpress. com, on which I write my blog.  It also blocked all searches using the words “china,” “Beijing,” “university” and so on.  It was a relatively restricted server, obviously, and there were ways to get around it (you could search for things on google.de — google deutscheland — that were blocked on google hong kong or google. UK; I guess the Chinese government does not have as many blog-blockers working in German as in English), but they were cumbersome and the connection could just break down unexpectedly.  So it was easier to wait until I returned home.

How are things in China?   China is still booming, relative to other countries, but it is running short of steam compared to where it was in the last decade.  First, it is crucial to recall that despite the newfound wealth of China’s capital and coastal cities and few industrial centers (Tianjin, Chongqing, Chengdu, Wuhan),  China remains a poor country.  Yes, its total GDP is now over seven trillion dollars per year, about half that of the U.S.   Spread across 1.3 billion people, that is a per-person output of $5,500 each.   But what is missing from that average is the fact that yawning inequality is now the number one preoccupation in China.  Some 300 million people in the major cities have incomes that are much higher, averaging perhaps $1o,000 per year.  That is the official figure,  but in fact doesn’t make much sense in terms of the urban consumption that is on view.  Some estimate that the ‘grey market’ of unreported income nearly doubles that figure, and that would make more sense.  It is hard to reconcile the obvious consumption of expensive housing, cars, and consumer goods with incomes of $10,000 per year.

According to local papers in Beijing, nicer apartments cost $3,000 to $5,000 per month.  Yet a typical senior professor’s salary is less than $20,000 per year.    According to a story in the China Daily this week, China’s glut of college graduates — facing an economy that needs technical workers and skilled blue-collar craftsmen, not white-collar workers — is driving down wages for new graduates: “The average monthly starting salary of Chinese university students who graduated in 2011 was 2,700 yuan ($432), and nearly 70 percent of them earned a starting salary less than 2,000 yuan ($320), according to a recent report by Tsinghua University.”  Blue-collar technical workers actually are doing better, with salaries of $470 to $790 per month at major international firms.  Still, it’s hard to understand how apartments get over-subscribed at $1,000 per month, or cars and nice clothes are sold to people earning on average under $10,000 per year.

I heard from one scholar that the situation in China’s cities is similar to that which prevailed in the Imperial era, when scholar-officials were paid low official salaries but were expected to augment their earnings by using their positions.  This was not corruption — not officially — but just a way of keeping down the official costs of government while relying on the judgement of local officials to manage their community’s (and their own) finances.  Was this system prone to abuse?  Of course!  But everyone was in on it, and expectations were built around it.  So in China, University professors teach private classes, executive education, and do consulting on weekends and evenings which pays more than their official salaries.  Other workers do the same whenever they can.  So I estimate that the real income of China’s urban population in leading centers may be closer to $20,000 per person per year.  That is good, but leaves less for the remaining  Chinese. The real losers are ordinary workers, farmers, and others without leverage.  According to the Population Reference Bureau, one-third of China’s population still lives on less than $2 per day.

So the idea that China will suddenly become a billion-plus middle class consumers remains far fetched.  China is becoming two countries:  the few hundred million who live in the cities with factories that still produce for the global export market, and who either work in those factories or provide services for the urban population that owns and works in those factories, and the billion who produce mainly for themselves and the Chinese masses, churning out food and low-end basic consumer goods at rock-bottom prices.

What this inequality underlines (aside from growing rural and lower-class resentment, shown in the hundreds of local protests that arise over land and tax disputes ever month), is China’s still-strong dependence on exports.  It is exports that fuel the factories that pay decent wages and create an urban capitalist, professional, and working class that can afford the clothing, cars, apartments, travel, and homes that make up China’s expanding consumption.  So when exports decline sharply, as they did in 2009 and are doing again in 2012 as Europe double-dips, Brazil and India slow, and the US fails to recover, all of China is affected.  The country can not simply shift to domestic consumption to make up the slack.

In 2009, the government kept the economy rolling by massive investments in infrastructure, using the vast surplus it had built up through years of exports far exceeding imports.  But that strategy appears to have run its course.  Most reasonable investments have been exhausted, and the speculative boom in property is cooling off.  In addition, as China now must import oil, ore, and food in greater and greater volumes, its huge export surpluses are shrinking.

I asked local experts which outcome seemed more likely for China:  Soft landing, hard landing, or disaster.   Most felt that disaster could be avoided, as the leadership of China has been tough, smart, and is aware of the challenge; they can print remimbi, manipulate exchange rates, and stoke investment through state-owned banks as necessary to keep the economy running.

But at the same time, it is clear that the ‘miracle years’ during which China sustained 10% annual growth by building an ever-bigger export machine to feed the ravenous consumption of Europe and America are over.   That may be OK — China’s population growth rate is slowing down, so 7-8% annual growth for the next few years will still fuel rapid per capita gains in income; and in fact population will slow so much that even 5-6% growth would be great to sustain after 2020.  But the soft-landing scenario is now the best that can be hoped for.  If Europe has a major crash due to problems with Med-zone debtors, and that drags the U.S. back into recession, the hard-landing in China will become inevitable.

So while I was in China, German Chancellor Angela Merkel was also in Beijing, seeking promises for continued support for the Euro and doing deals for German exports (including a multi-billion deal for Chinese airlines to purchase planes from Airbus).  China is deeply invested in Europe’s recovery, and was urging Germany to do all it could to promote renewed European growth.  Unfortunately, their largesse to Germany will likely have the opposite effect, assuring Germany of its own virtue, and strengthening Germany’s resolve to demand austerity and fiscal rectitude from its wayward Eurozone brethren.

The fate of the world economy will likely be determined this Fall, when Europe has to resolve the debt crises in Greece and Spain and put Italy and other fiscal problem countries on a sound footing.   They had better succeed, or the repercussions will be truly global.  China and other developing countries will not be able to drag the world economy forward if Europe goes down; rather the growth of emerging markets has been structured to depend on globalization and exports so that if Europe goes down, emerging markets will go down with it.