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Significance of China's economy to global growth
IT SHOULD come as no surprise that China is a dominant player in the world economy today. A huge economy that has maintained a consistent record of over 9 per cent annual growth for over two decades will naturally emerge as a major player. It is expected to sustain an annual growth of 7-8 per cent for another decade. And rational, profit-seeking international companies which have contributed to much of this growth continue to invest in China even though it continues to be among the top in corruption and among the lowest in rankings of economic freedom!
When one looks at the numbers, the progressive dominance of China is amazing. Recent issues of The Economist and Fortune magazines provide us with several fascinating quantitative details.
China's title as the factory of the world is not to be taken lightly. It produces about two-thirds of photocopiers, microwave ovens, DVD players and shoes in the world, half the apparel and digital cameras; about one-third the mobile phones; and about two-fifths of the personal computers. To keep its economy growing, it accounts for about 20 per cent of world consumption of copper, 19 per cent of aluminium, 31 per cent of coal, and about 27 per cent of steel.
A strategy that the country has adopted to spread the prosperity to the hinterland is that of urbanisation,[link widoczny dla zalogowanych]. Population will move away from land into the cities and smaller towns will grow into big cities. This will reduce number of people and land available for agricultural production.
With about 21 per cent of the world population, China accounts for about 51 per cent of world consumption of pork, 32 per cent of fish,[link widoczny dla zalogowanych], 33 per cent of rice, and 20 per cent of poultry. As the country shifts focus further away from agriculture to industrial development, a lot of agricultural commodity-producing nations around the world are going to benefit from rising Chinese consumption.
China has benefited most significantly from its partnership with the US. From the time of Nixon's visit to China in 1972,[link widoczny dla zalogowanych], the US has followed a policy of `engaging' China and bringing it into the gambit of the world,[link widoczny dla zalogowanych], rather than following one of isolation, which has not worked even for a small nation such as Cuba.
US policies have looked upon investment into China favourably, and US companies have been one of the largest investors in the Chinese economy. Now China and the US together accounted for almost half the growth that occurred in the global economy over the last year.
Textbooks on economic growth and development tell us that developing countries export agricultural commodities in significant quantities as they import industrial goods and sophisticated technology products to fuel their efforts towards development. China seems to have turned this logic on its head. The top Chinese export to the US last year was computer components and the top import from the US was soybeans.
The Chinese leadership must be particularly complimented for its ability to consistently follow a common vision without every change in government overhauling priorities. The launch of economic reforms by Deng Xiaoping in 1980, was followed by Mr Jiang Zemin, and is being continued now by Mr Hu Jintao.
Stability at the helm has played a great part in maintaining the speed and consistency of its transformation. It would be easy to ascribe this to the dominance of the Communist Party, and the autocracy that it maintains. That would be missing the point. The world is full of dictators even today who have failed to deliver any hope to their people.
The Chinese have followed a process of increasing regulation in some areas and de-regulation in other areas very carefully. They were neither swayed by the experts from international institutions (such asl the Russians were to their dismay) nor,[link widoczny dla zalogowanych], I suppose, did they read too many western economics textbooks. They have truly followed reform with their own nationalistic interests primarily guiding them. The Chinese leadership has global ambitions and they have taken care to invest in world-class infrastructure facilities such as roads and ports to make it happen.
Each deficiency in the Chinese system taken on its own would be quickly dismissed by experts as being harmful for attracting foreign investment. Yet,[link widoczny dla zalogowanych], compared to other nations,[link widoczny dla zalogowanych], the inward flow continues to be a flood. For example, China has a poor record of protecting intellectual property, yet this has not prevented manufacturers bringing in sophisticated technologies. China actively encourages the locals to learn from its foreign partners.
Many of the investors, reconciled to seeing their local partner emerge as a competitor in the not-too-distant future,[link widoczny dla zalogowanych], yet feel it is worth entering the market even for short-term benefit and stay for the long term. Reports suggest that some foreign partners have taken to preventing all Chinese employees from their maintenance area when they take the machines down and dismantle them for maintenance. A feeble attempt, indeed, at protecting their technology from prying eyes.
Textbooks warn about careful selection of partners in a joint venture. Yet, in China,[link widoczny dla zalogowanych], the same Chinese company may have joint ventures with competing foreign companies. This is true,[link widoczny dla zalogowanych], for example, in automobiles where the Chinese company,[link widoczny dla zalogowanych], Shanghai Automotive Industry Corp. has joint ventures with both Volkswagen and General Motors in two different ventures. Of course, the strong growth of automotive demand keeps rivalry low at present, but the situation will change when growth slows.
China still follows policies of requiring foreign investors take on local partners who hold the majority equity in several sectors, often quoted by experts as inhibiting investment in a country. Yet, this has not prevented entry. Initially, companies came in saying that they see China as a source of low-cost manufacturing, now they continue coming in saying China is a major consuming market.
China is rethinking some of its policies. One is the pegged exchange rate of 8.28 yuan to the US dollar. This has provided stability, which more than anything is greatly welcomed by businesses for their long-term business decisions. This will not last and several US politicians have been complaining about its unfair effect on the US-China trade balance.
Estimates suggest that the yuan is between 15 and 40 per cent undervalued. It also exacerbates the outsourcing phenomenon and costs US jobs,[link widoczny dla zalogowanych]. It is not healthy for China either for it misallocates resources. How long will it continue is anybody's guess and some wonder if China will have the courage to change it before Beijing Olympics (2008),[link widoczny dla zalogowanych]. China's major concern now is to assuage the world population not to fear its economic dominance.
While on the one hand the rhetoric warning Taiwan not to fall out of line and tightening of control over Hong Kong continues, the Chinese leadership also point out how the needs of its growth makes it run a deficit in trade with most of its neighbours. Even the Japanese economy has benefited through having the Chinese yank them out of the stagnation they were mired in.
China's continued growth will necessarily mean that all nations of the world need a "China strategy". As China slowly moves into its assured slot of another super power, a slot that was vacated by the Soviet Union, countries will have to re-align their foreign policies on how to deal with China.
The nation that will have the most difficulty in making this re-assessment will be the country that was primarily responsible to launch and help China on its path, namely the US. China is already the second largest economy of the world based on purchasing power parity rates, yet the developed west hesitates to include it as part of the G-7 group.
Error: In the "American Periscope" column titled "Do ethical violations deserve crime status?" (Business Line, October 4),[link widoczny dla zalogowanych], I referred to the case against Mr Quattrone that he was initially charged with the practice known as `spinning' and that he sent an e-mail to subordinates to delete certain files. A member of his defence team pointed out to me that these were incorrect and that (a) he was only charged with and convicted of obstruction of justice,[link widoczny dla zalogowanych], and (b) he forwarded and endorsed a subordinate's e-mail. The case is still active and it is important to place these corrections on record.
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