Home >> East Asia >> China, Hong Kong & Taiwan

     Email   Print 

China: Emerging Global Economic Player

Panna Lal Chowdhury - 4/5/2005

The People's Republic of China adopted an open door economic policy starting from 1978. Its centrally controlled and inefficient economy was replaced gradually with a market oriented economy. This historic initiative resulted in impressive economic and social developments for China. During the 1980s, China's GDP growth rate recorded a sharp increase and was second only to that of South Korea. In the 1990's, China experienced highest economic growth rate in the Asia-Pacific region. China now enjoying record inflow of foreign investment, the highest in the world. For the current decade China is the fastest growing economy of the world. China has become the third largest trading nation in the world and is projected to be the biggest trading nation by 2020.

The positive economic performance of China is exceptional and as such need a careful analysis to see what factors are contributing to this success and also how far it is going to impact the global economy. Is there any possibility that the growing economic weight of China may supersede the big economic players like US, Europe and others in future?

Economists from both developed and developing countries are of the opinion that, the opening-up and growth of the Chinese economy are having a profound impact on the global economy. Sir Nicholas Stern, second permanent secretary of the British Treasury, said it is plausible that global gross domestic product (GDP) and trade may both have entered recession in recent years without China's positive contribution to growth.

Stern, former chief economist and senior Vice President of the World Bank, said as China's economy has increased in size and openness, its influence over the global economy has grown. In each of the three years preceding 2003, China's contribution to global GDP growth in purchasing power parity (PPP) exceeded that of the entire seven industrialized nations put together. He said China's reemergence as a big economic player is a positive development to the outside world insofar as it promotes global economic development.

China's rapid economic growth initially started due to dramatic increases in the effective labor supply and effective capital stock supported by efficient macro-economic management. As China gradually opened up its economy, foreign investments found its right place contributing to the modernization of China's manufacturing industries through import of new technologies. China has also helped the world industrial structure, as 70 percent of foreign direct investment in China is invested in manufacturing.

In terms of development China has set a good example for many developing countries. There has been a creative initiative to channel foreign investments toward manufacturing industries in priority areas involving new technologies, industries with high capitalistic intensity and also export-oriented industries. The government encouraged these industries with fiscal and tariff support. Currently the subsidiaries of foreign firms accounted for half of Chinese exports. The gross domestic product of China registered an increase of 9.5 percent in 2004 over the past year. The Chinese national economy continues to maintain a stable and relatively-fast growth trend and is still going to witness another year of a relatively quick development during 2005.

Typically, per-capita net income of rural residents rose 6.8 percent last year, the strongest growth in the past seven years since 1997. Per-capita disposable income of urban residents shows a net rise of 7.7 percent. The Chinese government helped increase farmers' incomes, which rose by around 11 percent in the last year.

James Morris, executive director of World Food Program (WFP) confirmed that; China's achievements in alleviating rural poverty are a "great miracle" of the 20th century. China recorded an increase of annualized 11.5 percent in its overall added industrial value last year which is the biggest contributor to its economic expansion. Major industrial enterprises or firms whose annual sales revenues exceeding 5 million yuan (609,000 dollars) registered a 16.7 percent rise in its added value in the past year.

Consumer spending remained stable but showed invigorating signs in China last year, with the combined retail sales volume growing 13.3 percent year on year in 2004. It climbed 10.2 percent after deducting price hikes. The trend of growth during 2005 will be influenced by the positive changes in consumer demand pattern and improved infrastructure scenario. Chinese economy is now right on the track of a smooth development for industrialization and urbanization, resulting in speedy upgrade of consumption structure. The consumption pattern of the people is now in the transition from a simple eating, clothing and spending as main consumption to that with housing as a major objective. This change in demand pattern will help to expand the productivity and market based economy.

Next is the infrastructure scenario in general. The shortage of power supply in some important areas is gradually removed, thereby realizing a further emancipation of the productive forces in these areas. There is adjustment of investment and resource structure for eliminating the contradiction caused by the restriction of resources. Transformations of the state-owned enterprises are being intensified. All these will also help constitute a supporting factor for a speedy economic growth.

It is expected that the consumer price index may fluctuate within a range of 4 percent this year. However, the foodstuff price is expected to remain relatively stable. The factors that are most likely to affect the rise of prices are the following three: the price of means of production, the price for services which include prices for water, electricity and transportation and the third is the price of real estate. If the prices of these three elements rise simultaneously or one of them rises drastically it is possible to push up quickly the other consumption prices. The macro-control management is expected to remain alert to such developments.

The Observers are of the opinion that the biggest uncertain factor in the operation of Chinese economy this year is mainly the trend of the world economy, the tendency and level in the change of oil prices and the stability of the US dollars. The developments involving these three aspects are the factors that may be difficult to control.

The year of 2004 witnessed the best economic situation in the world compared to its preceding years. There was recovery in the US, Japan and Europe, which served a positive influence on China's economy, especially in its foreign trade and also the national economic situation as a whole. The year 2005, is still expected to continue with such stable scenario in world economy but the growth rate is possible to be somewhat slower than that of last year and the important uncertain factor still remains the huge deficit in US trade and finance and also the behavior of US dollar. The mighty US dollar is passing through a drastic devaluation, the big fluctuation in its exchange rate impacting the stability of the world economy. Next is the instability of the oil price. With the expansion of its economy China needs a year to year increase in its oil imports. As such there is no way to underestimate the negative impact of oil price rise, which may affect the Chinese economy. The People's Bank of China, the country's central bank, raised interest rates by 0.27 percentage points at the end of October 2004, the first increase in nearly a decade, to help curb inflation, which was 5 percent during that period.

The Chinese currency yuan is still pegged to US dollar and not floated in the market. The current
pegged value of yuan is 8.3 to a US dollar which is considered to be too low. The yuan has been fixed or "pegged" in a narrow range against the US dollar since 1994. Over the last year as the US dollar has weakened against the euro and other currencies, the Yuan has followed suit, making Chinese exports even more competitive, particularly in European and Japanese markets.

In view of this there is a chorus of calls in Europe, Japan and from sections of the US manufacturing industry for a revaluation of the yuan. Because it is argued that China's "undervalued currency" and cheap goods are creating a host of economic ills-from the prolonged recession in Japan to the problems of manufacturers in Europe and the US. However, there are counter opinions from the analysts saying that these arguments are not fully correct.

China has been the target of a growing international campaign calling for the revaluation of its currency. But so far Chinese authorities have resisted pressure to revalue the yuan, saying that a higher exchange rate would slow foreign investment and exports. Any economic slowdown is likely to rebound on the government as China's high levels of unemployment would lead to greater social unrest. Chinese authorities have made it very clear that setting up a sound financial framework is of utmost importance and this priority stands ahead of setting a free floating mechanism for its currency yuan. However, all these must be done in sequence, as it can be very risky to open the door too wide overnight.

In order to maintain the peg within the narrow band between 8.276 and 8.28 to the US dollar, China's central People's Bank has been compelled to engage in huge purchases of dollar-based assets over the last decade to offset China's substantial trade surplus with the US. Over the last year, the process has been accelerated. As a result, China is second only to Japan in its holdings of US Treasury bonds. In other words, the world's largest economy, the US, is heavily dependent on a continuing inflow of capital from China.

US Fed chairman Alan Greenspan once noted that the current level of the yuan required the Chinese government "to be very heavy purchasers of US dollar-dominated assets". He warned that such a situation could not last indefinitely as it will inevitably create instability in the Chinese monetary system which has a number of problems.

An editorial in the Asian Wall Street Journal once commented on the US China financial relationship: "You might even say that China is an economic colony of the US, with its currency so tightly pegged to the dollar and American companies using it as a base for their low-cost manufacturing. That might seem like a strange idea. For the coming year, economists say, challenges such as overinvestment and possible inflation remain in China. The Producer Price Index, a measure of cost of goods when they leave the factory, is now still high, adding to inflationary pressure. The Ministry of Finance noted recently China's fiscal policy along with its monetary policies and confirmed that these would be changed from "proactive" to "prudent.

Treasury bonds that have for years supported the development of roads, power plants and other
facilities will be on the decrease. The monetary policy committee also reiterated the central bank's pledge to improve the yuan exchange rate mechanism. The central bank said that in general the current financial situation is stable. It said that the central government's macro-economic controls have achieved obvious results but fixed asset investment can still rebound. The central bank has already implemented a number of policy measures to restrain fixed asset investment, which it fears has threatened overheating in some sectors of the economy. It has
directed bank lending in areas besides real estate, autos and steel and more recently has effectively raised the mortgage lending rate.

The central bank said it would use various monetary tools to adjust liquidity in the banking system, guide banks to improve their credit structure. The central bank also repeated its pledge to gradually push forward market-oriented interest rate reforms. The central bank grants commercial banks some flexibility in setting lending rates but it determines all of their deposit rates.

The World Bank is of opinion that China must overcome 3 major challenges to become world's top economy. A senior World Bank official said that China is now facing the challenges of changing its economic growth mode, maintaining rapid and sustainable economic growth and managing its growing inequality in order to become the world's top economy by 2030 or 2040.

Addressing the China Development Forum 2005, Shengman Zhang, managing director of the World Bank, said China has to transform its current economic growth mode, which is characterized by low efficiency and excessive consumption of resources and energy, to an efficient one, not simply relying on high growth of investment. China must also improve its market operating efficiency and improve corporate efficiency, he said.

Zhang said China has to maintain a rapid and sustainable economic growth while controlling the growing the negative impact on its environment through improved efficiency of energy and water consumption. Compared with the energy-efficient industrialized nations, it costs China about 150 percent or 200 percent of energy as those nations to produce per-unit gross domestic product, he said.

There are also recommendations that China should move faster on financial reform, promote domestic consumption and eliminate inequality between urban and rural areas, and coastal and interior provincial areas in order to sustain its fast economic growth. Because China's economy still inherits inefficient state-owned enterprises, a shaky financial system, and inadequate infrastructure, institutions for political participation have not been developed adequately along with its economic growth. The growing inequality remains one of the major challenges in China.

China's rapid development has helped to optimize global economic structure. It is a natural topic for the economist today to assess the future position of Chinese economy, as against other major economies of the world. The Analysts are of opinion that in spite of its robust growth rate and expansion it would not be possible for China's economy to reach parity with the US economy. The US economy is presently about twice the size of Chinese economy. So with the present higher annual growth rate of China compared to US, its size of economy may be comparable with US economy sometimes after about 25 years from today. Even so, they would not be equal in composition or sophistication. China would still have a vast underdeveloped countryside and would not be equal to the US in per capita income. But the story would not end there. The GDP growth rate of any economy is not a simple arithmetic. The present robust growth rate of China will gradually slow down in the coming decades when the law of diminishing return comes into operation. As such hardly there is any possibility that Chinese economy may supersede the American economy in its composition, size, per capita income and sophistication. Same yardstick will be applicable for comparison of China with Europe and other major economies.

At the annual session of China's parliament in March 2005, Chinese leaders emphasized the need to build a harmonious society. This is because though its fast growth record has created prosperity for some, it has also created the social division and regional disparities for others at the same time. Li Yong, vice-minister of finance of China, recently said that China is willing to work with all countries to address major developmental challenges faced by the world, and contribute to the stable and equitable development of the global economy.

Looking at the history and size of China it will be proper to specify the present rise of China as its re-emergence. Historically, China was a major power in Asia and it was only in the last few centuries that it was overtaken by Europe and America. In the current century, China is emerging again as a bright star in the global economic horizon and it will definitely contribute to the balanced development of the global economy.