Dr. Adil Rasheed: China's Economic Rise and Future Prospects
- 11 November 2007
It was Napoleon Bonaparte who had presciently warned: "Let China sleep for when she awakes, she will shake the world." However, it seems the votaries of globalization have finally managed to arouse the sleeping giant at their own peril. The result is China's growing ascendance in the world's economic, scientific, militaristic, and political spheres.
After initiating reforms in 1978, China's economy has grown at close to 10% annually, according to official data. Unofficial estimates believe the figure to be higher. This growth rate has made China the fourth largest economy in the world when measured by nominal GDP, and the second largest when measured by purchasing power parity. Even by the former criteria, China is predicted to surpass Germany to take the third place in early 2008. Many economists also believe that at its present rate of growth, China would overtake the US in overall GDP terms by 2040.
In addition, China is today the world's largest exporter of information and communications technology products, which is a major factor in the country's $100 billion-plus trade surplus and nearly $200 billion trade surplus with the US. It is already the world's largest mobile-phone market, and the second-largest market for personal computers. China is also the world's top producer of steel, coal, cement, cereal, meat, and cotton. It ranks among the top ten trading nations and is the second largest destination of direct foreign investment in the world. More importantly, it is the second-largest importer of oil in the world, despite being its fifth-largest producer.
As regards its industrial production, China today produces about two-thirds of the 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 aluminum, 31 per cent of coal, about 27 per cent of steel, and about 50 percent of the world's cement. In the past twelve months alone, China has overtaken Canada as the biggest source of imports to the US, and has overtaken the US as the biggest source of imports to the European Union. The latest Forbes China's richest list has 106 US dollar billionaires, second only to the US. China's biggest company, the state-owned oil giant PetroChina, earlier this month became the largest in the world and the first to exceed $1 trillion (£480bn) in value after its shares almost trebled on their first day of trading in Shanghai. Thus, a single Chinese company suddenly enjoys a market value that is of the size of India's economy.
Undoubtedly, China's large and fast-growing economy is expected to alter global patterns of production, trade, and pricing, if not even the global political and military order. China's sensational rise on the world economic scene, however, did not take place overnight. It all began in the late 1970s, when the People's Republic of China (PRC) converted its socialist communes to individual households for family farming, and instituted banks for financing enterprises. By the late 1990s, most state enterprises had been sold to private concerns, and banks had been transformed to operate increasingly as businesses.
Therefore, China's economic boom is clearly founded in its government's responsive attitude to the needs of its economy. The Chinese government has focused on public investment that has resulted in the development of the country's infrastructure, such as good roads and highways, ports, airports, state-of-the-art telecommunication networks, public health, law and order, education, mass transportation, etc. This has undoubtedly propelled the performance of its private sector, which presently constitutes 70% of its economy. In fact, China's efficient financial system has helped its government concentrate its resources in these public investments. The country's directed-credit system channels funds from banks and postal deposits to policy-determined public projects. This system works alongside the usual profit-oriented and competitive financial system.
Another reason for China's exponential growth is the astuteness of the country's leadership in opening up the economy in a phased and studied manner, without allowing major economic fluctuations or political instability to hurt economic development. The development-oriented ideology of its leadership, its ability to be pro-active and adept at taking necessary economic measures and its effective system of collaborative policy review has been important in giving its economy the necessary impetus and direction. The government has intelligently used modern technology and systems in keeping with the requirements of their economic needs and peculiarities, which its domestic institutions can easily absorb and benefit from.
Moreover, China's economic rise has been led primarily by domestic demand. Therefore, rather than suffering from slower growth rates, like the US and Asian economies in 2002, China's GDP accelerated right through that period and is still at almost maximum overdrive. Some international parties allege that China¿s economic rise is due to unfair commercial practices, such as violation of intellectual property rights, policies affecting exchange rate levels, accumulation of foreign exchange reserves, subsidies, etc. However, the International Monetary Fund and the US Treasury Department have repeatedly expressed their satisfaction with China's compliance with global standards for fairness.
Still, several shortcomings and weaknesses challenge China's economic prospects for the future and many international scholars even believe that the country's bulging economic bubble will eventually burst. These scholars see several fault lines in China's political and economic terrain and predict that the Chinese government may be unable to cope with the burden of its own internal contradictions.
Due to the rapid pace of economic development based on capitalist principles, the Communist government of China is embarrassed to find the growing chasm between the rich and the poor, the booming industrial and the faltering agricultural sector, and the developing urban and declining rural regions of the country. The government admits that just as farmers remain poor, the number of low-income city dwellers is also on the rise and manufacturers are restrained by limited investment in products that meet the market demand.
Several economists also see the possibility of a sudden collapse of China¿s financial sector because of non-performing loans and the slow-paced liberalization of the sector in market directions. Growing cases of corruption, lack of transparency in banking and other corporate sectors, economic crimes etc. also pose a major challenge to the Chinese economy.
The central government is also reportedly finding it difficult to discipline the actions of local governments. Local officials have been found to promote their interests by pushing for high investment rates and output levels. The central government is concerned about the adverse consequences of such actions, which it fears could lead to excessive investments, unsold inventories, and local policies that risk nationwide price inflation.
Finally, Chinese rapid rate of growth may itself prove to be a cause of its undoing, say many economic experts. The Chinese government has been mindful of the threat of "overheating" of the economy and its officials have been warning of introducing measures to curb "investment bubbles," overcapacity, inflation, and unsustainably high-energy consumption.
Thus, China faces a herculean task of steering its economic juggernaut in the right direction. Moreover, the increasing dependence of the world economy on continued expansion of the Chinese investment boom means that if the Chinese economy runs into trouble it could create significant problems for the world economy as well. Therefore, there is a lot riding on the proverbial Chinese dragon, as it scales new and giddy heights of economic growth and success.
