When China Rules the World (28 page)

As a result of the systematic lowering of tariffs, one of the singular features of the Chinese economy is its huge exposure to foreign trade, which accounts for around 75 per cent of GDP, far in excess of other major economies like the United States, India, Japan and Brazil, where the figure is 30 per cent or less.
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Such exposure makes China that much more significant in the global economy; it also leaves the country more vulnerable to external shocks such as a global downturn, a US recession or growing protectionist sentiment in the West.

China is in the midst of what Marx described - writing of the British Industrial Revolution - as primitive accumulation, or what we now know as economic take-off: the process in which the majority of the working population moves from the land to industry, from the countryside to the cities. Between 1952 and 2003, agriculture’s share of GDP fell from 60 per cent to 16 per cent and its share of employment from 83 per cent to 51 per cent.
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Although it took China only 10 years to double its per capita output (1977-87) - a measure of the speed of economic take-off - compared with 58 years for the UK, 47 for the US and 11 for South Korea, after three decades of economic growth averaging 9.5 per cent,
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around half the people still work on the land. It is estimated that even 20 years hence around 20 per cent of the population will still live in the countryside.
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A crucial consequence of this relatively ‘limitless’ supply of rural labour is that wages for unskilled work will remain depressed for several decades to come: in other words, for much longer than was the case with the earlier Asian tigers.
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This does not mean that wages in the more developed regions like Guangdong will remain low: on the contrary, as we have seen, they have already risen considerably.
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But in the poor, still largely rural, interior provinces they will continue to be much lower, which is the reason why low-end manufacturing is steadily relocating there. The rapid growth of the Chinese economy since 1978 has largely been a function of the extremely high rate of investment, in the region of 40 per cent of GDP for many years, presently edging closer to 45 per cent, and soon to approach 50 per cent.
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Such an extremely high rate of investment has been possible because of the similarly high rate of domestic savings, running at around 40 per cent of GDP, which, together with inward investment, has provided the main funds for China’s take-off. In 2001 the average Chinese household saved 25.3 per cent of its disposable income, compared with 6.4 per cent in the US in 2002. The huge savings made by Chinese families have played a key role in funding the country’s rise (see Figure 11).
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It is instructive to compare the experiences of China and Russia because both were confronted with the problem of how to move from a command to a market economy. Russia relied on the preferred Western prescription of shock therapy, which in the nineties led to hyper-inflation, large-scale capital flight, currency collapse and default on foreign debt. In contrast China, by pursuing a more gradualist approach, avoided hyper-inflation, the government remained internationally creditworthy and there was no capital flight. While in Russia the state sector was sold off at knock-down prices to assorted cronies, the state sector in China, rather than being subject to wholesale privatization, was contracted by a slow process of attrition. In
Forbes Magazine
’s listing of the world’s 100 richest billionaires in 2007, thirteen were in Russia and none in China. In 1990, China’s GDP was less than twice as big as Russia’s; by 2003 it was more than six times as large. The subsequent rebound in the Russian economy, prior to the global downturn, was largely a result of the increase in the price of its oil and gas exports. The Chinese leadership has displayed great patience and considerable competence at tackling a succession of difficult and elusive problems. At the end of the nineties, for example, the government was faced with three extremely difficult domestic issues: closing a very large number of loss-making state enterprises; overhauling the state banks, which were saddled with a large and rising proportion of non-performing loans, mainly to indebted state enterprises; and strengthening the weak fiscal position of central government. A decade later, the government is well on the way to overcoming these problems, having greatly reduced the problem of indebted state enterprises, transformed the condition of the banking system and improved its own finances.
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Given its scale and speed, China’s economic transformation is surely the most extraordinary in human history, notwithstanding the sheer novelty of Britain’s as the first. The government’s economic strategy, shrewd and far-sighted, has been very successful,
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resulting in stellar economic growth and a rise in per capita income from $339 in 1990 to over $1,000 in 2003, with the not unrealistic aim that this will be doubled within ten years.
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Economic growth is no longer confined to a few ‘islands’ but has spread out in waves to most provinces of China, albeit in sharply varying degrees. In a remarkably short space of time, China has become the centre of global manufacturing. ‘Made in China’ has become synonymous with a host of mass-produced consumer products throughout the world. It produces two-thirds of the world’s photocopiers, shoes, toys and microwave ovens; half its DVD players, digital cameras and textiles; one-third of its DVD-ROM drives and desktop computers; and a quarter of its mobiles, television sets, PDAs and car stereos.
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The country has borne witness to the greatest poverty-reduction programme ever seen, with the number of people living in poverty falling from 250 million at the start of the reform process in 1978 to 80 million by the end of 1993 and 29.27 million in 2001, thereby accounting for three-quarters of global poverty reduction during this period.
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Although foreign multinationals dominate the country’s exports, home-grown Chinese firms like Haier, Konka, TCL, Huawei and Galanz have done well in such sectors as domestic appliances, television and telecommunications. Encouraged by the ‘Go Global’ campaign initiated by the government, the larger Chinese firms have begun to invest abroad and establish overseas subsidiaries.
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China has made astounding economic progress, but its transformation is far from complete. It remains a work in progress. Although it is already the world’s second largest economy in terms of GDP (measured by purchasing power parity), this is primarily a consequence of population size rather than economic sophistication. Can China fulfil its enormous potential and become an economic superpower?

At the centre of any discussion about China’s future role in the world - let alone talk of a Chinese century - lies the country’s economic prospects. A commitment to a growth rate of around 10 per cent remains fundamental to the government’s strategy. China needs to create 8 million jobs a year for its expanding urban population, plus another 15 million or so for the new rural migrants who seek urban employment every year.
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Rapid economic growth will therefore remain at the heart of government strategy, with any serious and sustained drop below 8 per cent carrying the threat of serious social unrest. But, after a quarter-century, can this kind of growth rate be sustained? What are the limits to China’s present growth path? Could its present strategy go badly wrong? And, crucially, what will be the impact of the global contraction that has transformed the short-term outlook for China?

The basic global competitiveness of the Chinese economy - the remarkable performance of its exports, which have driven economic growth and made the country such an attractive destination for foreign investment - will persist for many years to come because the condition on which it rests, the huge migration of rural labour into the cities, is destined to continue for several decades. Even if labour costs rise, as is already happening in the coastal regions and the Shanghai area, the inland provinces, fuelled by migrant rural labour, will help to contain inflationary pressures.
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China’s present economic path, thus, can potentially be sustained, at least in its broadest outlines, subject to significant reform, for at least the next five to ten years, perhaps longer.
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But there are no guarantees. Yu Yongding, one of China’s top economists, suggested in an interview in 2006 that there was a 30 per cent chance of things going seriously wrong.
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The economy, given its high degree of exposure to trade, is very sensitive to exogenous developments. The global recession will be a major test of the extent to which the Chinese economy can maintain rapid economic growth in a situation where it can no longer depend to the same extent on Western export markets - prior to the global crisis, the European Union accounted for around 22 per cent of Chinese exports and the United States 18 per cent.
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In the context of the gathering recession, China’s economic growth rate is estimated to have been 9 per cent in 2008 and is projected to fall to 6-8 per cent in 2009, from 12 per cent in 2006 and 2007, and an average of well over 10 per cent since 2002. The government is seeking to compensate for falling Western demand by encouraging domestic consumption, which accounts for around one-third of total output, and engaging in large-scale public expenditure, mainly on infrastructure, education and health. The government is fortunate in enjoying very strong finances and is therefore in a position to lavish considerable resources on stimulating the economy. The contrast, here, between the debt-laden, cash-impoverished, low-growth Western economies and the cash-rich, fast-growth, surplus-generating Chinese economy could hardly be greater, not to mention the fact that while the Western financial sector is effectively bankrupt, that of China is deposit-rich. This notwithstanding, the problems facing the Chinese economy are severe. In early 2009, it was estimated that 20 million migrant workers had already lost their jobs, with the prospects for those many millions planning to leave the countryside in search of work in the cities bleak. It is possible that the government’s efforts to compensate for the drastic fall in exports and declining foreign investment by increased public spending on infrastructure and social services, together with increased consumer expenditure, will ameliorate the effects of the downturn. Much will depend on the gravity of the recession in the West. If it results in a major contraction in the size of their economies, as seems possible, and if the recession persists for several years, the consequences for the Chinese economy are likely to be severe, with growth rates falling below 6-7 per cent, and perhaps even lower. In such circumstances, the government might face rising social unrest as unemployment escalates. The most benign scenario is one in which the Western recession is not too deep and relatively short-lived, and the Chinese government’s counter-measures are relatively effective. The most pessimistic scenario is one in which the Western recession bears strong echoes of the slump in the 1930s, both deep and protracted, the US resorts to protectionist measures against China and the Chinese government’s compensatory policies simply cannot cope with the collapse of its exports and inward foreign investment; such an outcome could presage social instability and might weaken the government’s own position.