When China Rules the World (32 page)

Crucial to the creation of international firms is overseas direct investment. One forecast has suggested that as early as 2010 China’s outward direct investment will overtake foreign direct inward investment. It is estimated that overseas investment in 2008 was over $50 billion, a huge increase compared with 2002; official figures indicate that in 2006 60% went to Asia, 16% to Latin America, 7% each to North America and Africa, 6% to Europe and roughly 4% to Australasia.
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(See Figure 21.)

The transition from a command economy to a market economy, involving a major diminution in the role of the state, has understandably focused attention on the similarities between the Chinese economy and Western capitalist economies. It is becoming evident, however, that just as the Japanese and Korean economies have retained distinctive characteristics in comparison with the West, the same also applies to China. Given that the Chinese leadership consciously chose to follow the path of market reform, rather than having it imposed upon them by
force majeure
, as in the instance of Russia, this is not surprising. The key difference in China’s case concerns the role of the state. This should be seen as part of a much older Chinese tradition, as discussed in Chapter 4, where the state has always enjoyed a pivotal role in the economy and been universally accepted as the guardian and embodiment of society. The state in its various forms (central government, provincial government and local government) continues to play an extremely important role in the economy, notwithstanding the market reforms.

Around the time of the Asian financial crisis in the late nineties, it appeared that China was on the verge of drastically contracting the role and number of its state-owned enterprises (many of which were highly inefficient and heavily subsidized), and following the well-worn path of privatization trodden by many other countries. In fact, a decade later, a rather different picture is emerging. Certainly, the number of state-owned enterprises has been severely reduced, from 120,000 in the mid nineties to 31,750 in 2004, a process which has been accompanied by major restructuring and pruning, with tens of thousands of jobs cut.
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Rather than root-and-branch privatization, however, the government has sought to make the numerous state-owned enterprises that still remain as efficient and competitive as possible. As a result, the top 150 state-owned firms, far from being lame ducks, have instead become enormously profitable, the aggregate total of their profits reaching $150 billion in 2007. This has been part of a broader government strategy designed to create a cluster of internationally competitive Chinese companies, most of which are state-owned. Unlike the approach most countries have followed with regard to state-owned firms, which has seen them enjoying various degrees of protection, and often quasi-monopoly status, the Chinese government has instead exposed them to the fiercest competition, both amongst themselves and with foreign firms. They are also, unlike in many Western countries, allowed to raise large amounts of private capital. Of the twelve biggest initial public offerings on the Shanghai Stock Exchange in 2007, all were by state enterprises and together they accounted for 85 per cent of the total capital raised. Some of the largest have foreign stakeholders, which, despite tensions, has usually helped them to improve their performance. China’s state-owned firms can best be described as hybrids in that they combine the characteristics of both private and state enterprises.
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The leading state enterprises get help and assistance from their state benefactors but also have sufficient independence to be managed like private companies and can raise capital in the same way that they do. This hybrid approach also works in reverse: some of the largest privately owned companies, like the computer firm Lenovo and the telecommunications equipment maker Huawei, have been considerably helped by their close ties with the government, a relationship which to some extent mirrors the Japanese and Korean experience. Unlike in Japan or Korea, however, where privately owned firms overwhelmingly predominate, most of China’s best-performing companies are to be found in the state sector.
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The steel industry has been awash with private investment, but the industry leader and technologically most advanced producer is the state-owned Baosteel. Chinalco, also state-owned, has become one of the world’s largest producers of aluminium, and has designs on becoming a diversified metals multinational. Shanghai Electric is increasingly competing with Japan’s Mitsubishi and Marubeni in bidding to build new coal-fired plants in Asia. China’s two state-owned shipbuilding firms, China Shipbuilding Industry Corporation and China State Shipbuilding Corporation, are growing rapidly and starting to close the technological gap with their Korean and Japanese competitors. Chery, the state-owned car producer, with the fifth largest market share, has proved an extremely agile competitor and, given its limited resources, technologically ambitious and innovative. For the most part, it is these state-owned enterprises which are increasingly competing on the global stage with Western and Japanese companies.

The emergent Chinese model bears witness to a new kind of capitalism where the state is hyperactive and omnipresent in a range of different ways and forms: in providing assistance to private firms, in a galaxy of state-owned enterprises, in managing the process by which the renminbi slowly evolves towards fully convertible status and, above all, in being the architect of an economic strategy which has driven China’s economic transformation. China’s success suggests that the Chinese model of the state is destined to exercise a powerful global influence, especially in the developing world, and thereby transform the terms of future economic debate. The collapse of the Anglo-American model in the wake of the credit crunch will make the Chinese model even more pertinent to many countries.

The combination of a huge population and an extremely high economic growth rate is providing the world with a completely new kind of experience: China is, quite literally, changing the world before our very eyes, taking it into completely uncharted territory. Such is the enormity of this shift and its impact on the world that one might talk of modern economic history being divided into BC and AC - Before China and After China - with 1978 being the great watershed. In this section I will concentrate on the economic implications of China’s size.

When the United States began its take-off in 1870, its population was 40 million. By 1913 it had reached 98 million. Japan’s population numbered 84 million at the start of its post-war growth in 1950 and 109 million by the end in 1973. In contrast, China’s population was 963 million in 1978 when its take-off started in earnest: that is, twenty-four times that of the United States in 1870 and 11.5 times that of Japan in 1950. It is estimated that by the projected end of its take-off period in 2020, China’s population will be at least 1.4 billion: that is, fourteen times that of the United States in 1913 and thirteen times that of Japan in 1973. If we broaden this picture, India had a population of 839 million in 1990 when it started its major take-off, nearly twenty-one times that of the United States in 1870 and ten times that of Japan in 1950.
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Total population is only one aspect of the effect of China’s scale. The second is the size of its labour force. Although China’s population presently accounts for 21 per cent of the world’s total, the proportion of the global labour force that it represents is, at 25 per cent, slightly higher. In 1978, when the great majority of its people worked on the land, China only had 118 million non-agricultural labourers. In 2002 that figure had already increased to 369 million, compared with a total of 455 million in the developed world. By 2020 it is estimated that there will be 533 million non-agricultural labourers in China, by which time it will exceed the equivalent figure for the whole of the developed world by no less than 100 million. In other words, China’s growth is leading to a huge increase in the number of people engaged in non-agricultural labour and, as a consequence, is providing a massive - and very rapid - addition to the world’s total non-agricultural labour force.

The third effect of China’s rise concerns the impact of its economic scale on the rest of the world. China’s average annual rate of growth of GDP since 1978 has been 9.4 per cent, over twice the US ’s growth rate of 3.94 per cent between 1870 and 1913. It is projected that the duration of their respective take-offs may be roughly similar: 43 years in the case of the US, 42 years for China, because, although the latter’s growth rate is much faster, its population is also far larger. When the US commenced its take-off in 1870, its GDP accounted for 8.8 per cent of the world’s total, rising to 18.9 per cent by 1913. In contrast, China’s GDP represented 4.9 per cent of the world’s total in 1978, but is likely to rise to 18-20 per cent by 2020. In both instances, their GDP growth has had a major impact on the expansion of global GDP. In the 1980s, for example, the United States made the biggest single contribution of any country, accounting for 21 per cent of the world’s total increase; in the 1990s, however, China, even at its present limited level of development, surpassed the US , which remained at 21 per cent, while China contributed 27.1 per cent to the growth of global GDP.

The fourth effect is the impact China will have on world trade. Before the Open Door policy, China was one of the world’s most closed economies. In 1970 its export trade made up only 0.7 per cent of the world’s total: at the end of the seventies, China’s imports and exports together represented 12 per cent of its GDP, the lowest in the world. China’s economic impact on the rest of the world was minimal for two reasons: firstly, the country was very poor, and secondly, it was very closed. But since 1978 China has rapidly become one of the world’s most open economies. Its average import tariff rate will decline from 23.7 per cent in 2001 to 5.7 per cent in 2011, with most of that fall having already taken place.
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Although its trade dependency (the proportion of GDP accounted for by exports and imports) was less than 10 per cent in 1978, by 2004 it had risen to 70 per cent, much higher than that of other large countries. China has now overtaken the United States to become the second largest exporter in the world, while in 2004 it ranked as the world’s third largest importer, accounting for 5.9 per cent of the global total. By 2010 a developing country, in the shape of China, will for the first time become the world’s biggest trader.

Each of these scale effects - population, labour, economy and trade - clearly has a mainly positive impact on the rest of the world, stimulating overall global growth and the expansion of national economies. But the fifth effect, China’s consumption of resources, has a largely negative global impact: because the country is so poorly endowed with natural resources, its population so enormous and its economic development so intensive, its demand for natural resources has the double effect of raising the price of raw materials and depleting the world’s stock of them, a process that, on the basis of recent trends, is likely to accelerate in the future.

Although China remains a poor country, its per capita GDP only reaching $1,000 in 2003, it is already having a profound impact on the world. Along with the United States it has been the main engine of global economic growth, contributing no less than one-third of the world’s growth in real output between 2002 and 2005. It has been widely credited with having pulled Japan out of its long-running post-bubble recession, having been responsible for two-thirds of the growth in Japan’s exports and one-quarter of its real GDP growth in 2003 alone.
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The emergence of China as the world’s cheapest producer of manufactured goods has resulted in a sharp global drop in their prices. The price of clothing and shoes in the US, for example, has fallen by 30 per cent over the last decade. Major gainers from this have been consumers in the developed world, while the rise in commodity prices consequent upon Chinese demand had a beneficial effect on primary producers - many of which are based in the developing world - until the global downturn intervened. Anxious to secure sufficient supplies of raw materials to fuel its booming economy, China has been highly active in Africa, Latin America and the Middle East, concluding major agreements with Iran, Venezuela and the Sudan amongst many others. Another net gainer has been Russia, which is a major producer of many commodities, notably oil and gas; and, though rather less trumpeted, Australia. It is China’s shortage of raw materials that has driven a major diplomatic offensive with many African and Latin American countries, including the ambitious China-Africa summit in Beijing in November 2006.
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The main losers have been those developing countries, like Mexico, whose comparative advantage lies in similar labour-intensive production and that find themselves in direct competition with China.
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They have also lost out to China in terms of foreign direct investment, with many international firms relocating their operations from these countries to China. The other obvious losers are blue-collar workers in the developed world who have found their jobs being outsourced to China.