Is the middle kingdom the world’s new ‘economic messiah’?
Increasingly, the Middle Kingdom, or China, has been viewed as the new “messiah” of the world economy, amid speculation that a second-dip world crisis is on the horizon, with a low probability that existing stimulus measures, announced because of the global financial crisis in 2008, will address the deep-seated problems.
This is not without reason. China has begun to lead the world in a number of key areas. The country of 1.3 billion people may overtake the US, where the annual gross domestic product (GDP) is about $14 trillion, as the world’s largest economy by 2027, according to Goldman Sachs, thus capping the nation’s three-decade rise since Deng Xiaoping ditched hard-line Communist policies in favor of free-market reforms in 1978.
China surpassed Japan as the world’s second-largest economy last August and Germany as the world’s largest exporter — marking its increasingly dominant role in the global economy. The resilience of China’s growth during the crisis enabled a number of other countries, particularly commodity-exporting economies, to ride on its coattails. China’s economy is revving up into double digits.
Big, big, big…
China is often associated with record-breaking achievements and magnitudes. Four of the world’s top 10 companies by market capitalization are from China, including PetroChina Company, Ltd., Industrial & Commercial Bank of China, Ltd., China Mobile, Ltd., and China Construction Bank Corp. Last year China consumed twice as much crude steel as the EU, America and Japan.
China, currently the world’s largest exporter, is seen as the biggest threat for competing exporters and arguably the most flagrant manipulator of its currency. Its exports in October alone reached $136 billion, with trade surplus expanded to $27 billion in October ($147 billion in the first 10 months). In 2009 alone China’s outbound direct investment increased 14.2 percent to $47.8 billion — against the backdrop of a 40 percent decline in global foreign direct investment volume — making China the fifth-largest investing nation worldwide, moving from 12th in 2008. China’s 12,000 companies have established 13,000 operations in 170 countries.
The heated currency war with Washington is still going on. The Chinese are reluctant to assume the hassles that accompany the use of its currency, renminbi, as a medium of exchange at a time of speculation that the dollar may surrender its role as the world’s reserve currency. China has become the largest creditor to the US, underwriting low interest rates and easy credit that prop up the US economy as well as underpinning the stability of the dollar.
China is now the world’s biggest automobile market (again, replacing the US last year), manufacturing 17 million units each year. The nation is the world’s number one buyer of iron ore and copper and the second biggest importer of crude oil, and has underpinned demand for exports by its Asian neighbors.
In energy too, China overtook the US last year, becoming the world’s largest energy consumer, which reflects the spectacular growth of its economy over the past few decades and its transformation into an industrial superpower. The country is the world’s biggest emitter of greenhouse gases and a key influencer in how climate change will be effectively addressed.
New ‘inclusive growth’ development
Despite its growing economic size, the picture is not all rosy. Let’s not forget that China is still a relatively poor country. Its current GDP per capita is less than a tenth of that of the United States, ranking amongst the world’s 100 poorest countries. Even when its economy is slated to overtake that of the US, China’s GDP per capita will at best be comparable to that of Turkey.
What is more, there is a general realization that China’s impressive economic growth has been at the expense of a widening rich-poor divide. There are hardly any social provisions such as healthcare, affordable housing, education and old-age pensions to alleviate the rising economic inequalities. The problems will be compounded as China is expected to witness a dwindling pool of young workers as early as 2015, when the population enters an aging phase in the coming decades. In addition, national development is highly unbalanced, with many inner provinces still lagging behind. Added to these challenges are the plight of an army of migrant workers 200 million strong, the pressing environmental degradation, water and energy constraints and the pockets of bubbling ethnic unrest and separatism, particularly in the Xinjiang-Uyghur Autonomous Region.
It is therefore no wonder that a national development watershed was unveiled at the Chinese Communist Party Central Committee Plenum on Oct. 9-11 in preparation for the next Five-Year Plan (2011-15). This calls for a new, more balanced, sustainable and “inclusive growth” in a higher-quality development model with more social justice, more income redistribution (both between the rich and the poor and between earnings in state monopolies and counterparts in the private sector), more balanced regional development, more domestic consumption and higher levels of technology, innovation and resource conservation.
As communist ideology lost its appeal, there is a search for its replacement. The upsurge of nationalism, while conducive to the Communist Party’s popularity, can become problematic if allowed to veer out of control. Hence, in the wake of a rising tide of anti-Japanese protests against what many Chinese people see as a revival of Japanese aggression over the Diaoyu Islands, China has been anxious to dampen the bubbling national anger and hubris and mend relations with Japan and other Asian neighbors.
While many countries are still faltering under the consequences of the 2008 financial crisis, China will probably finish out 2010 with a growth rate of about 9 percent, in line with its average of the past 30 years. China managed to maintain an average annual growth rate of 9.8 percent between 1978 and 2009. Few in China believe the national growth rate will drastically drop in the foreseeable future. Yet, a consensus is emerging that China’s potential growth could be lower over the next decade than in the previous one.
Expectations for next year are that growth could marginally slow down to around 8 percent, as central authorities rein in speculation in the real estate sector and over investment from local governments. A recent study by the World Bank (WB) made a useful forecast of China’s potential growth over the coming decade. According to the WB estimate, the potential GDP growth would be 8.4 percent over 2011-15 and 7.0 percent over 2016-20.
As population aging advances, the share of savers (age 35-59) in the population should decline and that of dis-savers (age +65) rise, lowering the average household saving ratio.
While the Chinese economy may continue to benefit from technological innovations over the next decade, potential gains stemming from structural reform are unlikely to be as strong as over the previous three decades. This is because the most obvious distortions — the low-hanging fruit — in the economy have largely been removed after three decades of structural reform. As economic development moves to a higher level, it becomes harder to push through more profound reforms in order to address deep-seated structural rigidities, especially as vested interests become entrenched.
Boost through large-scale infrastructure investments
China requires huge infrastructure development and modernization. Nearly 40 percent of China’s $586 billion economic stimulus package announced in 2008 was allocated to infrastructure projects, and a large portion was dedicated to building a high-speed rail, advancing many projects that were otherwise further down the project pipeline.
Today, China is leading the world in high-speed rail, a key next-generation transportation technology. China has already built 4,000 miles of rail featuring trains with average speeds of 120 miles per hour. The country plans to build an additional 10,000 miles of the rail, connecting all of China’s major cities by 2020 and spending an estimated $300 billion in the process. The whole country, east to west, north to south, will be connected.
China is ranked fourth out of 10 countries and regions as a hot spot for energy investments and could climb higher if it improves the legislative process and financial incentives to woo investors. It is the world’s top investor in renewable energy projects, having invested $120 billion to $160 billion between 2007 and 2010. Smart grids — two-way, digitally controlled, flexible power management systems — would help China deal with disruptions to its electricity supply and make it easier to integrate intermittent renewable energy sources such as wind and solar into its power system.
China has 12 nuclear power reactors in operation, 24 under construction and more to begin construction soon. Additional reactors are planned, including some of the world’s most advanced, to give more than a tenfold increase in nuclear capacity to 80 GWe by 2020, 200 GWe by 2030, and 400 GWe by 2050. China is rapidly becoming self-sufficient in reactor design and construction, as well as other aspects of the fuel cycle.
China in the world of 2020
Currently, the top 10 economies in 2010 in terms of total GDP measured at purchasing power parity (PPP) are the US, China, Japan, India, Germany, Russia, the United Kingdom, France, Brazil and Italy. Six out of the 10 biggest economies in 2010 are advanced countries. With a GDP measured in terms of PPP accounting for 20.2 percent of the world total, the US is the world’s largest economy in 2010. By 2020, there could be major shifts in the world economic order, making emerging economies more important. China is expected to overtake the US to become the largest world economy. China’s share in the world total GDP in PPP terms has increased from 7.1 percent in 2000 to 13.3 percent in 2010 and could reach 20.7 percent by 2020.
These are all projections, extrapolated from current trends and performances. However, the West may not sit idly by to witness its decline and the dawn of a new Asian age led by China. It will be many decades before China, India, and the rest of the region take over the world, if they ever do. Political upheavals, domestic instabilities, natural catastrophes, military conflicts and technological breakthroughs in the West that are today unforeseen in could completely reverse the situation.