China’s recipe for success

Hicham Mourad , Wednesday 30 May 2018

How has China managed to become the driving force of the global economy in just the last 30 years

Wuhan Newport
File Photo: Wuhan Newport shanghai, China (Reuters)

On the invitation of Chinese Cultural Counseller in Egypt Shi Yu Yun, I recently visited several cities and provinces in China, including Beijing and Chengdu, capital of the Sichuan Province in the southwest of the country.

I was amazed by the huge progress that has been made over the last 30 years, raising the “Middle Kingdom” from the rank of a developing country to that of the world’s second-largest economy and the workshop of the world.

China even goes beyond several developed countries in the Western world in many ways, and it deserves special attention from us in Egypt if we are to understand the Chinese success story that has been brought about in only a single generation.

China, a sub-continent sized country of 9,388,211 km2, is the second-largest economy in the world behind the United States in terms of gross domestic product (GDP).

However, the World Bank has estimated that in 2014 it became the world’s largest economy in terms of purchasing power parity (PPP).

According to such estimates, China’s GDP amounted to $18,030,932 million in 2014, compared to $17,419,000 million in the United States. PPP is a tool that measures the purchasing power of a “basket” of 3,000 goods, instead of converting GDP according to the official exchange rate to the US dollar.

This measure is preferred, especially for comparing per capita GDP levels in different countries.

Over the years to come, China should move further and further ahead of the United States. The International Monetary Fund (IMF) predicts that China’s GDP, when measured in PPP dollars, will reach $27 trillion by 2019, when US GDP will be around $22 trillion.

These figures, however, include significant regional inequalities: the east coast of China where the country’s economic heart is located, particularly around the cities of Shanghai, Hong Kong and Macao, sees much of the production of the country’s wealth at the expense of the western provinces, which remain very rural and with significant development lags.

Beijing is already the world capital of billionaires ahead of New York, while China ranks 81st in the GDP per capita ranking.

Led by the Chinese Communist Party since 1949 and Mao Zedong’s rise to power, China’s economy was marked by strong state interventionism until the 1970s.

Inspired by the Soviet model, this dirigiste economic model included central planning in many agricultural and industrial sectors, as well as relative isolation on the international trading scene.

Since 1976, the year of the accession to power of former Chinese leader Deng Xiaoping, China has developed a model called the “socialist market economy” that combines an always omnipresent public sector, a certain amount of economic liberalism, and a gradual opening of internal markets.

Thanks to such policies, since the 1980s China has experienced strong economic growth, exceeding 10 per cent in some years and showing little sensitivity to cyclical shocks, particularly the subprime crisis in the US and the debt crisis in the Eurozone.

From 2000 to 2010, China supplied 33 per cent of world growth in absolute terms. From 1979 to 2011, per capita income quadrupled, rising from five per cent to more than 20 per cent of the developed countries, and it now exceeds that of several emerging Asian countries.

The massive industrialisation of China since the 1980s has made it a major player in labour-intensive industries like the textile industries and manufactured goods of lower quality.

But since the 2000s, China has also progressed towards more technologically advanced exports. For example, in 2008, it made more than a quarter of global telecommunication equipment exports.

Thanks to a large and cheap labour force and a very competitive exchange rate, China can export large quantities at low prices. Industrialisation strengthens its productive and exporting capacities from year to year, making the country the world’s factory.

Its international economic opening has been based on the Special Economic Zones (SEZs), which today cover almost the entire coastline in the east of the country.

Offering low-cost working conditions and tax benefits to multinational firms, the Chinese government obliges such firms to make their technologies public in the event of the relocation of their factories.

On average, China’s volume of exports increased by 14 per cent between 1990 and 1999, and 20.5 per cent between 2000 and 2008. Imports grew a little more slowly: 13 per cent per year during the 1990s, and 16 per cent between 2000 and 2008.

China accounted for about nine per cent of exports and seven per cent of world imports in 2008, compared with 1.2 and 1.1 per cent, respectively, in 1983.

Its place in world trade varies across sectors. It has a larger place for manufactured goods, where the country generates 13 per cent of world exports, than for agricultural or mining products. In industry, there are also great inequalities depending on products.

Thus, the country accounts for 33 per cent of world exports of clothing, but only three per cent of those of food and two per cent of those of automotive products.

Boosted by the country’s trade surplus, the Chinese government has launched a “Go Out Policy,” which is a globalisation strategy encouraging Chinese companies to invest in the strategic sectors of foreign economies.

The strong trade surplus enabled by China’s industrial exports has allowed the country to build up large foreign-exchange reserves, which reached $3,125 trillion in April 2018.

These reserves, which guarantee 18 months of imports and cover ten times the short-term debts of the country, give China considerable financial strength on the international scene.

However, Chinese finance is currently experiencing difficulties related to the explosion of “shadow-banking” in the country, being unconventional and unregulated finance that the political authorities do not seem able to stem and that the international ratings agency Moody’s estimated at $4.8 trillion in 2014.

Recipe For Success

The Chinese economic miracle is due to several reasons, especially a sharp increase in the factors of production, labour and capital.

From 1980 to 2010, the working-age population (15-59 years) in China increased by 360 million to more than 914 million people.

The investment effort has been considerable, and the investment rate has reached an exceptionally high level at almost 50 per cent of GDP in 2010, even in relation to the rates observed in Asia.

The investments were directed mainly towards industry and infrastructure, such as roads and real estate. Labour productivity has improved thanks to the increase in available capital per worker, the rising level of education and qualification of the labour force, and the reforms in agriculture as in industry.

On the other hand, the change in the distribution of employment to industry and services in China has also been the source of significant labour productivity gains, as these have been much stronger than in agriculture.

Agriculture accounted for 33.6 per cent of the Chinese workforce in 2012, but only 10 per cent of GDP. Industry has a more prominent place, and it employs about 30.3 per cent of the active population and is the most productive sector, producing nearly 47 per cent of GDP.

A whole series of reforms has accompanied the double movement of internal liberalisation and openness to world markets in China.

A preliminary law allowed individuals to set up limited liability companies. In 2004, the Chinese constitution was reworked to strengthen the role of the non-state sector and reaffirm the right of private property.

The prohibition on private enterprises to invest in certain sectors, such as infrastructure, public services, and financial services, was abolished in 2005. Foreign direct investment was authorised and encouraged by the establishment of coastal free zones and the lowering of customs duties.

The state monopoly on foreign trade has been dismantled, as has the system of multiple exchange rates. As a result, the private sector has expanded to produce nearly half of GDP and three-quarters of Chinese exports.

It thus now creates the bulk of new jobs and generates the best profitability (15 per cent against five to 10 per cent in the state sector). Within the private sector, foreign firms, often joint ventures with Chinese firms, account for 75 per cent of exports. However, Chinese-controlled private-sector exports are growing fast.

At the same time, the state sector is undergoing restructuring in China, leading to the elimination of 45 million jobs in the first half of the decade. But 35 per cent of state-owned enterprises are still considered unprofitable, and in the new economic context tinged with liberalism, public companies, or Danwei, are struggling to find their place and face more and more difficulties.

Their losses reached a peak of 102.6 billion yuan ($12.75 billion) in 2005. Rising production costs, an inefficient pricing system, overcapacity and significant technological shortcomings are the main causes of this situation, according to analysts.

Several decades of reform were needed to gradually stop the huge losses of the Chinese public companies and increase their productivity.

The rapid growth of the private sector has lowered the importance of public enterprise assets in China from almost 99 per cent in the late 1970s to 25.2 per cent in 2013, particularly as their results have remained well below comparable companies in the sector.

As a result, the indebtedness of state-owned enterprises has reached 55 per cent of total Chinese corporate debt, while their share of total production is only 22 per cent.

An Ageing Population

China’s continued economic growth is linked to its demographic strength. In this regard, it ranks first in the world, with an estimated population of 1,414,339,756 in May 2018, based on United Nations estimates.

China’s population is thus equivalent to 18.54 per cent of the total world population. In the early 1980s, China’s population reached about one billion, and in the early 2000s it surpassed 1.3 billion. During the 1980s, average population growth was about 1.5 per cent.

In the 1990s, this rate dropped to about one per cent, and today it is about 0.6 per cent, one of the lowest for a developing country.

However, three decades ago, only five per cent of the Chinese population was over 65. In 2015, 123 million people, or nine per cent of the Chinese population, were older than 65. A government think-tank has predicted that China will become the world’s oldest society in 2030.

By 2050, China’s ageing population could reach 330 million people, a quarter to 31 per cent of its total population. Children and young people under 20 could fall to 21 per cent of its population. These distortions are the source of increasing pressures on the Chinese age pyramid and existing social structures.

However, the labour force has continued to increase due to continued rural-to-urban migration, albeit more slowly. Nevertheless, the dependency ratio (the number of people not of working age to those who are) remains relatively low because of China’s one-child policy that restricts the flow of new entrants.

However, the country’s rapidly aging population, combined with the slowdown in the rural exodus, means that the growth potential will likely be lower in the future.

It was for this reason that the Chinese government abandoned its one-child policy in 2015. Introduced in 1979, this policy required Han ethnic couples, the vast majority of the population, to have only one child (the law largely exempted ethnic minorities).

The policy was cancelled due to profound distortions in the country’s demographic structure and enormous consequences for future growth prospects.

The government has predicted the lowest growth rate in 28 years in 2018 at 6.5 per cent, after 6.9 per cent in 2017 and 6.7 per cent in 2016.

The unbridled growth of the last 30 years has also had a flip side that Beijing can no longer neglect: the acceleration and deepening of income inequalities, pollution and environmental degradation, and public and private over-indebtedness.

For this reason, Chinese premier Li Keqiang announced in March that these three areas would be the field of “three decisive battles” against poverty, pollution and financial risks linked to colossal public and private debt of more than 250 per cent of GDP.

Geopolitical Shifts

The rise of China on the world economic scene has led to global geopolitical changes.

China’s international political and military influence should be confirmed in the medium and long run. According to PricewaterhouseCoopers (PwC), one of the world’s largest consulting firms, China is expected to be the world’s leading economy in 2030, with a GDP of $38 trillion against $23.4 trillion for the United States.

It will widen the gap in 2050, with $58.5 trillion against $34.1 for the US, which should plummet to third place, the second place being inherited by India with a GDP of $44.1 trillion.

These forecasts are to be placed in the context of the steady increases in Chinese defence spending.

In March, China announced that its military budget, the second-largest in the world after the United States, would increase by 8.1 per cent in 2018, a growth rate higher than last year (+ seven per cent). Thus, the Chinese defence budget would reach 1.107 billion yuan ($175 billion) in 2018.

China spent a total of $151 billion in 2017 on its military, according to a recent report by the International Institute for Strategic Studies (IISS), a London-based think tank.

This is four times less than the United States at $603 billion, but far more than Saudi Arabia ($77 billion), Russia ($61 billion), India ($53 billion), the United Kingdom ($51 billion) and France ($49 billion).

Beijing has been increasing its defence spending for more than 30 years to catch up with the West. The annual increase reached almost 18 per cent in the late 2000s.

Led by China, Asia is consolidating its position on the global economic scene. 2018 should confirm the rise of the continent, with the emergence of India as the fifth-largest economy on the planet. This Asian giant would supplant France and the United Kingdom, which would go to sixth and seventh place, respectively.

The ranking, published on 26 December, was produced by the Centre for Economics and Business Research (CEBR), a British institute.

This growth of the Asian economies will further strengthen in the next 15 years, when according to the CEBR, South Korea and Indonesia will have entered the top 10, and Taiwan, Thailand, the Philippines and Pakistan will have entered the top 25.

A study published in February 2017 by PwC said that by 2030 four of the world’s five major economic powers would be Asian in the shape of China, India, Japan and Indonesia.

This means that the centres of gravity of the global economy are moving more and more towards Asia, and the economic weight of the western countries will continue to fall.

In its study, the CEBR recalled that what is commonly called “the developed world” represented 76 per cent of the global economy until 2000. By 2032, this proportion should have fallen to 44 per cent, while the former “developing countries” will constitute 56 per cent of the world economy.

This shift seems inevitable given the growth dynamics that govern the different parts of the globe. While almost no country is missing on the growth chart, Asia clearly leads the race.

According to the IMF, in 2018 the Asia-Pacific region is expected to grow by 5.4 per cent, faster than the pace of the global economy (+ 3.7 per cent) and all the other regional blocs. North America should grow by 2.2 per cent, Europe by two per cent, and Africa by 3.7 per cent.

Several factors favour the Asian economies, including strong macroeconomic policies, strong trade integration driven by China, and a growing population.

According to the BMI Research Institute (the Fitch Group), by 2030 the continent should have an additional 410 million inhabitants and continue to represent more than 50 per cent of the world’s population.

Economists also cite the catch-up potential offered by the rate of urbanisation in Asia. This is around 40 per cent in Asia against 80 to 90 per cent in the advanced western economies.

The development of urban centres is usually accompanied by a boom in the industrial sector, services and consumer spending, and so it is an additional impulse for growth.

*A version of this article appears in print in the 31 May 2018 edition of Al-Ahram Weekly with headline:  China’s recipe for success

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