BRICs Series – 2 : China and its Economy

History:

Historically, China has been the most powerful state in East Asia. From the Han dynasty (206 BC to AD 220) through to the early modern period, it was one of the most advanced countries in the world technologically. But in the early years of the 19th century China was confronted with the challenge of the expansionist European powers. Defeat at the hands of the UK in the first opium war of 1839-42 led to the cession of Hong Kong island. The gradual fall of China under the sway of a handful of foreign powers came to be seen as a period of “national humiliation”, and the Chinese empire collapsed in 1911. On October 1st 1949 the Chinese Communist Party (CCP) leader, Mao Zedong, proclaimed the founding of the People’s Republic of China. The next 30 years were characterized by social and economic upheavals. In 1958-61 the government attempted to turn China into an industrial economy overnight, and policy failed miserably, resulting in the world’s worst ever man-made famine, in which an estimated 30 million people died. Following Mao’s death in September 1976, pragmatists within the ruling party, led by Deng Xiao Ping, took control of the government and successfully embarked on a course of radical economic reform.

Economy:

China has had the highest economic growth rate for 3 decades now. But historically, China’s economy has been agricultural-based and inward-oriented. Having suffered humiliation from foreign powers, it aligned with the Soviet Union and turned away from the West. China’s impressive growth period started with its opening up to the world in the late 1970s under Deng Xiao Ping. China’s integration into the world economy started slowly, but it accelerated. Further economic reform under the Presidency of Jiang Zemin, along with China’s entry into the World Trade Organization in 2001, served as a catalyst for the contraction of state-owned industrial sector, a surge in foreign investment (for export and domestic market), and an explosive growth in private sector activity. As a result, exports shot up and China started to dominate the textile industry. China real GDP growth was 10.3% in 2010, as a result of rising activity in all parts of the economy – due to loose credit conditions, and government backed stimulus package that boosted investment.

China’s Economic Structure: Industry – 48.6% of GDP, Agriculture – 11.3% of GDP, Services – 40.1% of GDP.

Strengths:

– Booming economy (averaging 10% growth for 3 decades), with a huge export-oriented manufacturing sector – 10% of world’s exports.

– Government very effective in implementing policies. Although it’s not of a democratic nature, it rules with the slogan “you don’t mess with politics and we will give you economic growth”.

– Has significantly removed tariff and non-tariff barriers to trade. It’s the largest emerging market recipient of Foreign Direct Investment (FDI) – $138 billion in 2007.

– Has invested heavily in infrastructure, especially in the past 2 decades, mainly in the coastal region. As a result, the port costs in China are very low (it costs less to ship from a port in China to the US, than ship it from a port in Mexico to the US).

– Has invested heavily in primary and secondary education in the past 25 years. Literacy rates are as high as developed nations.

– Although not efficient yet, it is ramping up rapidly in Research and Development investment – 1.5% of GDP. It is focusing on IT, electronics, space technology, scientific research, energy technology etc. It is also making use of its diaspora in neighboring countries like Taiwan. And a record number of Chinese students are now coming to the United States for higher education – best way to learn about technology and gain knowledge.

– Large highly skilled labor and flexible labor force. Due to the transformation of the economic structure, there was a massive migration of the labor force to the industrial sector (200-300 million). This fueled the manufacturing boom and helped reduce poverty in China.

– Large deposits of coal, and minerals. It’s the largest producer of coal in the world.

– Huge domestic booming market.

Weaknesses:

– Biggest weakness is the lack of access to energy, and its dependence on foreign countries to fulfill its energy needs.

– Political instability. Authoritarian form of government, one-party system. Lack of accountability. Lack of freedom of speech, freedom of press, and other human rights violations.

– Government corruption, abuse of power – weak judiciary / rule of law. CCP controlled government bureaucracy.

– Demographics – an ageing population.

– High and rising social inequalities – between urban and rural, and between regions.

– Poor quality of higher education.

– Agricultural sector and hence food prices are heavily dependent on weather conditions.

– Infrastructure is poor inland. Also power provision has been problematic all over the country (shortages). Logistic services (including warehousing and transport) have lagged in terms of their sophistication.

Threats It Faces:

– Separatist movement in regions of Tibet and Xinjiang, and protests against human rights violations can increase the potential of internal violence.

– Relations with the United States remain tense on issues of human rights, Taiwan and its currency value.

– Maritime border disputes in South-China sea are heating up. Historic border disputes with India still remain.

– Possible implosion of North Korea – which would send a massive wave of refugees to China.

– High dependence of foreign countries for its rising energy needs.

– Dependence on weather for its agricultural output.

– Negative environmental threats due to its massive industrialization.

Opportunities for China…what it needs to do:

– Needs to invest in alternative sources of energy – renewal / green energy technology.

– Needs to have better relations with India – huge opportunity for trade.

– Can ease tensions with the United States, its biggest trade partner (accounts for 20% of its exports).

– Needs to focus on social stability and bridging the inequality gap – promotion of development in rural areas, implementing reforms in health, education, finance, environmental protection, labor rights.

– Needs to invest in the infrastructure inland and in the western regions.

– Needs to invest in improving the quality of higher education / universities.

Since the economic crisis in 2009, majority of the global economic growth has come from China. It has become a global manufacturing workshop, and is hungry for more. Whether one likes it or not, China is here to stay. But it will be interesting to see how long can it sustain this phenomenal economic growth. Although the Chinese government has taken steps to shift the source of economic growth from investment and export-led development to domestic consumption, these steps have been slow in coming and are not enough. More vigorous policy action is needed in the fiscal, financial, exchange rate and pricing domain. Failure of the government to make the required policy changes may lead to a slowdown in China’s impressive growth, put upward pressure on global oil and commodity prices, and further increase China’s energy use and carbon emissions. It will also be interesting to see if its autocratic and unstable government is able to stay in power and maintain its stability, in an increasingly democratic world.

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About pritamkabe

Originally from Bombay, India. Relocated to the United States in 1997 for attending graduate school at The University of Texas. Completed my Masters in Electrical Engineering in 1999 and then worked in the Hi-Tech industry for the next 11 years in Austin, Texas. I have a passion for travelling, meeting new people, and experiencing new cultures...and i've been very fortunate to have gotten the opportunity to travel quite a bit. Sports and food are my other big passions in life. Some life-changing experiences in my life a years ago changed my perspective of life, after which, just have an engineering job was not meaningful to me anymore. Hence i quit my engineering career, and I'm now motivated to give back to society and make a positive impact in some way. To get started on that journey, i went back in graduate school, and recently graduated as a "Mid-Career Fellow in Foreign Service", from the Edmund A. Walsh School of Foreign Service, at Georgetown University, Washington DC. Currently in New Delhi, India, on a research fellowship, to learn about the educational issues in India, and brainstorm my ideas about technological interventions for resolving those issues.
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