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The economic growth of China – an unstoppable force

The economic growth of China – an unstoppable force

China is now the second-largest economy in the world by GDP and is looking set to overtake the US for number one spot within the next few years.

With a population of 1.3 billion, China has become a huge influence on the global economy and is now the largest single contributor to world growth since the global financial crisis of 2008. From an undeveloped country, struggling to feed its population  to an economic superpower that controls the world’s production in less than fifty years, put simply, China’s economic growth is changing the world.

In 2000, China’s economy stood at around a tenth of the US GDP.

A decade later, the global economy looked very different. China has grown to just over half the size of the US economy – a phenomenal economic expansion story. If the current trends continue, the Chinese economy will be 13% larger than that of the US by 2030.

It began on the land

Many argue that China’s dynamic growth did not start in 1980. Instead, it began in the 1950s, when agrarian reform provided land, infrastructure, credits and technical assistance to hundreds of millions of landless and destitute peasants and landless rural workers.

Through “human capital” and huge social mobilisation, the Communist Party built roads, airfields, bridges, canals and railroads as well as developing core industries, like steel, iron and coal. These have formed the backbone of the modern Chinese economy we see today.

Communist China’s vast free health and education systems created a vibrant, literate, and motivated work force. Its rapid development was based on the growth of its internal market and rapidly growing cadre of skilled technicians, scientists and workers. The promotion of working class and peasant mobility which stemmed from Communist planning and investment has proved the key driver of modern-day China’s economic success.

The Market has arrived

The late 1970’s saw a dramatic shift in Chinese economic strategy. Market reforms were initiated in 1978 radically shifting the economy’s focus from centrally-planned to market-based. Over the coming four decades the Chinese government opened up the country to large-scale foreign investment and privatised thousands of industries and state-owned services.

China’s strategy was based on “borrowed” intellectual property and technical know-how while leveraging access to overseas markets from foreign firms. In exchange foreign companies were provided with cheap, plentiful labour at the lowest cost.

High levels of capitalist growth were prioritized over its national system of free public education, health care and subsidised public housing. The switch to a new, capitalist strategy saw China’s private sector “take off” as it capitalised on the huge public outlays it had made since 1949.

The factory – the economic heart of China

China’s spectacular growth in its manufacturing sector was a result of highly concentrated public investment, technological innovations, high profits, and a protected domestic market.

While foreign capital has profited, it is strictly within the framework of the Chinese state’s priorities and regulations.

The regime’s dynamic “export strategy” led to huge trade surpluses in the early 2000s, making China one of the world’s largest creditors especially for US debt.

When industrialisation meets one billion workers

In 2014 China’s working-age population hit one billion. Harnessing this seemingly infinite pool of labour, enabling China to focus on manufacturing as the main driver of the economy.

The huge influxes of raw materials required for this industrial ‘miracle’ has resulted in large-scale overseas investments and trade agreements with mineral rich countries in Africa and Latin America. In 2010, China passed Japan to become the world’s second largest economy after the US.

By then it had already displaced the US and Europe as the primary trading partner for many countries in Asia, Africa and Latin America.

In the 10 years since, China’s GDP growth has averaged nearly 10 percent a year—the fastest sustained expansion by any major economy in history.

This unprecedented growth has lifted more than 800 million people out of poverty. China reached all its UN Millennium Development Goals (MDGs) by 2015 and while it’s GDP growth has gradually slowed since 2012, it still represents a hugely impressive feat by modern economic standards.

The Chinese economy has benefited hugely from its extraordinarily successful exports. They have grown by an average of 17% a year for three decades according to IMF data, an astonishing record.

This propelled China from being a bit player to becoming the world’s largest exporter. Obviously this level of growth has become unsustainable with the country now facing single digit growth rates in export in the coming decade.

A tech giant assimilating all before it

China’s flourishing digital economy is an excellent example of the economy’s meteoric growth. Tencent and Alibaba are China’s top two companies by market capitalisation, a contrast to just five years ago when no internet companies occupied the top 10.

China’s innovative techno-scientific establishment routinely assimilates the latest inventions from the West (and Japan) and modifies them, thereby decreasing the cost of production, innovation and R&D.

The digital economy is not only reshaping the Chinese economy but also presents enormous business opportunities for foreign companies. The digital sector is expected to hit 16 trillion U.S. dollars by 2035.

Still developing

 

And so, it is staggering to think that China remains a developing country – its per capita income is still a fraction of that in advanced countries and its market reforms are incomplete.

According to China’s current poverty standard (per capita rural net income of RMB 2,300 per year in 2010 constant prices), there were 55 million poor in rural areas in 2015.

This rapid economic ascendance has also brought challenges. These include rapid urbanisation, high levels of inequality and a severe environmental impact. China also faces demographic pressure due to its aging population and the legacy of its strict population management programme. The emphasis for China’s regime has recently become one of sustainability rather than growth.

As seen in other industrialised countries, the transition from middle-income to high-income status is often more difficult than from low to middle income.

The plan – more quality

China’s current Five-Year Plan (2016-2020) looks to address these issues. It highlights the development of services and looks to address environmental and social imbalances.

It has set targets to increase energy efficiency, reduce pollution and improve access to education and healthcare. The annual growth target in the plan – the 13th such 5-year plan – is 6.5%. This reflects a rebalancing of the economy, focusing more on the quality of growth while also seeking to achieve a “moderately prosperous society” by 2020.

China’s economy had already began to slow even before the US trade war threatened Chinese exports.

While US tariffs have increased downward pressure on the economy toward the end of 2018, recent meetings between the US and China have showed signs that a deal on trade may be close at hand.

A natural and foreseen slowdown

The reality of China’s economic slowdown is the diminishing effectiveness of several key contributors to the productivity growth that fuelled the country’s spectacular economic expansion in the previous four decades.

These include more efficient allocation of resources and investment capital, the rising quality and quantity of the labour force, and the rapid upgrading of technology.

The slowdown is both natural and desirable. Most of the lower hanging fruit such as price liberalisation and low value-added labour-intensive exports have been harvested. Now the transition to higher value-added production, rising wages, and an improving living standard will take place.

Implicit in this economic transition is the potential for higher quality of growth for Chinese society. As China’s Belt and Road initiative shows us, the Red Dragon looks intent on wrapping its tail around the globe.