Macroeconomics

 

It was viewed as something of an oddity some years ago. China’s growth rates – averaging 9.4 per cent a year for the last two decades – seemed even up to the end of the 20th century something of an irrelevance in global economic terms.
Not anymore, it isn’t. Both the Nasdaq crash of spring 2000 and September 11 have seen to that, as the global economy was shaken to its core. And, in the interim, China’s phenomenal growth has emerged as one of the fundamental pillars of a global economic recovery that has slowly but surely grown in strength.
But can growth continue? If the latest figures released by the National Bureau of Statistics in February for 2004 are anything to go by, then the answer is a resounding ‘yes’.
Momentum
For example, last year the economy grew by 9.5 per cent despite the best efforts of Beijing to cool growth. Furthermore, industrial production by large-scale enterprises rose by 16.7 per cent. While that was below 2003’s 17 per cent, it was 5.6 percentage points higher than the national average for 1995-2002. The message is clear – China’s growth is not only being sustained but its unrivalled status as the global manufacturing base is gathering more and more momentum.
Little wonder then that Wang Mengkui, director of Beijing’s Cabinet Development Research Centre predicted annual growth to 2010 of 8 per cent with annual output reaching $2.6 trillion by the end of the decade.
He said: "The next five years will be a golden time for China’s economic development. Growth will be driven by China’s strength in materials and technology, a large domestic market, an abundant labour force and a stable society."
In fact, Mengkui’s confidence largely corresponds to Goldman Sachs’ Dreaming with BRICs: The path to 2050 report from autumn 2003, which famously predicted that China’s absolute GDP will emerge as the biggest by 2041. The UK (2005), Germany (2006), Japan (2015) and the US finally in 2041 will all be passed by China if Sachs’ projections are accurate.
And naturally, the growth of the Chinese economy is being reflected in a new global order. Just as Chinese film has come from nowhere in the last 3-4 years to take Hollywood by storm, so too is a new global order emerging where an assertive China is once again flexing a bit of muscle.
Even IBM, the global PC giant, has succumbed. It was enticed into a deal with domestic PC maker Lenovo, selling off its majority stake in the PC business for a whopping $1.75 billion in December 2004. As a symbol of China’s economic growth, it could hardly have been more dramatic.
Politically too, there is growing confidence. While that might have set alarm bells ringing two decades ago, it appears that there is less to fear from China now. For example, China has worked hard at strengthening its ties in the south-east Asian region, including an agreement concluded with the Association of South-East Asian Nations (ASEAN) in November 2004 to create the largest free trade region in the world.
And despite the continuing political impasse, the massive investment Taiwan has poured into China in recent years has only cemented the ever deepening business links between the two. (see next chapter)
While China’s full accession to the World Trade Organisation in 2006 has much to do with its new-found desire to encourage good economic relations, the domestic impetus for reform is also clearly evident.
Attractive
For example, a law passed last June significantly opened the door to foreign investors, with an array of obstructive barriers to investment removed. Indeed, Staples’ approximate $10 million swoop for internet and catalogue delivery business OA365.com leading to the formation of joint venture Shanghai Staples Industry Development Co last August, benefited to some extent from those changes. (see next chapter)
The result is an environment that, though far from perfect from a business perspective, is becoming more and more attractive to foreign investors. While the legal infrastructure still leaves something to be desired, the list of companies that have already set up businesses in China is legion. Kentucky Fried Chicken and McDonald’s are both prominent in the fast food market and the likes of Nike, Dr Martens and Hornbys, to mention but a few, have set up their own production facilities.
Indeed, any threat to China’s stability – a point reinforced by Mengkui – would appear to come from within. While China’s growth has been phenomenal, it has been uneven. Social disparities between the haves and the have-nots abound and they exist not only between regions but also within cities and towns.
Indeed, a catalogue of the various mining disasters that have struck China in the last 12 months – at least 209 were killed for example by an explosion at Sunjiawan coal mine in Liaoning Province in February – indicates only too well the deep social problems that afflict China.
The issue is fundamentally economic rather than political, but will be watched with considerable concern by a sensitive communist hierarchy. It is only too aware that its continued role at the head of the political spectrum in China depends on delivering economic growth to the country – an unwritten pact that by and large it has managed to uphold successfully thus far.
It also brings to the fore another perennial debate that has raged over China for the last few years: the revaluation of the renminbi. The US in particular has been sharply critical of China’s unwillingness to unpeg the renminbi from the dollar from a value of 8.6 to 1.
However, while China’s domestic environment continues to cause concern, Beijing is unlikely to do anything that would potentially destabilise already sharply felt social disparities. More likely is a gradual realignment of the renminbi over the next two years, but nothing more significant than a floating corridor with a leeway of 3-5 per cent either side.
That will satisfy not only domestic requirements but also those of trading partners around the world who have ridden the Chinese wave. These have not only included the likes of Mexico, much of the African continent and naturally the whole south-east Asian region, but also Japan which can attribute much of its fragile recovery in 2004 to its burgeoning trading economic relationship with China.
Little wonder that Japanese prime minister Junichiro Koizumi told the Diet in January: "The global economy has an extremely large impact on Japan’s economy. The firmly expanding US and Chinese economies are a plus for Japan."
Like Japan, there are many around the globe hoping to harness Chinese growth and take advantage. And not surprisingly, office products companies figure prominently among them.