<B>The answer is China</B>

Rafael Pampillón. Professor. Instituto de Empresa

25 May 2004

China’s economic success story is much on the minds of investors, managers and academics around the world.

Who was responsible for France’s losing its fourth-place position in the world ranking of exporting countries in 2003? The answer is China, a country that now occupies that spot behind the U.S., Germany and Japan. What is responsible for rising oil prices? The Chinese economy, which needs oil to sustain its enormous growth and is now the world’s second-largest consumer. The last decade has seen it evolve from a net oil-exporting country into one that now imports the resource. Meanwhile, it has also become the world’s number-one importer of steel and cement, and its greatest consumer of copper, zinc, platinum, steel, iron and tin.

The increase in raw-material prices results not only from China’s growth, but also from the recovery of the world economy. Who is taking employment away from companies in Mexico and the United States? Again, the answer is China, a country which produces at very low salary costs, and consequently offers highly competitive goods and services on international markets. Add this to a relatively devaluated exchange rate, and its competitiveness in sectors such as toys, footwear and textiles is guaranteed. Though it is true that - so far, anyway - unemployment in the United States has not reached levels that cause concern, it remains a possibility.

Besides competing on international markets, China is also a driving force behind the global economy, thanks to its role as an important source of demand for the rest of the world. European and American exports to China are growing at unstoppable rates. One particularly significant event is the Olympic Games in 2008, which will spark substantial investment in the country over the next five years.

Mandarin miracle

What is behind the low inflation rate in developed countries? Low-priced Chinese products, which have more impact on consumer-price indices than raw materials. And which country is financing the United States’ budget deficit by purchasing treasury bonds? Yes, you guessed it, China. What’s more, it has become a manufacturing powerhouse in which that sector represents 50 percent of its GDP. In Spain and the U.S. the figure is below 25 percent.

What is the key to its success? Obviously not its Marxist ideology. Its turbocharged performance is due to the reforms implemented 25 years ago by Deng Xiaoping, which aimed to open the economy to internal market strengths, foreign investment and trade. The most significant results of these reforms included higher industrial production and increased exports. As a consequence of these measures, GDP growth rate has reached an annual average of 9 percent. It is important to point out that the most densely populated country in the world (it represents one-fifth of the planet’s population) also has the world’s highest growth rate.

But China has its problems, too. A low democratic index, and a huge number of unprofitable public companies owing great amounts to banks, have brought the financial system to the verge of suspension of payments. Still, China is the answer to many of the questions being asked by the world economy. Its dollar reserves are second only to Japan’s. If the Central Bank of China decided tomorrow to reorganize its exchange reserves by buying euros and selling dollars, the euro would appreciate and the competitiveness of the European economy would embark on a downward slope. Finally, China is the largest and most promising emerging economy in the world, one set to become the strongest on the planet in 2040, with a higher GDP than even the U.S.


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