The economic future of China

<a href="http://www.ie.edu/eng/sobreie/sobreie_expertos_detalle.asp?id_exp=302">Rafael Pampillón</a>. Professor. IE Business School

3 December 2007

China, the Asian giant, has made the continent an investment magnet. The next stop is for the countries to join forces.

The economic boom in China is one of the most outstanding events of the 21st century. Key factors underlying the boom include strong demographic potential (with a population of 1,350 million), a high internal rate of saving and the opening-up to the exterior which, if maintained over the coming years, will change the economic map of the world.

It is a well-known fact that in China the average annual growth of GDP has reached around 10% over the last 30 years. In 2007, an economic growth of around 12% is expected, the highest level of the last 11 years. This is accompanied by increased expectations of policies being adjusted to prevent the world´s fastest-growing economy from overheating. The figures, released by the National Office of Statistics, position the Asian giant on the road to reaching its fifth consecutive year with a two-digit growth rate and only one step away from overtaking Germany as the third-largest economy in the world.

To cool down the economy, the Chinese are increasing interest rates through the credit the Central bank of China awards to the banking system and by increasing the coefficient of bank reserves. At present, it is a moderate adjustment aimed at controlling the monetary and credit situation. Goldman Sachs anticipates a striking growth rate of 12.3% for 2007. However, as we have already pointed out, this growth is not free from inflationist pressure. The growing global demand for foodstuffs, the climate change and pressure to divert harvests to the manufacture of biofuels are increasing food prices all over the world. China is no exception. The increase in the price of basic foodstuffs, such as pork, eggs and cooking oil, has forced the Chinese food price index through the roof. We must remember that foodstuffs are of great significance in the Chinese CPI. For this reason, China has accumulated an inflation rate of 6.5%.

China´s economic boom of the last three decades seems to have accelerated since it joined the World Trade Organisation (WTO) in 2001. However, many of its neighbours (Thailand, Malaysia, Singapore, the Philippines, Indonesia, Taiwan and South Korea) saw it as a threat. If China was already a strong competitor on the world market as far as its neighbours are concerned, with its entry in the WTO, these countries feared that the dismantling of the commercial barriers required by the organisation would make China even more irresistible for foreign capital, diverting investments which might otherwise have gone to them.

However, this does not seem to have been the case. It is indeed true that foreign investment in China has increased considerably. In 2004, China caught up with Japan to become the third-largest exporter in the world, second only to the USA and Germany. At the beginning of this year, China overtook the USA and, last August, its exports surpassed those of Germany, traditionally the leading exporter in the world, for the first time. However, foreign investment has not only grown in China. The 10 countries of ASEAN have experienced an increase in foreign investment, largely due to the economic boom of China. This is because a "machine" as big as China favours the region as a whole. Indeed, many of the components and parts manufactured in China are assembled in neighbouring countries, such as Thailand, Malaysia, the Philippines, Indonesia, Taiwan and South Korea.

This is why China´s entry in the WTO has led to the creation of complex but increasingly efficient production network in the region. Even Japan has benefited from the Chinese boom. If it were not for China´s heavy demand for top-notch components and consumer goods, Japan would not have managed to overcome the depression from which it suffered for 15 years. India and the more eastern countries of South Asian have also benefited from the Chinese boom, albeit not for the same reasons as Japan. They are rich in resources such as rubber, oil, palm oil and natural gas and they welcome China´s large appetite for these raw materials.

Relations between China and its neighbours make up a complex mesh of regional and sub-regional cooperation agreements. The aim is to create multilateral groups, such as t ASEAN or APEC. For China and its neighbours, it is important to maintain relatively stable relations and reduce their commercial and economic dependence on the USA.

China´s significance in both Asia and the world as a whole is constantly increasing, to the point where it has become a new economic pole. At the beginning of 2007, during the second East Asian Summit (with the participation of 16 nations from the region), which took place in the Philippines, Gloria Macapagal Arroyo, president of the host country, declared: "We are proud to have China as our big brother". Chinese politicians consider that the development of regional interdependence is a key factor of success for the strong growth of the Chinese economy and, therefore, that of its environment, to be sustainable and durable. The time is undoubtedly coming when both China and its Asian partners will become the leading economic reference in the world (especially if we take into account the fact that the year-on-year expectations for growth are surpassed by reality).

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