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China, the economy of the year

December 29, 2003 12:06 IST

Let China sleep, for when she wakes up she will shake the world. -- Napoleon Bonaparte

Napoleon was no Nostradamus, but there are enough signs that what he said 200 years ago has more or less come true.

China has made enough of an impact on the world economy in the year about to end to be recognised as a major power, ranking with the US, the European Union and Japan.

The big, headline-attracting event was the pressure on China to upvalue its exchange rate -- I cannot recall a parallel to the developed world pressuring what is, in many ways, still a developing economy, because it feels threatened. Clearly, China has 'arrived'. Consider some numbers:

Chinese exports are the world's fourth largest, and growing rapidly (30 per cent in 2003).

With import tariffs brought down sharply (7 per cent on manufactured goods, and just 3.6 per cent on primary products), imports are growing at an even faster 40 per cent.

The bilateral trade surplus with the US is in excess of $120 billion, but China's deficit with Asia has also grown rapidly.

In fact, the relatively small surplus on the current account (a projected 1.5 per cent of GDP in the current year) and the much faster growth of imports than exports for several years now, is hardly evidence that the currency is undervalued.

Its reserves are nearing $400 billion ($600 billion if Hong Kong is included), but it still borrowed billions on the international financial markets.

Clearly, unlike us, it is neither afraid of the level of reserves, nor prepaying sovereign debt -- indeed, it is adding to it, if only to satisfy investor demand.

The last bond issue had a coupon just about 0.5 per cent above US treasuries. Chinese companies are also accessing the international equity markets equally aggressively.

The recent issue of China Life, an insurance company, for $3.4 billion, was oversubscribed 20 times. Like any major economic power, it has started affecting the fortunes of countries far away.

The Mexican manufacturing/assembly industry, just south of the US border, is unable to compete with Chinese imports in the US from across the Pacific, and is suffering.

On the other hand, commodity producers from Brazil to Argentina to Chile have seen great benefits coming from the rise in the prices of commodities ranging from soyabean to copper, thanks to Chinese demand.

Chinese imports of iron ore are expected to aggregate 150 million tonnes this year.

The current buoyancy in shipping freight rates also owes much to Chinese demand. With the imminent phase-out of textile quotas, smaller exporters are shivering at the prospect of facing unbridled Chinese competition.

The domestic economy is also booming -- indeed, overheating by some measures.

Full-year growth may come to 9 per cent, industrial production is up 16 per cent, and money supply 20 per cent.

Prices have started increasing and the retail price index is up 3 per cent over the corresponding period last year, its highest rise in six years.

The number of cars and light vehicles sold was 4 million -- General Motors expects the Chinese market to be bigger than the US market by 2025.

China consumes almost a quarter of the world's steel production, outstripping both the US and the EU with 16 per cent each.

Its steel capacity is the world's largest, more than that of the US and Japan combined.

Baosteel is an even more efficient producer of steel than Korea's famed POSCO, with a cash flow of $100 per tonne. China is also the world's second largest consumer of crude oil.

Chinese research and development expenditure is the world's third largest after the US and Japan. As the world's largest manufacturer of DVD players/recorders, it has ambitions to get its technical specifications accepted as the world standard.

For a different measure, consider that 375 million Chinese are learning English -- Indian call centres, beware!

At the micro, corporate level as well, several Chinese companies have become world heavyweights, and not just in low-cost manufactures. If court cases by competitors is any guide, several Chinese companies really have made an impact.

Take Huawei, a large telecom equipment manufacturer posing a threat to companies like Cisco. Cisco sued Huawei for patent infringement, but is now talking about a compromise.

ZTE is another large and super-competitive telecom equipment manufacturer.

In consumer electronics, TCL took over Thomson's TV manufacturing and is now the world's largest. Haier, another big consumer electronics firm, was sued by Matsushita, again for patent infringement. Nissan, too, has sued a Chinese automobile company.

Legalities apart, companies of the standing of Matsushita and Nissan would hardly enter into such litigation unless a major threat is perceived.

Another sign of having 'arrived' is that international luxury brands are finding China a very attractive market for perfumes, cosmetics, high fashion accessories and the like.

The weak points? Of course, there are -- the banking sector with non-performing assets as high as 40 per cent. The state sector needs to improve productivity to face the post-World Trade Organisation competition.

Unemployment remains a problem and can escalate into social tensions.

But will the West's perceptions of China as a threat to its 400-year-old economic supremacy, turn out to be as overblown as its similar worries about OPEC in the 1970s and Japan in the 1980s?

This time it does look more real!

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A V Rajwade