The Chinese Global Challenge: The world’s second largest economy

04.MAR.11

Editor: “It is glorious to be rich”, the prescient words of Deng Xioping- the then defacto leader of China in 1979, signal China’s experimentation with Market Socialism, as they have deemed it, but more redolent of Capitalism. These poignant words have heralded the rise of China as an economic super power.{{more}}

China, with much hubris, has recently surpassed the prosaic economy of Japan to become the second largest economy in the world, with a gross domestic output of US$ 5.9 trillion.

The factory of the world- as it is often referred to, churns out voluminous amounts of low tech goods to feed the insatiable appetite of western consumers. Such exports have allowed it to amass a foreign exchange reserve of USD 2.89 trillion by the end of 2010. It has become the leading creditor nation to the United States, holding more USD891.6 bilion Treasury bills (short term bonds) by the end of that same year. Instead of receiving no interest on such reserves, it has invested such in financial securities. Such bank rolling of the United States has enabled the American to buy cheap Chinese goods.

The growing economic strength of the Chinese economy has emboldened the government to flirt with the idea of a semi-convertible currency, establishing foreign accounts in Hong Kong, where Chinese exports can be paid in the Yuan- the Chinese currency- rather than in US dollars, Pounds, Euro or the Yen, thus laying the ground work for a fully convertible currency when it feels comfortable enough to do so. In so doing, the Yuan will become the fifth tradable currency in the world that facilitates international trade.

Its monolithic state monopolies have created tradable subsidiaries, whose shares are bought and sold on the Shanghai, New York, London and Hong Kong stock exchanges.

Chinese companies have become major players in the world of finance, manufacturing and minerals. The likes of Petro China, Sinopec, CNOOC, Minmetals, Industrial and Commercial Bank of China, Ping An and China Life have become influential players in their respective industries. Haier- the white goods manufacturer, Huwei technology and ZTE telecom equipment maker and Lenovo the computer maker are all global brands. ICBC, one of the four big state banks, was the largest bank in the world by market capitalization by the end of December 2009. Three out of these four banks were in the top 10 companies in the world in this category.

Petro China was the world’s largest tradable company in December 2009, outstripping the likes of Exxon Mobil, Microsoft, ICBC and Wal-Mart.

For two consecutive years, China has surpassed the United States in domestic car sales. Car sales in China rose to 13.6 million units in 2009, while in the United States 10.4 million units were sold.

In the next decade, Chinese car companies such as Cheery, Geely, First Auto Works, Dong Feng Motors and SAIC will offer formidable challenges to Japanese and South Korean companies.

While the Japanese practice reversed engineering in developing new products, the Chinese have taken the route of joint ventures and the outright purchase of companies to acquire technological knowhow. The majority of Chinese motor industries are in tie-up with major Western companies. General Motors alliance with Shanghai Automotive Industry Corporation (SAIC) fetched it more profit in China than in the United States.

The success of China not only lies in the comparative advantage it has in the abundance of cheap labour. The inflow of foreign direct investment which amounted to USD105.7 billion a 17.5 percent on the year earlier has enabled China to achieve break- neck economic growth of around 10 percent per annum.

Patents, a crude sign of innovation, is another area where China is rapidly catching up with the United States and Japan. It surpassed Japan in new patents in 2010. It is more startling given the fact Japan had four times as patent filing than China in 2000.

China’s demand for commodities has led to considerable investment in Africa and South America. Zimbabwe recently announced that China is contemplating investing USD10 billion in the mining and agricultural sectors. While Colombia announced that China is to invest USD3 billion in a cross country rail link to the Pacific to satisfy the country’s demand for raw material. It has signed an US$800 million agreement with Cuba to improve the operations of its Nickel industry and to lay he ground work for the exploratory stage of drilling f or oil on the north coast of the island.

Where Chinese capital flows its nationals will follow. It is estimated that up to 1 million Chinese migrants are working or doing business in Africa, to the chagrin of locals.

The Chinese have been broadening diplomatic relations with the Caribbean region also. They are more interested in Trinidad and Tobago, Jamaica, Guyana and Cuba because of their mineral resources, but they are also busy buying influence in the smaller islands. In competition with Taiwan for diplomatic influence, it has been munificent in the granting of foreign aid to many of these islands. It has built stadiums in Grenada and Bahamas.

China’s success has come at a cost to the environment. It is the leading polluter in the world. The break neck pace of China’s development has led to environment degradation such as the destruction of the forest and pollution of major rivers. Freedom of speech is severely restricted and the Communist party is the only one legally allowed. The press is virtually state owned

China, as the world’s most populous country and the second largest economy in world, has it pros and cons that pose many global challenges.

Nilio Gumbs