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China — Asia’s Super Tiger

In view of the global recession, what is China’s secret of success?

October 19, 2001

In view of the global recession, what is China's secret of success?

Most leaders of APEC countries could get some intriguing ideas about restoring or speeding economic growth in their own countries while they visit China. Many Asian-Pacific economies — Taiwan, Thailand, the Philippines and Indonesia — are near stagnation. Japan and the United States are in outright recession. China on the other hand is surging ahead by more than 8 percent this year. This is only a couple of points below China’s 10.3 percent annual 1990-2000 growth average.

China’s total production is still relatively small. Including Hong Kong, it accounts for only about 4 per cent of world GDP. But China has emerged as the growth star of Asia — a super tiger. It is also now one of the few growth engines in the entire world.

Even more surprising — especially in an Asian context — is the fact that China is able to grow its vast national economy, even with declining dependence on exports.

There are a dozen keys to Chinese success amid world sluggishness. But the core reason is this: China did not let the 1997-98 Asian financial and currency crisis derail it from the track of modernization and free market reform.

True, China has launched massive new repressions against religious groups and criminals in recent years. But China has also plunged ahead with economic reforms.

China’s desire to join the World Trade Organization spurred part of the reforms. Thus, Beijing ordered its army to privatize the commercial companies that the army had set up over the years. And the Chinese army complied with that command.

China is also cracking down hard on intellectual piracy, although some abuses continue to occur on this front.
Why did the Chinese do so? Of course, the stealing and counterfeiting of Western software was against WTO rules. But that alone may not have been enough.

A more powerful reason to combat the rampant thievery was that it was also severely damaging to China’s own emerging software industries. In essence, without proper legal protection, its home-grown techies were getting robbed of the benefits of their creations even faster than the West’s major companies.

On the government front, China is continuing to close state-owned enterprises — or sell them to the private sector. It has now laid off, or otherwise shed, 46 million workers who once worked for non-agricultural collectives or state corporations. The dead-weight, money-losing state sector has shrunk to just 30 percent of the economy.

Meanwhile, China’s banks are relentlessly rationing their lending to state-owned enterprises. The reason is simple: The government reimburses the banks’ losses on those loans — which rarely make the banks money — at very low rates, or no interest at all. That hard-line policy is unheard of in Japan, which — even though it has a much more mature economy — would need this medicine even more.

And China’s consumers and private businesses, on the other hand, repay their credit lines, with interest — and the banks are lunging for these profits.

China’s drive for a smaller government sector extends to general government. The national regime has initiated a program to halve the number of general government services workers from 8 million to 4 million.

Given Beijing’s official communist label, many assume that the government function must be a swollen bureaucracy. But excluding the admittedly still large state corporations, and the pension and other transfers that pass through government hands, China’s cost of government is surprisingly light.

According to the World Bank’s 2002 Development Report, China’s general government burden (“net purchases”) is 11 percent of total production. This compares to 14 percent in the United States — and 19 percent each in Germany and France.

Equally remarkable is the pace at which China is reducing its dependency on exports. The reforms in China are facilitating the expansion of the domestic economy even more than they are boosting exports.

Indeed, exports will expand only about 10 percent this year, compared to 28 percent in 2000. In Western analyst circles, those numbers are widely viewed as a sign of crisis. These analysts should be able to sleep more soundly. After all, China’s overall economic growth will be as fast as in 2000.

What this shows is that the switch away from relying (too much) on demand for Chinese exports from abroad and toward more domestic demand is essentially working. But there are other factors at play as well. Consider, for example, the contrast between China’s endorsement of change following the 1997 crisis — and the eraction of Taiwan and Japan.

Once models for growth to the whole world, the economies of Taiwan and Japan are now dominated by money-losing banks and businesses that are hanging on to most of their employes in the name of social welfare.

But they are launching nothing new and hopeful. So growth is next to nothing, and these countries’ unemployment levels are rising anyway. Stagnation is mounting — and their long-term social welfare is in doubt.

In the case of China and Japan, the stimulative role of foreign investment is striking. Japan, 55 years after starting development, is still a dwarf in this regard. It had absorbed only $39 billion in total direct investment in factories and businesses by foreigners through the end of 1999.

China, on the other hand, has attracted $306 billion in foreign direct investment in just the last two decades. In fairness to Japan, though, China is vastly poorer and ought to grow more rapidly. It is, after all, importing or creating 21st century technologies in what is still a largely backward farming nation that used no modern technology at all.

China thus has a lot of easy, catch-up gains in output to record. Still, at their respective growth rates over the last dozen years, China will overtake Japan in total output within less than 20 years.

Admittedly, there are those who doubt the reliability of the Chinese government statistics quoted above. Evidently, no one can know for sure. But I am encouraged that these numbers are not pie-in-the-sky acts of wishful thinking.

When it comes right down to it, there is a lot that the Chinese government does right in its pursuit of economic reform. It acts with a deftness and courage that is both surprising — and inspiring.

In fact, many of the member nations of APEC — but also the nations of Europe — could learn a lot from the truly revolutionary zeal displayed by those “communist” policy planners in Beijing these days.

All of which goes to show you how little those erstwhile ideological labels matter in today’s world.