News Release Details
China – The Growth Story
New Delhi 20-Mar-2007
China’s economic growth in recent years in terms of both scale and size has seldom been witnessed by any other country or region. With its large economic base (2006 GDP: US$ 2.68 trillion), it almost adds an economy equivalent of a third of India or one Greece or two Singapores every year. At 10.7%, the growth achieved during 2006 was the best in last 11 years in China. During 18 years of pre reforms period (1960-78), China’s economy grew at a very decent average rate of 5.3%. The post reforms 25 years (1979-2004) saw a consistently outstanding pace of growth, notching an average of 9.3%. In contrast, look at the world & the rest of it: During 1990-2003, world economy grew at an average of 3.2%, USA at 2.9%, Japan at 2% & India at 5.6%. How could, within a short period, a country of such size, notch such a remarkable growth? Lets seek some answers. But first, lets fathom the ‘BIG’ness of China. <b>China – How Big?</b> At 1.3 billion, China’s population is 20% of the world population. In terms of area, it’s the 4th largest country in the world, about 3 times larger than India, slightly smaller than USA. Measured on a purchasing power parity (PPP) basis, China, at US$ 10 trillion (2006 estimate), is the second largest economy in the world after USA (US$ 13 trillion). China contributes 15.4% to world PPP GDP, whereas India contributes to 6.5% (See adjoining graph). Chinese foreign exchange reserves (including gold) surpassed the unprecedented 1 trillion dollars during 2006, the largest in the world – 20% larger than the Indian economy! [Many of you may know, but still some may like to ask - “What is PPP”? It’s the acronym of “Purchasing Power Parity”; PPP theory states that price levels in any two countries should be identical after converting prices into a common currency. In other words, it says that purchase power of $1 in USA is not necessarily the same as that of Rs 45/- (Rupee equivalent of US$1) in India. For example, if $1 buys you an apple in USA and Rs 45/- buys two apples in India, India’s PPP GDP would be double that of its GDP at nominal exchange rates.] <b>China – The Big Producer & Consumer</b> China is also one of the largest producer as well as consumer of goods in the world. It’s the world’s manufacturing hub for both technology & labour-intensive products. Of the total produce of various products in the world, Chinese factories contribute 70% of toys, 60% of bicycles, 50% of shoes & Microwave ovens, 33% of luggage / televisions / air conditioners, 25% of dishwashers & 20% of refrigerators. China is the largest market for Boeing’s commercial aircrafts. It is also Volkswagen’s biggest foreign market ahead of USA. <b>China – Some Recent BIG events</b> In recent times, many of what China has been doing, are of a scale larger than ever seen before. Few such examples are Three Gorges Dam, 100 MW solar power station, first A320 jet plane assembly line outside Europe and IPO of Industrial & Commercial Bank of China. <b>China – Some Recent BIG events</b> In recent times, many of what China has been doing, are of a scale larger than ever seen before. Few such examples are Three Gorges Dam, 100 MW solar power station, first A320 jet plane assembly line outside Europe and IPO of Industrial & Commercial Bank of China. The 1.4 mile long, 607 ft high, US$ 22 billion “Three Gorges Dam” on the Yangtze (Changjiang) River, when completed in 2009, would be the largest hydroelectric project in the world, providing 18,200 MW of electricity (equivalent to 54% of India’s total hydro installed capacity). China intends to build, in next 5 years, a 100 MW solar power station, the second largest after the planned 154 MW power station announced by Australia. This will be located at Dunhuang, Ghansu province of North West China. Airbus' first air¬craft assembly plant outside Europe is planned at Tianjin, the largest port city in North China. The first aircraft is expected to be delivered in 2008 and the plant will be able to produce four jets a month by 2011. The Chinese capital market recently saw something world has seen never before. The Industrial & Commercial Bank of China (ICBC), on 27-Oct-06, pulled off world’s largest Initial Public Offering (IPO), collecting a staggering US$ 21.9 billion (after exercising greenshoe options) in Hong Kong & Shanghai markets, surpassing the previous record US$18.4 billion by Japan's NTT DoCoMo Inc in 1998. During Oct-Nov-2006, China achieved the unprecedented financial high of US$1 trillion dollars foreign reserves holdings, accounting for nearly 20 percent of the world's foreign exchange with about 70 percent of its holdings in dollars. Like being a multi-millionaire, or in the case of China's central bank, a trillionaire, hoarding such huge amounts of money has benefits as well as side-effects. While it provides security in times of economic trouble and also helps defend against financial speculators, it also over-stimulates the economy putting pressure in inflationary growth. <b>China – The Energy Guzzler</b> On the energy front, during 2005, China consumed maximum coal (1082 mtoe, 37% of world), maximum hydroelectricity (91 mtoe, 13.6% of the world); second largest quantity of oil (327 MMT-8.5% of the world) & primary energy (1554 mtoe-14.7% of the world). India is the 3rd largest coal consumer in the world (7%), 5th largest in primary energy (4%), 6th largest in oil (3%) & 7th largest in hydroelectric (3%). (See adjoining graph). <img src=/NewImages/Thumbnail/graph2.jpg> <b>What spurred such a high pace of growth?</b> China's economy during the last quarter century has changed from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. How this has helped China in registering this remarkable high rate of growth? What are the stark contrasts in economy during the pre & post reforms era? Three key reasons of this are a) An early reforms agenda (a 10-year head start as compared to India); b) Boom in Foreign Direct Investment (FDI) and c) A sharp & sustained increase in productivity, i.e. increased worker efficiency. <b>a) Market oriented reforms started in 1978, more than a decade ahead of India!</b> During 1950s, all of China’s individual household farms were collectivised into large communes. During 60s & 70s, Government undertook large-scale investments in physical & human capital. By 1978, as much as 3/4th of industrial production were coming from State Owned Enterprises (SOE) and private enterprises/ foreign investment firms were nearly non-existent. During pre-reforms era (pre 1978), planning was centralized & State control was there on all productive assets. The State set production goals, controlled prices & allocated resources with a goal of self-sufficiency. Foreign trade was limited to goods not produced domestically. Ministry of Foreign Trade owned all import export wings viz. State Planning Commission (SPC) and a handful of other foreign trade corporations. SPC’s Import/Export Plan covered more than 90% of all imports and export volumes were specified for more than 3000 commodities. Imports/exports were insensitive to exchange rates. The situation, perhaps, was something like License raj of India that prevailed prior to 1991or may be even worse. The Chinese exports consisted of many capital-intensive goods – even refined petro products were exported till the late 80s, which was away from Chinese comparative advantage. As a result of the restrictive trade policies, the volume of Chinese trade as a percentage of world trade declined from 1.5% in 1953 to 0.6% in 1977. Post 1978, reforms were introduced which freed many enterprises from State intervention & profit incentives were given to rural collective enterprises, family farms, small private businesses, foreign investors, traders, etc. The number of State Owned Enterprises (SOP) came down from 56% (1978) to 40% (1992). Reforms unlocked avenues for opening small non-agricultural businesses in rural areas, decollectivised agriculture, which fetched higher income allowing farms to use labor more efficiently. The number of people working in agriculture-related areas came down from 80% to 50%. Rapid growth of village enterprises drew tens of millions of people from agriculture to higher value added manufacturing. Reforms granted more autonomy to enterprise managers, more freedom to sell products in private market, grant bonuses to good workers, fire bad ones, retain some profit for reinvestments, etc. All these steps helped in creation of jobs, developed consumer products, improved tax revenues for Government, made national economy more resilient & flexible, improved foreign trade and earned more foreign exchange for the country. <b>b) Entry of Foreign Direct Investment (FDI)</b> The widespread reforms attracted foreign investment. Whereas cumulative FDI till 1979 was negligible, it stood at US$ 704 billion at the end of 2006 (US$ 69 billion in the year 2006 itself). It would increase further with reduction of investment barriers, China’s WTO entry & increase in imports. FDI has played a very significant role in aiding the growth impetus of China. FDI as a percentage of gross fixed capital formation was 9.2% during 2005 as against 3.5% of India. According to an estimate, by the end of 2005, the number of registered foreign-invested enterprises was 2,80,000, employing about 25 million people. In contrast, the cumulative FDI into India upto Nov-2006 (US$ 46 billion) was less than what China got in last one year itself. It was US$ 7.2 billion during the 8-month period Apr-Nov/06, making India, as some people say, an "underachiever" in attracting FDI. However, there has been some scepticism about what all China includes while compiling its FDI figures. As per some analysts, China’s FDI would be lower than the stated figures (since data under several heads that China includes in its FDI do not strictly fall under the purview of FDI). On the other hand, India's adoption of a somewhat broader method of FDI computation would raise its net annual FDI inflow figures. Nomenclature apart, China has made great strides in attracting FDI & has greatly improved its infrastructure, which has given a positive ripple effect in the entire chain of FDI attracted, actual investment, employment generation, improving productivity, generating surplus funds & making the whole economy resilient. <b>c) Sharp & sustained increase in productivity (or worker efficiency)</b> An IMF research team had examined the sources of China’s growth and arrived at surprising conclusions. In addition to growth in capital accumulation (factories, machinery, communications systems, etc) & no of workers, a sustained increase in productivity (worker efficiency) was the key behind the economic boom. During the 15-year period 1979-94, productivity gains accounted for more than 42 percent of China's growth and by the early 1990s had overtaken capital as the most significant source of that growth. The annual growth rate of productivity was 3.9% for China (1979-94). In contrast, USA productivity grew at 0.4% (1960-89) and Asian tigers (HK, Korea, Singapore, Taiwan) grew at 2% (1966-91). This marked a departure from the traditional view of development in which capital investment takes the lead. This jump in productivity originated in the economic reforms begun in 1978. And it is productivity led growth that is expected to last longer than capex led growth. The boost in productivity was primarily due to decontrol of agriculture (no of Chinese people in agriculture came down from 80% to 50% in 1½ decades), private ownership in manufacturing, greater autonomy to enterprise managers, etc, that unlocked the potential amongst the Chinese. Moreover, China's open-door policy brought in FDI along with the best in technology, managerial expertise and best practices from all around the world. <b>Epilogue</b> The restructuring of the economy and efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Though on a PPP basis, China is the second-largest economy in the world after the US, in per capita terms, the country is still lower middle-income and 130 million Chinese fall below international poverty lines. Even in terms of PPP GDP per capita, China’s rank (US$ 7600/-, 1/6th of USA & 1/5th of Hong Kong) in the world is 107, quite a long way to go! The Central Committee of the Chinese Communist Party has approved the draft for the 11th 5-year plan for 2006-2010. The plan calls for a further 45% increase in GDP and 20% reduction in energy intensity by 2010. The 5-year plans aim for 7.5 percent annual growth in GDP and 6.6% growth in per capita GDP till 2010. China projects its growth of economic output to $4 trillion by 2020, up from $2.7 trillion in 2006, with output per capita tripling to $3,000 per person. In spite of many obstacles (low per capita income vs the developing economies, disparities in incomes, regional disparities in richness, under performing State Owned Enterprises, Human rights issues, surplus manpower, loss of arable land, pollution, corruption, etc) on its way towards growth, China, perhaps, is the best example of success amongst the developing economies.
New Delhi 20-Mar-2007
China’s economic growth in recent years in terms of both scale and size has seldom been witnessed by any other country or region. With its large economic base (2006 GDP: US$ 2.68 trillion), it almost adds an economy equivalent of a third of India or one Greece or two Singapores every year. At 10.7%, the growth achieved during 2006 was the best in last 11 years in China. During 18 years of pre reforms period (1960-78), China’s economy grew at a very decent average rate of 5.3%. The post reforms 25 years (1979-2004) saw a consistently outstanding pace of growth, notching an average of 9.3%. In contrast, look at the world & the rest of it: During 1990-2003, world economy grew at an average of 3.2%, USA at 2.9%, Japan at 2% & India at 5.6%. How could, within a short period, a country of such size, notch such a remarkable growth? Lets seek some answers. But first, lets fathom the ‘BIG’ness of China. <b>China – How Big?</b> At 1.3 billion, China’s population is 20% of the world population. In terms of area, it’s the 4th largest country in the world, about 3 times larger than India, slightly smaller than USA. Measured on a purchasing power parity (PPP) basis, China, at US$ 10 trillion (2006 estimate), is the second largest economy in the world after USA (US$ 13 trillion). China contributes 15.4% to world PPP GDP, whereas India contributes to 6.5% (See adjoining graph). Chinese foreign exchange reserves (including gold) surpassed the unprecedented 1 trillion dollars during 2006, the largest in the world – 20% larger than the Indian economy! [Many of you may know, but still some may like to ask - “What is PPP”? It’s the acronym of “Purchasing Power Parity”; PPP theory states that price levels in any two countries should be identical after converting prices into a common currency. In other words, it says that purchase power of $1 in USA is not necessarily the same as that of Rs 45/- (Rupee equivalent of US$1) in India. For example, if $1 buys you an apple in USA and Rs 45/- buys two apples in India, India’s PPP GDP would be double that of its GDP at nominal exchange rates.] <b>China – The Big Producer & Consumer</b> China is also one of the largest producer as well as consumer of goods in the world. It’s the world’s manufacturing hub for both technology & labour-intensive products. Of the total produce of various products in the world, Chinese factories contribute 70% of toys, 60% of bicycles, 50% of shoes & Microwave ovens, 33% of luggage / televisions / air conditioners, 25% of dishwashers & 20% of refrigerators. China is the largest market for Boeing’s commercial aircrafts. It is also Volkswagen’s biggest foreign market ahead of USA. <b>China – Some Recent BIG events</b> In recent times, many of what China has been doing, are of a scale larger than ever seen before. Few such examples are Three Gorges Dam, 100 MW solar power station, first A320 jet plane assembly line outside Europe and IPO of Industrial & Commercial Bank of China. <b>China – Some Recent BIG events</b> In recent times, many of what China has been doing, are of a scale larger than ever seen before. Few such examples are Three Gorges Dam, 100 MW solar power station, first A320 jet plane assembly line outside Europe and IPO of Industrial & Commercial Bank of China. The 1.4 mile long, 607 ft high, US$ 22 billion “Three Gorges Dam” on the Yangtze (Changjiang) River, when completed in 2009, would be the largest hydroelectric project in the world, providing 18,200 MW of electricity (equivalent to 54% of India’s total hydro installed capacity). China intends to build, in next 5 years, a 100 MW solar power station, the second largest after the planned 154 MW power station announced by Australia. This will be located at Dunhuang, Ghansu province of North West China. Airbus' first air¬craft assembly plant outside Europe is planned at Tianjin, the largest port city in North China. The first aircraft is expected to be delivered in 2008 and the plant will be able to produce four jets a month by 2011. The Chinese capital market recently saw something world has seen never before. The Industrial & Commercial Bank of China (ICBC), on 27-Oct-06, pulled off world’s largest Initial Public Offering (IPO), collecting a staggering US$ 21.9 billion (after exercising greenshoe options) in Hong Kong & Shanghai markets, surpassing the previous record US$18.4 billion by Japan's NTT DoCoMo Inc in 1998. During Oct-Nov-2006, China achieved the unprecedented financial high of US$1 trillion dollars foreign reserves holdings, accounting for nearly 20 percent of the world's foreign exchange with about 70 percent of its holdings in dollars. Like being a multi-millionaire, or in the case of China's central bank, a trillionaire, hoarding such huge amounts of money has benefits as well as side-effects. While it provides security in times of economic trouble and also helps defend against financial speculators, it also over-stimulates the economy putting pressure in inflationary growth. <b>China – The Energy Guzzler</b> On the energy front, during 2005, China consumed maximum coal (1082 mtoe, 37% of world), maximum hydroelectricity (91 mtoe, 13.6% of the world); second largest quantity of oil (327 MMT-8.5% of the world) & primary energy (1554 mtoe-14.7% of the world). India is the 3rd largest coal consumer in the world (7%), 5th largest in primary energy (4%), 6th largest in oil (3%) & 7th largest in hydroelectric (3%). (See adjoining graph). <img src=/NewImages/Thumbnail/graph2.jpg> <b>What spurred such a high pace of growth?</b> China's economy during the last quarter century has changed from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. How this has helped China in registering this remarkable high rate of growth? What are the stark contrasts in economy during the pre & post reforms era? Three key reasons of this are a) An early reforms agenda (a 10-year head start as compared to India); b) Boom in Foreign Direct Investment (FDI) and c) A sharp & sustained increase in productivity, i.e. increased worker efficiency. <b>a) Market oriented reforms started in 1978, more than a decade ahead of India!</b> During 1950s, all of China’s individual household farms were collectivised into large communes. During 60s & 70s, Government undertook large-scale investments in physical & human capital. By 1978, as much as 3/4th of industrial production were coming from State Owned Enterprises (SOE) and private enterprises/ foreign investment firms were nearly non-existent. During pre-reforms era (pre 1978), planning was centralized & State control was there on all productive assets. The State set production goals, controlled prices & allocated resources with a goal of self-sufficiency. Foreign trade was limited to goods not produced domestically. Ministry of Foreign Trade owned all import export wings viz. State Planning Commission (SPC) and a handful of other foreign trade corporations. SPC’s Import/Export Plan covered more than 90% of all imports and export volumes were specified for more than 3000 commodities. Imports/exports were insensitive to exchange rates. The situation, perhaps, was something like License raj of India that prevailed prior to 1991or may be even worse. The Chinese exports consisted of many capital-intensive goods – even refined petro products were exported till the late 80s, which was away from Chinese comparative advantage. As a result of the restrictive trade policies, the volume of Chinese trade as a percentage of world trade declined from 1.5% in 1953 to 0.6% in 1977. Post 1978, reforms were introduced which freed many enterprises from State intervention & profit incentives were given to rural collective enterprises, family farms, small private businesses, foreign investors, traders, etc. The number of State Owned Enterprises (SOP) came down from 56% (1978) to 40% (1992). Reforms unlocked avenues for opening small non-agricultural businesses in rural areas, decollectivised agriculture, which fetched higher income allowing farms to use labor more efficiently. The number of people working in agriculture-related areas came down from 80% to 50%. Rapid growth of village enterprises drew tens of millions of people from agriculture to higher value added manufacturing. Reforms granted more autonomy to enterprise managers, more freedom to sell products in private market, grant bonuses to good workers, fire bad ones, retain some profit for reinvestments, etc. All these steps helped in creation of jobs, developed consumer products, improved tax revenues for Government, made national economy more resilient & flexible, improved foreign trade and earned more foreign exchange for the country. <b>b) Entry of Foreign Direct Investment (FDI)</b> The widespread reforms attracted foreign investment. Whereas cumulative FDI till 1979 was negligible, it stood at US$ 704 billion at the end of 2006 (US$ 69 billion in the year 2006 itself). It would increase further with reduction of investment barriers, China’s WTO entry & increase in imports. FDI has played a very significant role in aiding the growth impetus of China. FDI as a percentage of gross fixed capital formation was 9.2% during 2005 as against 3.5% of India. According to an estimate, by the end of 2005, the number of registered foreign-invested enterprises was 2,80,000, employing about 25 million people. In contrast, the cumulative FDI into India upto Nov-2006 (US$ 46 billion) was less than what China got in last one year itself. It was US$ 7.2 billion during the 8-month period Apr-Nov/06, making India, as some people say, an "underachiever" in attracting FDI. However, there has been some scepticism about what all China includes while compiling its FDI figures. As per some analysts, China’s FDI would be lower than the stated figures (since data under several heads that China includes in its FDI do not strictly fall under the purview of FDI). On the other hand, India's adoption of a somewhat broader method of FDI computation would raise its net annual FDI inflow figures. Nomenclature apart, China has made great strides in attracting FDI & has greatly improved its infrastructure, which has given a positive ripple effect in the entire chain of FDI attracted, actual investment, employment generation, improving productivity, generating surplus funds & making the whole economy resilient. <b>c) Sharp & sustained increase in productivity (or worker efficiency)</b> An IMF research team had examined the sources of China’s growth and arrived at surprising conclusions. In addition to growth in capital accumulation (factories, machinery, communications systems, etc) & no of workers, a sustained increase in productivity (worker efficiency) was the key behind the economic boom. During the 15-year period 1979-94, productivity gains accounted for more than 42 percent of China's growth and by the early 1990s had overtaken capital as the most significant source of that growth. The annual growth rate of productivity was 3.9% for China (1979-94). In contrast, USA productivity grew at 0.4% (1960-89) and Asian tigers (HK, Korea, Singapore, Taiwan) grew at 2% (1966-91). This marked a departure from the traditional view of development in which capital investment takes the lead. This jump in productivity originated in the economic reforms begun in 1978. And it is productivity led growth that is expected to last longer than capex led growth. The boost in productivity was primarily due to decontrol of agriculture (no of Chinese people in agriculture came down from 80% to 50% in 1½ decades), private ownership in manufacturing, greater autonomy to enterprise managers, etc, that unlocked the potential amongst the Chinese. Moreover, China's open-door policy brought in FDI along with the best in technology, managerial expertise and best practices from all around the world. <b>Epilogue</b> The restructuring of the economy and efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Though on a PPP basis, China is the second-largest economy in the world after the US, in per capita terms, the country is still lower middle-income and 130 million Chinese fall below international poverty lines. Even in terms of PPP GDP per capita, China’s rank (US$ 7600/-, 1/6th of USA & 1/5th of Hong Kong) in the world is 107, quite a long way to go! The Central Committee of the Chinese Communist Party has approved the draft for the 11th 5-year plan for 2006-2010. The plan calls for a further 45% increase in GDP and 20% reduction in energy intensity by 2010. The 5-year plans aim for 7.5 percent annual growth in GDP and 6.6% growth in per capita GDP till 2010. China projects its growth of economic output to $4 trillion by 2020, up from $2.7 trillion in 2006, with output per capita tripling to $3,000 per person. In spite of many obstacles (low per capita income vs the developing economies, disparities in incomes, regional disparities in richness, under performing State Owned Enterprises, Human rights issues, surplus manpower, loss of arable land, pollution, corruption, etc) on its way towards growth, China, perhaps, is the best example of success amongst the developing economies.