China Baffles Western Analysts:

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http://www.dawn.com/2005/12/19/ebr17.htm

China’s baffling feat

By Ashfak Bokhari

CHINA has overtaken the United States as the world’s largest exporter of a broad category of electronic goods including computers, mobile phones and digital cameras. A report issued by the Paris-based Organization for Economic Cooperation and Development on December 12 marks a milestone in China’s diversification from low-tech textile plants into sophisticated electronics factories.

It says Chinese exports of information and communications technology goods rose by 46 per cent year-on-year to $180 billion in 2004, outstripping US exports of $149 billion, 12 per cent higher than the previous year.

Beijing’s amazing feat has baffled its critics in the West who still continue to make old accusations to hide their embarrassment. America’s “BusinessWeek” asks: “Are all these high-tech exports really Chinese?” and answers: “about 60 per cent of these exports come from foreign-invested enterprises.”

A popular comment in Washington is: China cheats.

The fact remains that China’s positive trade balance in tech products almost tripled to $31 billion last year from $12 billion in 2003. The country first became a net exporter of such goods just a year before that, recording a 2002 surplus of $3 billion.

Sacha Wunsch-Vincent, the report’s author, said it highlighted China’s steady rise up the value chain — from televisions, stereos and other low-margin electronic goods to expensive hi-tech equipment. “It is a good sign for the US economy”, he said.

China’s booming trade surplus in PCs and laptops stood at $45.4 billion last year, the new data shows, and its overall trade in ICT goods has grown an average 38 per cent per year since 1996. China also overtook Japan as the main exporter of such goods to the United States last year.

According to the OECD report, European and American mobile phone and PC producers have been investing heavily in China and it still depends heavily on imports for the microchips and circuit-board components it needs to feed its booming hardware manufacturing industry. China’s overall trade deficit in components swelled to nearly $62 billion last year. But these countries are seeing their share of that parts trade shrinking and America now enjoys only a “very small surplus” in components.

Another OECD report released in September had already predicted that China would leapfrog the United States and Germany within five years to become the world’s biggest exporter.

Despite growing social strains and international concerns, the report had said, there would be no let-up in its rapid growth. China is not a member of the OECD but still it published its first report on it simply because of the miracles Beijing has performed by transforming itself within a quarter of a century from a struggling peasant economy to an industrial “titan.”

The OECD says China’s share in world exports was set to rise to 10 per cent by 2010, by which time it would overtake the US. Despite 25 years of GDP growth at an annual rate of more than nine per cent, China is not expected to slow in the near future. The Think-tank has predicted that it would overtake Britain, France and Italy to become the fourth largest economy within five years.

Recently, Ernst & Young, an accounting firm, released a report predicting China would surpass the US as the world’s second largest consumer of luxury goods within 10 years. A separate study by the China Academy of Social Sciences predicted that China’s middle class would more than double in size by 2020 to account for about 40 per cent of the 1.3 billion population.

The OECD has also identified areas that will have to be reformed if Beijing is to complete the transition from a centrally planned economy to a free market economy. These include strengthening the financial system, further steps to allow the currency to float freely and measures to reduce inequality. There is still an evidence of a growing gulf between the urban and rural areas and between the rich and the poor.

The pace of economic change in China has been extremely rapid since the start of economic reforms over 25 years ago. According to official statistics, economic growth has averaged 9.5 per cent over the past two decades and seems likely to continue at that pace for some time. National income has been doubling every eight years. Such an increase in output represents one of the most sustained and rapid economic transformations seen in the world economy in the past 50 years.

The size of the economy, when adjusted for differences in purchasing power, is already larger than all but one or two OECD economies. While average incomes are still below those in other middle income countries, there are large parts of the country that resemble developed East Asian countries just one generation ago and are proceeding along a similar rapid catch-up path.

Many industries have become completely integrated into the world supply chain and, based on current trends, China could become the largest exporter in the world by the beginning of the next decade, with as much as 10 per cent of global trade compared with six per cent at present.

This extraordinary economic performance has been driven by changes in government economic policy that have progressively given greater power to market forces. The transformation started in the agricultural sector more than two decades ago and was extended gradually to industry and large parts of the service sector, so that price regulation was essentially dismantled by 2000 outside the energy sector.

During this period, the government introduced a pioneering company law that for the first time permitted private individuals to own limited liability corporations. The government also rigorously enforced a number of competition laws in order to unify the internal market, while sharpening the business environment by allowing foreign direct investment in the country, reducing tariffs, abolishing the state export trading monopoly and ending multiple exchange rates.

The momentum towards a freer economy has continued this decade with membership of the World Trade Organization leading to the reform of a large number of China’s laws and regulations and the prospect of further tariff reductions. In 2005, regulations that prevented privately-owned companies from entering a number of sectors of the economy, such as infrastructure, public utilities and financial services were abolished.

Overall, these changes have permitted the emergence of a powerful private sector in the economy.