China has come a long way since Deng Xiaoping adopted the capitalist ideal in 1978 and launched his policy of ‘reform and opening up’. Over the last three decades, the value of the country’s economy has risen dramatically. Delivering growth of around 9% per annum and achieving 10.1% last year, that value has risen by £2.8trn in the last ten years. In 2010 the gross domestic product (GDP) rose to £3.7trn, taking China’s economy to a global second place after the United States. Goldman Sachs predicts that the China will actually overtake the States by 2027 but some crystal balls forecast a much earlier date.
Putting that growth into context, Britain reported a contraction of 0.5% in 2010 and although that’s likely to go into the black this year, the forecast is for a mere 1.5%. As for America, life might be improving a little but with a predicted growth rate of 3.5%, it’s still a long way behind the dragon.
There’s little question that China is cash rich and the mandarins have not been slow to invest. Which in turn, has boosted economic growth to levels which many economists feel is unsustainable. China’s banks fed almost £1trn into the economy last year, (a sum in excess of the UK’s total national debt). And there is likely to be little change in 2011 with the government setting lending targets of over £7bn. But the shadow of inflation creeps up on the heels of increased liquidity; the rate of inflation in December was 4.6%, slightly down from the 5.1% of the previous month with the benchmark corporate interest rate also at 5.1% but that is expected to rise over the next few months.
Notwithstanding all the statistics, China’s money supply is still a quarter more than that of the States. (In part, say the cynics, because during the global recession, the Chinese printed a whole lot more!) In 2010, China imported more than £800bn worth of goods and services and the government has indicated that that figure will rise. Luxury goods are high on consumers’ lists: many people now insist on drinking French wines and last year spent some €200m on the stuff. After the embarrassment over the Nobel Peace Price winner, Liu Xiaobo, China has turned away from Norway and, for the first time, has come to an agreement with Scotland for the supply of salmon. On average, the Chinese consume more than 200,000 tonnes of salmon products every year and almost 50% is imported.
And then there is China’s seemingly insatiable demand for commodities. Saudi Arabia is to raise oil exports to Sinopec by 10% this year, bringing levels to at least 970,000bpd which would almost eclipse sales to the States. China has already increased it’s refining capacity and has an eye on buying into the potential of oil rich areas such as Canada’s Athabasca Oil Sands and the offshore reserves of Brazil and Namibia. Metals are high on the shopping list and, with a current massive shortage of grain, China is chasing key commodities like corn, wheat, sugar and soybeans.
Speaking at the recent World Economic Forum in Davos, Commerce Minister Chen Deming said that China was planning to double its imports over the next five years and reduce its reliance on exports.
“Our development needs to be shared, so in the future we will be even more open,” said Chen. “We are encouraging Chinese companies to head out all over the world and expand. We are also building up our domestic market to increase consumption.”
Chinese businessmen were ahead of the game and are already investing overseas. In March 2010, Zhejiang Geely Holding Group bought the ailing Volvo brand from Ford for a reported £1.2bn and on 25 January, opened its new corporate headquarters in Shanghai. In December the State Grid Corp of China bought the assets of seven Brazilian power transmission companies and Pengxin International Group Ltd of Shanghai has just put in a bid to buy 16 dairy farms in New Zealand. PetroChina has offered Ineos £626m for a 50 per cent share in its European refining business which includes the refineries at Grangemouth in Scotland and Lavéra in France. On his recent visit to the US, President Hu Jintao agreed export deals worth £28bn which included almost £12bn for the purchase of 200 Boeing aircraft. And those are just a few facets of a vast portfolio of investment that affects economies from one side of the globe to the other.
Despite Chen Deming’s claim that China’s export drive is to slow down this year, it is still expected to rise by 39%. Over the last 30 years, the volume of low priced goods that has poured from Chinese factories has prompted calls for greater protectionism from Europe and America. In the mid 2000s the textile and shoe industries in particular called for higher taxes on the cheap imports and strict quotas to be imposed. While individual manufacturers might have found it difficult to compete, it did help receiving countries keep down inflation. At that time, Chinese exporters had few friends in the western corridors of power but recent banking policies may have been designed to address that problem.
While key countries in Europe continue to be mired in recession, wondering how to avoid falling into the abyss, China appears to be offering a helping hand. A pledge has already been made to buy €6bn of Spanish debt in bonds, an offer to buy Greek bonds has been on the table since October and China has promised financial support to Portugal. Given the importance of exports to the Eurozone, China cannot afford to let the euro slide.
“We do have confidence in European financial markets and the euro,” said Yi Gang, the People’s Bank of China Deputy Governor at a London briefing in January. “We will be here for a very long period of time. China has been a long-term, stable investor in Europe.”
Obviously part of the plan is to build bridges and political alliances which will help smooth the way for Chinese exports in the future. And naturally, the People’s Bank hopes to eventually turn a profit from its long term investment. But the final factor in the equation is that China needs to diversify its massive currency reserves which currently stand at an all time high of US$2.85trn.
However internal development has not been forgotten. Beijing has announced that it plans to invest £383bn in water conservation over the next 10 years. The severe drought in the wheat growing areas of north China that started in October is a stark reminder of the fact that the country suffers a shortfall of 40bn cubic metres of water every year. In addition, the State Council is considering investing almost £1trn to boost seven key industries which include nuclear power, high speed railways, aviation, biotechnology and telecoms. Subject to approval, this will form part of a 2011-2015 five year plan which will go before the National People’s Congress at its annual session in March.
Although not actually signed off, a programme to develop a thorium-fueled molten salt nuclear reactor was launched at the Chinese Academy of Sciences’ annual conference in Shanghai in late January. The government has said that £2.8bn has been earmarked to build four new airports and upgrade six others in the energy-rich area of Xinjiang. In Washington, GE Transportation has signed a Letter of Intent with China’s Ministry of Railways to help advance the growth of rail infrastructure. Valued at around £867m, over a third of the money relates to the supply of locomotives, service support and signalling systems.
And one cannot ignore China’s aim to create the world’s largest mega city by linking nine lesser cities. Bounded by northern Guangzhou to Zhuhai in the south, Zhaoqing to the west and Shenzhen to the south east, the as yet unnamed metropolis around the Pearl River delta will be home to 42m people. Some 150 major infrastructure projects are likely to be initiated at a cost of £190bn to merge transport, water, energy and telecommunications networks. And foreign investment is likely to be welcome, with tax breaks and other incentives in the offing.
Legendary financier George Soros has been credited with saying that: the balance of power is shifting from the US to China; that the euro will fall apart; and that China should allow the yuan to appreciate to curb inflation. There’s the underlying implication that some time in the future, the mighty dollar might be toppled as the international monetary unit and supplanted by the redback.
The financial statistics are truly impressive and China has a swelling band of extremely rich people that has reaped the benefits of the country’s dramatic growth. But it should not be forgotten that the latter form only a small proportion of China’s 1.3 billion person population, 750 million of which are simply peasants scratching a living in the rural areas. Many more live below the breadline in the cities. The challenge for China is not just to maintain the momentum but to retain the balance.
In the wake of the uprisings in Egypt, the Tibetan Review ran a piece with the strapline: “As Egypt sneezes democracy, China fears catching a cold”. The echoes of Tiananmen Square still echo in Beijing and human rights remain a contentious issue. Could this be the vulnerable underbelly of the dragon?