Tracking China's phenomenal growth

While awaiting the findings of the investigation into the hostage-taking fiasco – which has led us to another political crisis with international repercussions in RP-China relations – let’s take a break and cast an eye on the phenomenal rise of our giant neighbor’s economy over the last three decades.

Is there something we can learn from China’s double-digit growth amidst the financial and economic crisis gripping the world? In contrast, the United States – from whom we take our policy cues – has piled up debts almost equal to its $14.25 trillion gross domestic product; unemployment is running high. Along with the other big capitalist countries, the US today is uncertain how and when recovery will come about.

This year China surpassed Japan to become the world’s second largest economy next to the US. China’s per capita income, according to the World Bank, rose from $410 in 1975 to $6,567 in 2009. GDP is well over $5 trillion and international reserves are at $2.45 trillion.

Most American economists assume that China’s rapid growth has been due to its adoption of capitalist economic principles in lieu of socialism. The US welcomed China’s entry into the World Trade Organization, thinking it would then have to follow the WTO’s US-designed rules. But instead, China joined the group of developing countries in resisting US pressures, calling for reforms in the WTO, and stalling further liberalization of trade and investments that had done harm to their economies.

When Deng Xiaoping stepped up to lead after the death of Mao Zedong, the government urged private entrepreneurs – suppressed in the socialist-construction period – to thrive and prosper. The assets of many state-owned firms were privatized. Consequently, millionaires began emerging in what had once been an egalitarian society. By 2009, one estimate says, China had 875,000 known millionaires.

 Subsequent policy changes curbed the preferential treatment for private entrepreneurs. Harnessing its enormous fund reserve, the government invested large amounts in state-owned enterprises (SOEs) to fortify the industrial base, employ several million more workers, and sustain high-level growth.

While the global financial crisis raged elsewhere, China’s government poured four trillion renminbi, equivalent to hundreds of billions of US dollars, into building new highways, railroads, and other big projects. It channeled most of the funds through 129 giant SOEs. State banks that had financed the private entrepreneurs lent support.

Such a huge infusion of government funds under centralized planning resulted in the rapid development in the infrastructure of the poor interior regions, facilitating the establishment of industries and stanching the outmigra-tion of 100 million rural people seeking employment in the prosperous coastal areas. Favored SOEs became hugely profitable. For instance, in 2009 the two topmost SOEs, China Mobile and China Petroleum, together made 249.1 billion renminbi, much higher than the 217.95 billion renminbi (about $32 billion) in combined profits of the 500 biggest private enterprises. 

The secret? Speaking to the nation last March, Prime Minister Wen Jiabao asserted: “The socialist system’s advantage enables us to make decisions efficiently, organize effectively, and concentrate resources to accomplish large undertakings.”

The Chinese government tightened state control, aside from finance, over sectors of the economy deemed strategically crucial to national security and development. These included the energy, mining, telecommunications, ports, railroad, and airline industries. Although China committed to open her telecommunications sector to joint ventures with foreign firms after joining the WTO, she has not done so to this day. The government bought out private coal mining companies to increase production, and guarantee fuel supply to state-owned utilities. In contrast, the Philippine government, from the Cory Aquino administration onward, has been in a hurry to privatize the few key industries under state control (energy generation and distribution, water supply) or where it had significant ownership share (oil refining and distribution) – thereby losing the power to control prices of these vital services.

Not everything has gone positive for China, however.

For one, agricultural food production appears to have peaked or suffered physical constraints, particularly the shortage of arable land and water. After three decades of relative food self-sufficiency attained through massive spending for irrigation, pest control, grain reserves, and biotechnological research to develop better crops, Reuters reported Tuesday, China has increased its imports of rice from Vietnam and corn and wheat from the US.

(We used to buy rice from China and now from Vietnam. Soon we will be competing with China for Vietnamese rice. Another missed opportunity! Had we developed our own rice industry to have enough for export besides self-sufficiency, we should even be vying to supply part of China’s needs today.)

Another challenge for the Chinese government is the development of the domestic consumers market, in order to sustain production and growth despite the slack in exports to US and other large markets caused by the global crisis. To achieve this, the government must raise wages and spur family savings. 

More importantly, economic inequalities must be redressed to ensure the stability of Chinese society. An interesting problem indeed!