China’s Economic Boom and its International Impact (ARI)

China’s Economic Boom and its International Impact (ARI)

Resumen en Inglés

Theme: the purpose of this article is to provide an overview of China’s economic boom and to examine some of the main advantages and problems it will face over the mid and long terms.

Summary: this presentation will first provide a brief overview of some of the most noteworthy international dimensions of China’s economic boom, and secondly it will examine some of the main advantages and problems China’s economy will face over the mid and long terms. [1]


1. The International Dimensions of China’s Economic Boom

Economic growth
For more than 25 years China has posted an annual average GDP growth of around 10%, more than double that of low- and middle-income countries, and well over three times the figure posted by high-income nations. Furthermore, world gross product has grown at an annual average of around 3% over the past quarter century.

Table 1. Average annual GDP growth (%)

Low- and middle-income countries3.03.95.3
East Asia and the Pacific7.88.58.3
Latin America and the Caribbean1.83.32.3
South Asia5.75.66.4
High-income countries3.22.72.2

Source: World Bank.

As a result of this swift growth, China’s share of world gross product (in purchasing power parity) has risen from 3.4% in 1980 to 15.4% in 2005, while the US’s share has remained steady at around 21% and the joint share of the countries that make up the EU today has fallen from 29% to 21%.

Graph A. Weight in world gross product (in PPP), 1980-2006

Source: IMF.

Foreign Trade
China’s share of international trade in goods has grown significantly, as shown in Table 2.

Table 2. Share of world merchandise exports (X) and imports (M), 1993 and 2006 (%)

X 1993X 2006M 1993M 2006
Latin America and the Caribbean4.

Source: World Trade Organisation.

As for energy, from 1990 to 2006 China’s consumption of primary energy and coal more than doubled, while its consumption of oil trebled (Table 3). These increases are huge compared to the figures for the rest of the world and, of course, for those of the OECD countries. The increase in oil consumption, which has risen from 2.32 to 7.44 million barrels a day, is especially noteworthy, even compared with the other great emerging economy, India. Table 3 also highlights that the increase in China’s energy consumption has been greater than that of all the OECD countries combined and that China has accounted for more than three-quarters of the increase in world coal consumption.

Table 3. Consumption of primary energy, coal and oil, 1990 and 2006

1990%2006%% of ?
Consumption of primary energy (Mt)
Consumption of coal (Mt)
Consumption of oil (mbbl/d)

Source: BP.

As for other raw materials, China stands out as a world consumer of certain metals, being a major net importer of iron, zinc, lead, copper and nickel. In these five cases, China accounts for between 15% and 33% of world consumption (Table 4). The table also shows that China’s share of the world’s consumption of cotton, rice, soybean oil and rubber stands at over 20%.

Table 4. China’s consumption of certain metals (2005) and agricultural products (2003) as a percentage of the world total

Soybean oil24.56.4

Source: S. Streifel, ‘Impact of China and India on Global Commodity Markets. Focus on Metals and Minerals and Petroleum’, Development Prospects Group, World Bank, mimeographed, August 2006, chart 1.

China has become an enormous holder of foreign currency reserves, at US$1.4 trillion in mid-2007, far above Japan’s US$900 billion.

China’s accumulation of reserves has been stunning in the first years of the 21st century. From 2000 to late 2006, its foreign currency reserves have swelled from US$165 billion to more than US$1 trillion. The increase is attributable to its current account surplus and the net inflow of foreign capital. But China -similarly to other Asian countries- has accumulated reserves for other reasons as well. One is the sterilisation of the current account surplus and/or of the inflow of foreign capital by acquiring foreign currency in order to counter the rise in demand for the national currency and, hence, its appreciation. Another motive has been a desire for insurance against the risk of a balance of payments crisis. It should be borne in mind that China experienced very close to home the Asian crises of 1997-98.

Table 5. Main holders of foreign currency reserves (excluding gold), in US$ million

June 2002June 2006Latest data2007%
South Korea112,200225,600250,700June4.2

Source: IMF.

Finally, other important aspects of the international impact of China’s economic boom are the following:

  • Direct overseas investment by Chinese companies has risen from US$830 million in 1990 to US$11.3 billion in 2005. According to some estimates China should hit the US$60 billion mark around 2010.
  • Chinese tourism abroad has soared from 4.5 million people in 1995 to 31 million in 2005. The World Tourism Organization estimates that, as early as 2010, China will have 60 million outbound tourists.
  • Chinese emissions of carbon dioxide (the main greenhouse gas that causes global warming) have now exceeded those of the US, according to some estimates. Its total emissions could more than double by 2030, by when China should be responsible for 26% of world emissions (in 2004 China’s share was 17%).

According to some forecasts China’s GDP could exceed that of the US as early as 2020, if measured in purchasing power parity (Graph B). However, measured in current dollars, according to some estimates (see Graph C) China’s GDP will not overtake the US until some time in the 2040s.

Graph B. Share of world gross product (in purchasing power parity), 1980-2020

Sources: IMF and EIU.

Graph C. Share of world gross product (in current US$), 2004-50

Source: Keystone India.

However, the forecasts in Graph C are based on expected growth rates that might be too low in China’s case and too high in the case of the US. A simple exercise, as in Graph D, assumes that average annual growth in the US will be 3% over the next half century (similar to the rate it has posted during the past 25 years). The less-steep curve in Graph D represents the value in current dollars of the US’s GDP until the 2060s. The approximate date of China’s overtaking of the US will depend on how much China can grow in the next few decades. If the average annual growth rate remains at around 10%, China’s GDP should catch up with the US in around 2030. If it is 9%, this should occur around 2035; if 8%, in 2040; if 7%, in 2048; and if 6%, in 2062.

Graph D. When will China overtake the US? (GDP in current US$ million)

Source: author’s calculations.

2. Prospects Over the Mid and Long Terms: Advantages and Problems

Besides the obvious ones (a high savings rate, an abundant labour supply, a Confucian work ethic, rising consumption in a middle class which is now estimated at 80 million people and could reach 150 million in 2010, etc), China’s main advantages are the following:

(1) A Substantial degree of integration in the world economy. The ratio of exports of goods and services to GDP was 37% in 2005, while direct foreign investment reached US$72.4 billion that year. By comparison, these figures were much lower for India (21% and US$6.6 billion).

(2) Modern infrastructure in major cities and in special economic zones. Even in the country as a whole, the percentage of paved roads is 79.5%, compared with 77.7% in Japan, 62.6% in India and 58.8% in the US. Investments in motorways, airports, sea ports, energy distribution and so on has been massive in recent years. China has a large number of telephone mainlines and of mobile phone customers considering its per capita income, etc.

(3) Strong job-creation. Because of rapid industrialisation and labour-market flexibility, the proportion of people employed as part of the total population in 1999-2003 was 76.4% in China, compared with 73.4% in Vietnam, 62.5% in Indonesia, 59.5% in the Philippines, 57.7% in South Korea and 55% in India.

(4) Healthy macro-economic indicators which, along with an increasingly sophisticated macroeconomic policy, suggest a reasonable macro-economic stability in the future. In 2006 China posted a small budget deficit (equivalent to 0.4% of GDP), a large current account surplus (8.6% of GDP), an inflation rate of 1.5%, foreign debt of US$323 billion, foreign currency reserves of more than US$1 trillion and direct foreign investment totalling US$72.4 billion.

(5) A swift improvement in social indicators, which affords the government a certain degree of legitimacy and -should it persist- allow for continued social stability. Poverty has declined from a rate of 63.8% of the population in 1981 to 16.6% in 2001 (in other words, an impressive reduction totalling 422 million people); life expectancy at birth has risen from 63 years in 1970-75 to 71 in 2000-05; the infant mortality rate (for children less than a year old) has fallen from 85 per thousand in 1970 to 31 per thousand in 2004; malnutrition has fallen from 16% in 1990-92 to 11% in 2000-02; the adult literacy rate has grown from 78.3% in 1990 to 90.9% in 2004; the gross school-attendance rate at the secondary level has risen from 48.7% in 1991 to 72.5% in 2004, etc.(6) A successful economic reform strategy. Because it was gradual and sustained, the reform has been a big success. It has fostered a clear and pragmatic vision among the authorities. Unless a big surprise occurs, there is no reason to believe the government will stray from this path in the next few decades.

China has numerous disadvantages. Some could be resolved by the authorities in coming years, but of course it is not certain that they will succeed in every case. These problems include an excess of savings and investment, inefficiency in the banking sector, sharp inequality in the regional and personal distribution of income, and corruption. These are all serious problems but they can be dealt with, especially if the government tries to resolve them gradually and with pragmatism.

There are other problems that are of a more structural nature, of which the following should be highlighted:

(1) An aging population. This will probably cause China to grow old before it gets rich. As a result of a low birth rate, the percentage of people aged 65 or older is growing rapidly and is expected to rise from 7.6% of the total population in 2005 to 13.7% in 2025. As the relative weight of the under-15 population declines less rapidly, the rate of dependency (people 0-14 years of age or older than 65, compared to people between the ages of 15 and 64), which was 67% in 1980, should drop to 38% in 2010 and subsequently rise (to 44% in 2020; 50% in 2030 and 65% in 2050). Another effect of the aging process should be a drop in the relative weight of the working-age population (15-64 years) starting in 2010 and of the absolute number of that sector of the population starting in 2015. Having said this, it should be borne in mind that aging or its negative effects can be partially countered with an easing of the one-child policy, an improvement in work-force quality or a greater transfer of manpower from agriculture towards industry and services.

(2) Over-industrialisation, which can be detrimental to the development of a knowledge-based economy. The latter should depend to a greater extent on the dynamism of the service sector. In 2005, the secondary sector accounted for 46% of GDP (compared with 28% in India, 41% in South Korea and 31% in Japan), so that China should increase the relative weight of the service sector (currently at 42% of GDP) not so much at the expense of agriculture but of industry.

(3) Excessive dependence on foreign capital. In 2005 the ratio of direct foreign investment (as a flow) and gross fixed capital formation was 9.2% (compared with 4.0% in the US, 3.5% in India and 3.1% in South Korea) and the ratio between the stock of direct foreign investment and GDP was 14.3% (13.0% in the US, 8.0% in South Korea and 5.8% in India). This high dependence on direct foreign investment makes the economy vulnerable to possible changes in the international location strategy of multinational companies (with possible relocations to Vietnam, India, Bangladesh, etc) and causes a loss of efficiency in industrial policy.

(4) Growing energy dependence, especially on oil. According to data from the International Energy Agency, Chinese demand for oil should rise from 6.2 million barrels a day (mbbl/d) in 2004 to 10.0 mbbl/d 2015 and 13.1 mbbl/d in 2030. As China’s domestic production of oil stagnates, net imports as a percentage of consumption should rise from 43.5% in 2004 to 68.0% in 2015 and 81.7% in 2030.

(5) Growing and increasingly serious deterioration of the environment. Desertification, soil degradation, pollution of rivers, emissions of greenhouse gases and loss of biodiversity, among others, have been the effects of a very swift process of industrialisation that has failed to respect the environment in coastal areas and of persistent poverty inland, despite improvements. For instance, pollution in rivers and lakes is very serious, especially in the north of the country, with at least 60 million people finding it difficult to obtain enough drinking water. As for air quality, 16 of the world’s 20 most polluted cities are in China (So are five of the top 10.) China is now the world’s top emitter of carbon dioxide (although its emissions per inhabitant are still low) and the leader in chlorofluorocarbons and sulphur dioxide per inhabited surface area. Growth in the number of cars in use, which could rise from 20 million in 2004 to 60 million in 2010 and 90 million in 2015, will certainly worsen air pollution in major cities. The mass use of low-quality coal with a high sulphur content is also a cause of acid rain, that affects 30% of China’s territory and spreads far beyond its borders. Soil erosion, caused to a large extent by deforestation, will contribute to worsening the effects of flooding.(6) The absence of a democratic political system, an independent judicial system and adequate protection for intellectual property rights. Although personal freedoms have increased as a result of economic reforms, the regime continues to repress freedom of expression, gathering or association. Some analysts suggest that such a regime would not survive events like a serious economic crisis, widespread political protests, grave public health problems or major ecological catastrophes. As for the judicial system’s lack of independence and the absence of adequate protection for intellectual property rights, over the long term these could hinder direct foreign investment and exports to developed countries.

Pablo Bustelo
Senior Analyst, Asia-Pacific, Elcano Royal Institute and Professor of Applied Economics at Madrid’s Complutense University

[1] Text of presentation at the Summer Course at Madrid’s Complutense University, “China on the New International Stage”, El Escorial, 17 July 2007.