I
admit China has always fascinated me as a superpower. From being a
famine-inflicted country half a decade ago to being the second largest economy
in the world and technological epicenter, China has carved out an enlightened
growth strategy which can be a lesson for many. This post tries to look at
China’s growth story analyzing the factors which led to its progress and
current scenario playing out amidst the ballooning trade war
F
|
ifty years ago, China
was a poor country inflicted with growing famine. At that point, no one would
have possibly said that this nation would eventually end up at the top of the
hill However, if we were to look at China closely, they were blessed with one
growth factor: an increasing population expanse. It was a god-send opportunity
for rapid industrialization and China used it wisely. Their primary focus was
agriculture since it was intense yet very low skilled. China slowly started to
add more skills to the growing population as the workforce started to move from
farms to factories. The Chinese corporate started following a 9-9-6 approach under
a stringent monitoring and control of the higher management. The strict work
environment was essential to compete against cheap labour intensive products in
South East Asia, Latin America & Africa. Manufacturing sector boomed but
China had restricted itself to follow imitation policy as developed countries
started outsourcing their business processes to China. Gradually the economy
transitioned into technology and services following giant footsteps of Japan
and South Korea. To understand the economic growth of any country, an appropriate
indicator is the per capita GDP. The average annual per capita GDP since
1978 for China surpassed the World Bank estimates of 2% to record a whopping
9%. China realized that innovation is imperative to attract more attention and
investments in the technology sector. They followed a unique model where the foreign
companies had to give up their technical know-how to carry their projects on
Chinese soil. Whether this model was ethical or not is up for a debate and I
would rather not jump to hasty conclusions. However, China did attract heavy
foreign direct investments eventually with immense debt piling up the financial
statements.
If we take a look at
the Chinese historical timeline, we get few solid evidences of how they had
carved a strategy to be a superpower. The first two decades following the
establishment of People’s Republic of China in 1949 observed the period of growth
in per-capita GDP. After the first Five-Year Plan, foreign countries started
taking active interest in developing quality projects in China. For instance,
6000 Soviet advisors helped establish 156 large scale projects leading the way
towards a rapid industrialization. China reported massive industrial
transformation between 1962 and 1966 before advent of Cultural Revolution brought
the economy to a standstill. Cultural Revolution was a socio-political movement
launched by Mao Zedong which pitted the strikers against government authorities
and brought the economy to its knees. The
economy eventually picked up when government introduced various reforms to sell
agricultural produce in the open markets. The Government also launched Chinese Foreign Equity Joint Venture which
allowed smooth flow of foreign capital in country. Gradually by mid-1980s,
Chinese government arranged for ease in pricing and allowed companies to set
their own wage structures. Market liberalization led to reopening of Shanghai
stock exchange after a gap of 40 years and eventually helped China to accede to
the World Trade Organization.
China growth story is
phenomenal in all aspects and acts as a learning platform to many nations who
are struggling to rise. However, current trade war with United States of America
looks awful for Chinese economy and other emerging markets as no headways in
resolution are made so far by both warring nations. China is showing no signs
of changing as per USA’s demands. USA has demanded a transparency in heavy
subsidization by China to target companies and strong rules in protection of
intellectual property rights. Trade war is expected to have a negative impact
on China’s growth fabric as it has sent shockwaves across financial markets.
Two important facets of Chinese economy: industrial output and retail sales
have cooled indicating a softer demand. National Bureau of Statistics has
reported alarming numbers wherein industrial output increased by 5.4% in April
as against 8.5% in March. Retail sales have grown by 7.2% not adhering to
forecast of 8.6% by the analysts. Exports have shrunk with decreasing factory
orders and it is a dangerous situation to be in since China is an export-driven
economy with huge economies of scale. Fixed asset investment also fell to 6.1%
of GDP as against expected 6.4%. In a dire need for comeback, China has to
slash taxes and increase its spending on infrastructure.
Trade war is
detrimental across emerging markets with Chinese yuan losing its value against
dollar. It is suggested that China will resort to more devaluation of yuan as
well as observe the trends across global financial markets. With devaluation of
currency, they have to boost their exports in order to realize the gain. However,
it is for the investors and economists to see how other currencies and stock
markets will respond to this action.
