THE GROWTH STORY OF CHINA

 

World witnessed a growth in net worth from $156 trillion to $514 in the period of year 2000 to 2020. According to a new report by the research arm of consultants McKinsey & Co.  global wealth tripled over the last two decades, with China leading the way and overtaking the U.S. for the top spot worldwide. 

According to the report,  ten countries representing more than 60% of world income. China accounted for almost one-third of the increase. Its wealth increased to $120 trillion from $7 trillion in 2000. 

The U.S., held back by more muted increases in property prices, saw its net worth more than double over the period, to $90 trillion. In both countries , the world's biggest economies  more than two-thirds of the wealth is held by the richest 10% of households, and their share has been increasing, the report said. 

As estimated by McKinsey, 68% of global net worth is stored in real estate. The balance is held in such things as infrastructure, machinery and equipment and, to a much lesser extent, so-called intangibles like intellectual property and patents.  

According to McKinsey, recently witnessed  steep rise in net worth has taken over  the increase in global gross domestic product and has been rising by the rise in property prices due to decline in interest rates. It found that asset prices are almost 50 per cent above their long-run average relative to income.  

That raises doubt about the sustainability of the wealth boom. 

  

Surging real-estate prices can make housing unaffordable for many people and increase the risk of a financial crisis  like the one that hit the US in 2008. China can face the similar trouble over the debt of property developers like China Evergrande Group.  

According to the report, the world’s wealth should get investments into more productive avenues  that expand global GDP. 

There is a prevalence of threat of fall in asset prices that could destroy nearly one-third of global wealth.

Mao launched the Cultural Revolution in the 1960s,  to get rid of his rivals, but which ended up destroying much of the country's social fabric.

After Mao's death in 1976, reforms spearheaded by Deng Xiaoping began to reshape the economy. Peasants were granted rights to farm their own plots, improving living standards and easing food shortages. In 1978, the government of China went on a major shift  of economic reforms. 

The reform processes encouraged formation of rural enterprises and private businesses. It liberalized foreign trade and investment, relaxed state control over some prices & invested in industrial production and the education of its workforce. This strategy has worked successfully. 

While pre-1978 China had seen annual growth of 6 percent a year, post-1978 China saw average real growth of more than 9 percent a year with fewer ups and downs. 

For several years, the growth rate of economy was more than 13 percent. Per capita income had four fold increase in the last 15 years. According to IMF research team, along with the capital accumulation,  growth in the country's stock of capital assets, such as new factories, manufacturing machinery, and communications systems was important.  Similarly, the number and efficiency of  Chinese workers was considered important. All these factors contributed to the long term economic boom. 

During 1979-94 productivity gains contributed  for more than 42 percent of China's growth and by the early 1990s had overtaken capital as the most significant source of that growth. This marks paradigm shift in the view of development in which capital investment takes the lead. 

There are theoretical and empirical problems while understanding the 

central planning and strict government control of many industries, which tend to distort prices and misallocate resources. 

Much previous research on economic development has suggested a significant role for capital investment in economic growth, and a sizable portion of China's recent growth is in fact attributable to capital investment.  

In other words, new machinery, better technology, and more investment in infrastructure have helped to raise output. 

Chinese productivity increased at an annual rate of 3.9 percent during 1979-94, compared with 1.1 percent during 1953-78.  

By the early 1990s, productivity's share of output growth exceeded 50 percent, while the share contributed by capital formation fell below 33 percent.  

The U.S. productivity growth rate averaged 0.4 percent during 1960-89 and enviable, since productivity-led growth is more likely to be sustained. Analysis of the pre- and post-1978 periods indicates that the market-oriented reforms undertaken by China were critical in creating this productivity boom.

 

The reforms raised economic efficiency by introducing profit incentives to rural collective enterprises which are owned by local government but are guided by market principles, family farms, small private businesses, and foreign investors and traders.

Chinese govt de-regularized the constant state control of some enterprises.Resultantly between 1978 and 1992, the output of state-owned enterprises declined from 56 percent of national output to 40 percent,while the share of collective enterprises rose from 42 to 50 percent and that of private businesses and joint ventures rose from 2 to 10 percent.  

The increase in profit incentive created positive impact on the private investment of capital market as the growing private sector was looking for more capital opportunities. 

Till 1978 reforms, nearly four in five Chinese worked in agriculture; by 1994, only one in two did. Reforms expanded property rights in the countryside and touched off a race to form small non-agricultural businesses in rural areas.

Decollectivization of land and higher prices for agricultural products led to more productive farming and  efficient use of labor. 

The growth of village enterprises has drawn people from traditional agriculture into higher-value-added manufacturing. 

The post-1978 reforms awarded greater autonomy to enterprise managers. They evolved their own decision making and brought a competitive strategy. The work culture of incentivising skilled workers and removing unskilled workers helped to create a good work force. 

The reforms created greater space and opportunities  for private ownership of production, resultantly created jobs, developed the supply side , earned foreign currency through international trade , increased state revenue, and this way created a resilient and flexible economy. 

Cumulative foreign direct investment, reached nearly US$100 billion in 1994; annual inflows increased to 18 percent in 1994. Industrial agglomerations developed in more than 12 open coastal areas where foreign investors enjoy tax advantages. Economic liberalization boosted exports , rising to 19 percent a year during 1981-94. Increasing  export growth, set a trend to fuel productivity growth in domestic industries.  Chinese government introduced, price reforms ,in which they granted a fair autonomy to producers of consumer goods and agricultural products but much less to other sectors. 

China is the largest U.S. merchandise trading partner, biggest source of imports, and third-largest U.S. export market. China is also the largest foreign holder of U.S. Treasury securities, which help fund the federal debt and keep U.S. interest rates low.  

Chinese government developed an innovative approach to develop economic control of various enterprises which was given to provincial and local governments, which were generally allowed to operate and compete on free market principles. 

From 1979 to 2018, China's annual real GDP averaged 9.5% .  On average China has been able to double the size of its economy in real terms every eight years.   

After economic slowdown of 2008 , Chinese government responded by implementing a $586 billion economic stimulus package, aimed largely at funding infrastructure and loosening monetary policies to increase bank lending. 

Its ruling party espouses a communist, egalitarian ideology while presiding over the emergence of a hugely unequal, capitalism-driven society. The divergent interests of the urban middle class clash with those of peasants and migrant workers.   

An important introduction of pilot project was an important intervention which was explained by  Deng Xiaoping as, “crossing the river by feeling the stones.” This approach was characterized by experimentation and local policy tinkering, in order to reach the best in practice, before adoption at the national level.

 Introduction of  SEZs was a revolutionary step for Chinese economy. It succeeded in, attracting unprecedented flows of foreign investment and transforming fishing villages like Shenzhen into global manufacturing hubs. This approach was used repeatedly over the years to test new policies, from cooperative medical care schemes to abolishing controls on the movement of workers from the countryside to the cities.  

 The preservation of the power of Communist Party of China in considered as important as it succeeded in maintaining the ideological descipline in all walks of Chinese life. Beijing deployed a range of strategies including censorship and purges, but also worked on emergence  of  urban middle class. By tying the prosperity of this group to the continuance of the party at the helm of policy-making. 

Communist Party succeeded in preserving power by delivering on promises of economic growth. The middle classes began to demand improvements in their quality of life beyond opportunities for material prosperity. 

 

In the post reform period China has developed a problem-solving approach that made its leaders more responsive to socio-economic challenges.  Reforms extended beyond the economic realm into governance and administration.

This emphasis on outcome rather than ideology has its corollary in performance over process. Communist Party of China has still not resolved the contradiction between state control of the economy and the embrace of free markets, what in China is called “socialism with Chinese characteristics”.  

 The recent scrapping of the presidential term limit that enables Mr. Xi to potentially continue in office indefinitely. 

Deng proposed economic openness and encouraged China to recruit overseas expertise, Mr. Xi emphasises self-reliance and warns of the threats posed by hostile foreign forces. 

 The policy emphasis on peaceful economic integration is being replaced by a trade war that some fear could degenerate into a new cold war.

Chinese government used its management system to create its own model of economic development, extending economic growth to all the basic social units through good social management.  

China has greatly reduced the illiteracy rate, made primary education universal, and implemented infrastructure projects, and established a comprehensive health and sanitary system, improvements in public transport, diversified supply of comodities. The inflow of large quantity of foreign direct investments has turned China into a world-class manufacturing base.  

Economists generally attribute much of China's rapid economic growth to two main factors: large-scale capital investment & the rapid productivity growth.

China has historically maintained a high rate of savings. When reforms were initiated in 1979, domestic savings as a percentage of GDP stood at 32%. However, most Chinese savings during this period were generated by the profits of State Owned Enterprises, which were used by the central government for domestic investment. 

Economic reforms, which included the decentralization of economic production, led to substantial growth in Chinese household savings as well as corporate savings. As a result, China's gross savings as a percentage of GDP is the highest. The large level of domestic savings has enabled China to support a high level of investment. In fact, China's gross domestic savings levels far exceed its domestic investment levels, which have made China a large net global lender.

Resource management and reallocation to more productive uses resulted in increasing productivity. All these sectors were controlled by central government formerly. 

Chinese government introduced economic decentralization which resulted into the rise of non-state firms. These firms were tended to pursue more productive activities than state owned firms. 

Additionally, the export sector was exposed to competitive forces. Local and provincial governments were allowed to establish and operate various enterprises without interference from the government. 

In addition, FDI in China brought with it new technology and processes that boosted efficiency.

China has emerged as the world's largest manufacturer according to the World Bank.  

In 2016, the value of China's manufacturing on a gross value added basis was 49.2% higher than the U.S. level. Manufacturing plays a considerably more important role in the Chinese economy than it does for the United States.

China established multilateral trading system to explore and grasp markets as well as absorb new technology that would raise productivity. 

 Important parts of the Chinese economy are over-leveraged. According to Hiau Looi Kee of the World Bank and Heiwai Tang of the University of Hong Kong, China has expanded its domestic base in the intermediate input sectors, leading to an increase in domestic value addition in exports. 

 In its 2016 Global Manufacturing Competitiveness Index, Deloitte , ranked China as the world's most competitive manufacturer. China was expected to remain a major manufacturing power because of its large R&D spending levels, movement toward higher-valued, advanced manufacturing, government policies to promote innovation, and a large pool of graduates in science, technology, engineering and mathematics.   

The decline in China's working age population may have contributed rising wages in China. From 2007 to 2018, China's average monthly wages rose by 263%.   

The United Nations Conference on Trade and Development (UNCTAD) reports that China has became  a major recipient of global FDI and a major provider of FDI outflows . 

In the year 2000, China's leaders initiated a new "go global" strategy, which sought to encourage Chinese firms (primarily SOEs) to invest overseas. One key factor driving this investment is China's massive accumulation of foreign exchange reserves.  

Traditionally, those reserves has been invested in relatively safe and low-yielding assets, such as U.S. Treasury securities. On September 29, 2007, the Chinese government officially launched the China Investment Corporation (CIC) in an effort to seek more profitable returns on its foreign exchange reserves and diversify away from its U.S. dollar holdings. 

The CIC was originally funded at $200 billion, making it one of the world's largest sovereign wealth funds. Investing in foreign firms, or acquiring them, is viewed as a method for Chinese firms to obtain technology, management skills. A significant level of Chinese FDI that goes to Hong Kong, the British Virgin Islands, and the Cayman Islands likely is redirected elsewhere. 

The American Enterprise Institute (AEI) maintain the China Global Investment Tracker (CGIT), a database that has been developed to track the actual flows (from the parent company to the final destination) of Chinese investment globally. The CGIT database tracks FDI valued at $100 million or more (which it refers to as "China's outward non-bond investment"). These data differ significantly from official Chinese FDI outflow data. The CGIT data on the top destinations of total Chinese outward non-bond outward investment from 2005 to 2017 included the United States ($172.7 billion), Australia ($103.7 billion), the United Kingdom ($75 billion), Brazil ($61.2 billion), and Russia ($53.8).

Economic reforms and trade and investment liberalization have helped transform China into a major trading power. Chinese merchandise exports rose from $14 billion in 1979 to $2.5 trillion in 2018, while merchandise imports grew from $18 billion to $2.1 trillion . China's merchandise trade surplus grew sharply from 2004 to 2008, rising from $32 billion to $297 billion.Reaching a record $679 billion in 2015 before falling to $611 billion in 2016, $489 billion in 2017, and $382 billion in 2018. 

 In 2009, China overtook Germany to become both the world's largest merchandise exporter and the second-largest merchandise importer . 

China's abundance of low-cost labor has made it internationally competitive in many low-cost, labor-intensive manufactures. As a result, manufactured products constitute a significant share of China's trade. A substantial amount of China's imports is comprised of parts and components that are assembled into finished products, such as consumer electronic products and computers, and then exported.

 According to the World Bank, "China has become one of the world's most active users of industrial policies and administrations.

China's State Council has said that there are currently 150,000 SOEs at the central and local government level. China's SOEs may account for up of 50% of non-agriculture GDP. One study found that SOEs constituted 50% of the 500 largest manufacturing companies in China and 61% of the top 500 service sector enterprises.  

Fortune's 2016 list of the world's 500 largest companies includes 103 Chinese firms (compared to 29 listed firms in 2007). Of the 103 Chinese firms listed, Fortune identified 75 companies (73% of total) where the government owned 50% or more of the company.

 Together, these 75 firms in 2016 generated $7.2 trillion in revenues, had assets valued at $20.7 trillion, and employed 16.2 million workers. Of the 28 other Chinese firms on the Fortune 500 list, several appear to have financial links to the Chinese government.  

 From 2001 to 2016, China's production of raw steel rose from 152 million metric tons to 805 million metric tons, an increase of 459.9%. During this period, China's share of global production rose from 17.9% to 50.3% and China accounted for 87.1% of the increase in global steel production.

Many analysts contend that China's steel industry is heavily supported by government entities at the central and local government level through low-cost credit and subsidies. These enable many Chinese steel firms to operate, even when they are unprofitable and heavily in debt which are termed by some as "zombies."   

China's banking system is largely dominated by state-owned or state-controlled banks. According to one analyst, the managers of China's state banks are drawn from the ranks of the Chinese Communist Party cadre system, which "enables the party and government leaderships to exert influence over bank lending.  

 In 2015, the top five largest banks in China in terms of assets were state-owned entities. 

The percentage share of assets held by state-owned commercial banks (including the five large state-owned banks), the three government policy banks, and joint-stock commercial banks where government entities are a major stock holder , together accounted for 68.5% of total bank assets in China.  

Foreign participation in China's banking system is relatively small, accounting for 1.6% of total bank assets.

The Chinese government has maintained restrictions on capital inflows and outflows for many years, in part to control the exchange of its currency, the renminbi (RMB), against the dollar and other currencies in order to boost exports.