China The 21st Century New Superpower

FOREWORD

In the 21st century’ economy there are four major countries which can be considered superpowers: the US, Japan, Germany and China. China has been added to the list too due to the fact that the Chinese economy has doubled roughly every seven and a half years. But in order to assign this label to each of these countries we must first define the term “superpower”. There is no standard definition for the term ‘superpower’ yet, however there are several characteristics that have to be taken into account in order to speak about a superpower economy.

A superpower is a state with a great position in the international system which has the ability to influence on a global scale. It is an extremely powerful nation that has excessive and superior power over the rest. This term is used with reference to the US and the former Soviet Union when these nations were perceived as the two most powerful powers of the world that could conduct a global strategy including the possibility of destroying the world.

The basic characteristics of a superpower are: military, economic, political and cultural. However an important part is also geography and demography. All of these factors have helped China in becoming closer in getting this status.

In short a 21st century superpower needs to be a great power in the traditional sense and a military outstanding one, but also a transnational performer. A 21st Century superpower needs to be a force for engaging human energies toward addressing global needs.

At the first look China seems to be a great power as its population accounts for a fifth of the world’s population. And also it is the third largest country after Russia and Canada with almost 10 million square kilometers. More important is that behind all its glory, China is home to close to 1.3 billion people. Surprisingly enough, China has not the cheapest workforce in the world. What helped China the most is the fact that it sits in a relatively stable part of the globe and it offers the world’s manufacturers a reliable, docile and capable industrial workforce, groomed by government enforced discipline.

China is known to be a major military power because it has in possession nuclear weapons. It is the world’s largest manufacturer and exporter of such weapons and it is also an important player in the space satellite-launching business.

Looking back in time, the Chinese empire was built on strategic military force and they managed to develop a relatively efficient system of government. The empire has managed to survive the collapse of dynasties, invasion and conquest, civil war and disorder. As it was observed: “Of all the civilizations of pre-modern times, none appeared more advanced, none felt more superior, than that of China”. What stood behind all of these was the fast, rapid development and modernization which remains at the heart of government strategy.

Chinese culture is one of the world’s oldest and most complex. China has behind five thousand years of history however at heart it is still the same. The traditions and customs have been well conserved by the people, despite the fact that it has been diluted through the generations however it has never been lost. Chinese people have a sensitivity and respect for the historical traditions. They managed to accommodate their culture to the demands of modernization, in their way to urbanization and industrialization they kept the old habits and customs as well. Their culture is their pride and it is now spread all over the world.

Going back to the term ‘Superpower’ the second important thing needs to be taken into consideration and that is the governance – the leader. This is the asset for a growing superpower. It takes a great leader, one with a strong sense of direction and the desire to develop its society and economy. Politics have remained under the tight control of the Chinese Communist Party; the failure of the democracy to rise in China did not affect the country’s economic growth. The term ‘democracy’ for the Chinese people can be interpreted in various ways. It implies that the best government is by a ruler who pays great attention to the interests of the population at large.

The most crucial element of all in the superpower equation is the powerful economy, the world’s most rapidly changing largest economy. China is today the world’s second trading nation and it is one of the most open economies in the developing world. The first step to success is the opening up of China to the world. The high growth rates, low labor costs and the big emerging market have attracted the foreign direct investment (FDI). The enlargement of the investment scale and investment fields, the increase of transnational companies and capital and the technology intensive development have been the key features in building a superpower economy. Through the time China has gained a confidence that the fast developing economy will continue to see sustained growth and that is why it remained the major reason for the multinationals to go invest in China.

In the first chapter of this paper we will try to give a theoretical presentation of the term “superpower” by stating the main characteristics of such an economy. We will also analyze China’s economy in order to see whether it can be labeled as a superpower or not.

In the second chapter entitled “China as a superpower economy” we will look into the history of China’s economy, and we will try to see whether China has the necessary characteristics in order to become a superpower. We will also present China’s current position in the global economy.

The third chapter entitled “China in the future” deals with several scenarios about this country’s economic future and also discusses the chances of China to take the world after all.

The conclusions of this paper discuss about the steps already done by this country in favor of becoming the next superpower economy but also its drawbacks and steps that still have to be done.

CHAPTER I

DEFINING A SUPERPOWER

1.1 Theoretical consideration about superpower economy; defining a superpower

The world economic landscape is rapidly changing. When looking at the 21st century’s world superpowers there are four major countries beginning with the US, Japan, Germany and China. China has been added to the list too due to the fact that the Chinese economy has doubled roughly every seven and a half years. There is no standard definition for the term ‘Superpower’ yet, however there were made some approaches in defining it.

A superpower is a state with a dominant position in the international system which has the ability to influence events and its own interests and project power on a worldwide scale to protect those interests. A superpower is traditionally considered to be a step higher than a great power.

The basic characteristics of a superpower are: military, economic, political and cultural. However an important part is also geography and demography. All of these factors have helped China in becoming closer in getting this status.

In short a 21st century superpower needs to be a great power in the traditional sense and a military outstanding one, but also a transnational performer. A 21st century superpower needs to be a force for engaging human energies toward addressing global needs. The term in its current political meaning was coined by Dutch-American geostrategist Nicholas Spykman in a series of lectures in 1943 about the potential shape of a new post-war world order. This formed the foundation for the book The Geography of the Peace, which referred primarily to the unmatched maritime global supremacy of the United Kingdom and United States as essential for peace and prosperity in the world. A year later, William T.R. Fox, an American foreign policy professor, elaborated on the concept in the book The Superpowers: The United States, Britain and the Soviet Union — Their Responsibility for Peace (1944), which spoke of the global reach of a super-empowered nation. Fox used the word Superpower to identify a new category of power able to occupy the highest status in a world in which, as the war then raging demonstrated, states could challenge and fight each other on a global scale.

It was a term first applied in 1944 to the British Empire, the Soviet Union and the United States of America. After the Cold War, only the United States appeared to fulfill the criteria to be considered a world superpower. Following World War II, as the British Empire transformed itself into the Commonwealth and its territories became independent, the Soviet Union and the United States generally came to be regarded as the only two superpowers, and confronted each other in the Cold War.

The term second superpower has also been applied by scholars to the possibility that China will emerge as a superpower on par with the United States. Brazil, the European Union, and India are thought to have the potential of achieving superpower status within the 21st century A few heads of states politicians and news analysts claim that Russia may have already reclaimed that status. Some people doubt the existence of superpowers in the post Cold War era altogether, stating that today's complex global marketplace and the rising interdependency between the world's nations has made the concept of a superpower an idea of the past and that the world is now multipolar.

Alice Lyman Miller, defines a superpower as "a country that has the capacity to project dominating power and influence anywhere in the world, and sometimes, in more than one region of the globe at a time, and so may plausibly attain the status of global hegemony." He also states that "The basic components of superpower stature may be measured along four axes of power: military, economic, political, and cultural (or what political scientist Joseph Nye has termed “soft power”).

In the opinion of Kim Richard Nossal of Queen's University, "generally this term was used to signify a political community that occupied a continental-sized landmass, had a sizable population (relative at least to other major powers); a superordinate economic capacity, including ample indigenous supplies of food and natural resources; enjoyed a high degree of non-dependence on international intercourse; and, most importantly, had a well-developed nuclear capacity (eventually normally defined as second-strike capability)."

1.2 Does China fulfill in being a Superpower?

Due to their large markets, growing military strength, and economic potential and influence in international affairs, the Federative Republic of Brazil, the People's Republic of China, the European Union, Republic of India and the Russian Federation, are among the powers which are most often cited as having the ability to influence future world politics and reach the status of superpower in the 21st century. While some believe one (or more) of these countries may replace the United States as a superpower, others claim they will rise to rival, but not replace, the United States. The question whether China will become a superpower has given rise to many comments: while some are certain that China is able to become a superpower others are more concerned about this country’s future: Lester Brown wonders who will feed China. Gordon Chang announces the coming collapse of China. Callum Henderson sees China as on the “brink,” while Ross Terrill writes of the “illusory nature of the market in most of the Chinese economy” and that “a crash looms because the Leninist core of the regime is unchanged from Mao’s construction of it in Yan’an six decades ago” . Nicholas Lardy stresses the large economic problems and the unprecedented potential for social unrest due to ever more indebted state-owned enterprises, the extent of nonperforming loans, and a decline in government revenue.

At the other end of the range are those who project a strong China. Geoffrey Murphay's China: The Next Superpower (2008) argl-developed nuclear capacity (eventually normally defined as second-strike capability)."

1.2 Does China fulfill in being a Superpower?

Due to their large markets, growing military strength, and economic potential and influence in international affairs, the Federative Republic of Brazil, the People's Republic of China, the European Union, Republic of India and the Russian Federation, are among the powers which are most often cited as having the ability to influence future world politics and reach the status of superpower in the 21st century. While some believe one (or more) of these countries may replace the United States as a superpower, others claim they will rise to rival, but not replace, the United States. The question whether China will become a superpower has given rise to many comments: while some are certain that China is able to become a superpower others are more concerned about this country’s future: Lester Brown wonders who will feed China. Gordon Chang announces the coming collapse of China. Callum Henderson sees China as on the “brink,” while Ross Terrill writes of the “illusory nature of the market in most of the Chinese economy” and that “a crash looms because the Leninist core of the regime is unchanged from Mao’s construction of it in Yan’an six decades ago” . Nicholas Lardy stresses the large economic problems and the unprecedented potential for social unrest due to ever more indebted state-owned enterprises, the extent of nonperforming loans, and a decline in government revenue.

At the other end of the range are those who project a strong China. Geoffrey Murphay's China: The Next Superpower (2008) argued that while the potential for China is high, this is fairly perceived only by looking at the risks and obstacles China faces in managing its population and resources. The political situation in China may become too fragile to survive into superpower status according to Susan Shirk in China: Fragile Superpower (2008). Other factors that could constrain China's ability to become a superpower in the future include: limited supplies of energy and raw materials, questions over its innovation capability, inequality and corruption, and risks to social stability and the environment.

Minxin Pei argued in 2010 that China is not a superpower and it will be not be one anytime soon and argued that China faces daunting political and economic challenges. In 2012 she argued that China, despite using economic power to influence some nations, has few real friends or allies and is surrounded by potentially hostile nations. This situation could improve if regional territorial disputes would be resolved and China would participate in an effective regional defense system that would reduce the fears of its neighbors. Alternatively, a democratization of China would dramatically improve foreign relations with many nations.

Amy Chua stated in 2007 that whether a country has enough pull to bring immigrants is an important quality for a superpower. She also wrote that China lacks the pull to bring scientists, thinkers, and innovators from other countries as immigrants. However, she believed that China made up for this with its own diaspora, and said that size and resources for them are unparalleled.

Although there are many negative opinions about China becoming a superpower in the future, this country seems to be a great power as its population accounts for a fifth of the world’s population. Economically, it is the world's fourth largest trading nation, having risen from 32nd in 1978 and 10th in 1997. Its GDP at 13% of world output (at purchasing power parity) is second to the US. China, inheritor of 5,000 years of civilisation, is also the world's fastest developing economy in the present age, having grown an average of 9.5% annually for the past 20 years.

It is also the third largest country after Russia and Canada with almost 10 million square kilometers. More important is that behind all its glory, China is home to close to 1.3 billion people. The most important task concerns population. There needs to be continued control of the growth rate so that population increases do not outstrip the capacity to support it – including the environment. The onechild policy which was implemented in the late 1970s has helped in managing China’s population growth. Increased employment opportunities and more productive use of the labour force are also needed. This relates not only to enhancing China’s vast human capacity. It also removes a social source of insecurity. It is now widely acknowledged that China’s emphasis on developing the Eastern coast first has resulted in a huge wealth gap between the booming East and the much poorer Western interior of the country. The Surprisingly enough, China has not the cheapest workforce in the world. What helped China the most is the fact that it sits in a relatively stable part of the globe and it offers the world’s manufacturers a reliable, docile and capable industrial workforce, groomed by government enforced discipline.

China is known to be a major military power because it has in possession nuclear weapons. It is the world’s largest manufacturer and exporter of such weapons and it is also an important player in the space satellite-launching business.

Looking back in time, the Chinese empire was built on strategic military force and they managed to develop a relatively efficient system of government. The empire has managed to survive the collapse of dynasties, invasion and conquest, civil war and disorder. As it was observed: “Of all the civilizations of pre-modern times, none appeared more advanced, none felt more superior, than that of China”. What stood behind all of these was the fast, rapid development and modernization which remains at the heart of government strategy.

The Chinese culture is one of the worlds oldest and most complex. China has behind five thousand years of history however at heart it is still the same. The traditions and customs have been well conserved by the people, despite the fact that it has been diluted through the generations however it has never been lost. Chinese people have a sensitivity and respect for the historical traditions. They managed to accommodate their culture to the demands of modernization, in their way to urbanization and industrialization they kept the old habits and customs as well. Their culture is their pride and it is now spread all over the world.

Going back to the term ‘Superpower’ the second important thing needs to be taken into consideration and that is the governance – the leader. This is the asset for a growing superpower. It takes a great leader, one with a strong sense of direction and the desire to develop its society and economy. Politics have remained under the tight control of the Chinese Communist Party, the failure of the democracy to rise in China did not affect the country’s economic growth. The term ‘democracy’ for the Chinese people can be interpreted in various ways. It implies that the best government is by a ruler who pays great attention to the interests of the population at large.

The most crucial element of all in the superpower equation is the powerful economy, the world’s most rapidly changing largest economy. China is today the world’s second trading nation and it is one of the most open economies in the developing world. The first step to success is the opening up of China to the world. The high growth rates, low labor costs and the big emerging market have attracted the foreign direct investment (FDI). The enlargement of the investment scale and investment fields, the increase of transnational companies and capital and the technology intensive development have been the key features in building a superpower economy. Through the time China has gained a confidence that the fast developing economy will continue to see sustained growth and that is why it remained the major reason for the multinationals to go invest in China.

China is by now a global player, in many industries especially those that are labor intensive. China’s factories make 70 percent of the world’s toys, 60 percent of its bicycles, half of its shoes and one third of its luggage. In those product categories, it is often impossible to find a non-Chinese product on the store shelves. The words MADE IN CHINA are as universal as money.

China is not content with being the low-tech, labor-intensive manufacturer. It is already active in areas where technology plays an important role and labor is not the dominant cost factor. The country builds now half of the world’s microwave ovens, one third of its television sets and air conditioners, a quarter of its washers and one fifth of its refrigerators. All these products represent the fastest growing segment of its exports. Manufacturers in other countries increasingly rely on Chinese components or subassemblies to stay competitive. The nation is making parts for Boeing and it is exploring space with its own domestically built rockets. It is already the largest market for Boeing’s commercial aircraft and American machine tool makers, and its automotive market is the most promising in the world.

Unlike other great powers, China will not let go of the labor-intensive segment as it moves up the ladder, it will leverage its dominance in labor-intensive and mid-technology industries to fund a major push into knowledge-intensive areas that will drive the future world economy. Even though there is a vast pool of human resources, there are also a growing number of engineers, scientists and skilled technicians. China is developing also its educational system and it is upgrading the infrastructure and skill sets. It established alliances with Western institutes to send its students to study abroad. Chinese students study in Europe, Australia, Japan and USA. They manage to come back to China thanks to the wealth of economic opportunities offered by a fast growing economy. The students that are coming back to China are bringing with them not only academic knowledge, but also application know-how and business-related expertise.

One big reason China is growing is that the world keeps feeding it capital. Foreign companies are investing more in building businesses in China than they spend anywhere else in the world. In the past, the USA was the main attraction for foreign companies however since 2003 China has taken the lead and pulled in $53 billion compared to US’s $40 billion. At the moment the increasing number of billions coming to US is being spent by Chinese companies buying American counterparts.

With the capital influx comes the knowledge. China is receiving a river of European, Asian and American experts in manufacturing, banking, computing, advertising and engineering every day. All these enabled China to require technology transfer as a condition for foreign investor entry. More than half of China’s trade is controlled by foreign firms, many of which import goods into the country that they then manufacture into exports. This means that the goods pass through China just to get finished at lower costs and shipped back out.

Today, however, China’s soft power is in flux. How attractive is a China that lost Confucianism to Communism, and is still trying to find its way back again to Confucian humanism without sacrificing the politics of control? To be a superpower requires not only capacity and willpower, but also legitimacy in the eyes of the world. Legitimacy, in turn, affects the reach of a superpower. Thus China may find legitimacy in Asia but not in the West, with its fears of China as a looming economic and military threat, as well as country that does not respect human rights in its domestic affairs. So long as China does not gain the respect of the West, it will remain only an East Asian regional power. It needs legitimacy to develop itself globally.

CHAPTER II

CHINA AS A SUPERPOWER ECONOMY

2.1 A short history of the Chinese economy

China is the world's second largest economy after the United States. It is the world's fastest-growing major economy, with growth rates averaging 10% over the past 30 years. China is also the largest exporter and second largest importer of goods in the world. The country's per capita GDP (PPP) was $8,394 (International Monetary Fund, 90th in the world) in 2011. The provinces in the coastal regions of China tend to be more industrialized, while regions in the hinterland are less developed. As China's economic importance has grown, so has attention to the structure and health of that economy.

In the modern era, China's influence in the world economy was minimal until the late 1980s. At that time, economic reforms initiated after 1978 began to generate significant and steady growth in investment, consumption and standards of living. China now participates extensively in the world market and mostly state owned but also some private sector companies play a major role in the economy. Since 1978 hundreds of millions have been lifted out of poverty – yet hundred of millions of rural population as well as millions of migrant workers remain unattended.

In the 1949 revolution, China's economic system was officially made into a communist system. Since the wide-ranging reforms of the 1980s and afterwards, many scholars assert that China can be defined as one of the leading examples of state capitalism today.

China has generally implemented reforms in a gradualist fashion. As its role in world trade has steadily grown, its importance to the international economy has also increased apace. China's foreign trade has grown faster than its GDP for the past 25 years. China's growth comes both from huge state investment in infrastructure and heavy industry and from private sector expansion in light industry instead of just exports, whose role in the economy appears to have been significantly overestimated. The smaller but highly concentrated public sector, dominated by 159 large SOEs, provided key inputs from utilities, heavy industries, and energy resources that facilitated private sector growth and drove investment, the foundation of national growth. In 2008 thousands of private companies closed down and the government announced plans to expand the public sector to take up the slack caused by the global financial crisis. In 2010, there were approximately 10 million small businesses in China.

The PRC government's decision to permit China to be used by multinational corporations as an export platform has made the country a major competitor to other Asian export-led economies, such as South Korea, Singapore, and Malaysia. China has emphasized raising personal income and consumption and introducing new management systems to help increase productivity. The government has also focused on foreign trade as a major vehicle for economic growth. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Some economists believe that Chinese economic growth has been in fact understated during much of the 1990s and early 2000s, failing to fully factor in the growth driven by the private sector and that the extent at which China is dependent on exports is exaggerated despite the lack of full convertibility of the RMB. Nevertheless, key bottlenecks continue to constrain growth. Available energy is insufficient to run at fully installed industrial capacity, and the transport system is inadequate to move sufficient quantities of such critical items as coal.

The two most important sectors of the economy have traditionally been agriculture and industry. The two sectors have differed in many respects. Technology, labor productivity, and incomes have advanced much more rapidly in industry than in agriculture. Agricultural output has been vulnerable to the effects of weather, while industry has been more directly influenced by the government. The disparities between the two sectors have combined to form an economic-cultural-social gap between the rural and urban areas. China is the world's largest producer of rice and is among the principal sources of wheat, corn (maize), tobacco, soybeans, peanuts (groundnuts), and cotton. The country is one of the world's largest producers of a number of industrial and mineral products, including cotton cloth, tungsten, and antimony, and is an important producer of cotton yarn, coal, crude oil, and a number of other products. Its mineral resources are probably among the richest in the world but are only partially developed.

China has acquired highly sophisticated foreign production facilities and through "localization policies" also built a number of advanced engineering plants capable of manufacturing an increasing range of sophisticated equipment, including nuclear weapons and satellites, but most of its industrial output still comes from relatively ill-equipped factories. The technological level and quality standards of its industry as a whole are still disastrous, notwithstanding a marked change since 2000, spurred in part by foreign investment.

China's increasing integration with the international economy and its growing efforts to use market forces to govern the domestic allocation of goods have exacerbated this problem. Over the years, large subsidies were built into the price structure, and these subsidies grew substantially in the late 1970s and 1980s. By the early 1990s these subsidies began to be eliminated, in large part due to China's admission into the World Trade Organization (WTO) in 2001, which carried with it requirements for further economic liberalization and deregulation. China's ongoing economic transformation has had a profound impact not only on China but on the world. The market-oriented reforms China has implemented over the past two decades have unleashed individual initiative and entrepreneurship, whilst retaining state domination of the economy.

At the formation of the PRC, an enormous effort was made towards creating economic growth and entire new industries were created. Tight control of budget and money supply reduced inflation by the end of 1950. Though most of it was done at the expense of suppressing the private sector of small to big businesses by the Three-anti/five-anti campaigns between 1951 to 1952. The campaigns were notorious for being anti-capitalist, and imposed charges that allowed the government to punish capitalists with severe fines. In the beginning of the Communist party's rule, the leaders of the party had agreed that for a nation such as China, which does not have any heavy industry and minimal secondary production, capitalism is to be utilized to help the building of the "New China" and finally merged into communism.

The new government nationalized the country's banking system and brought all currency and credit under centralized control. It regulated prices by establishing trade associations and boosted government revenues by collecting agricultural taxes. By the mid-1950s, the communists had ruined the country's railroad and highway systems, barely brought the agricultural and industrial production to their prewar levels, by bringing the bulk of China's industry and commerce under the direct control of the state.

Meanwhile, in fulfillment of their revolutionary promise, China's communist leaders completed land reform within two years of coming to power, eliminating landlords and redistribute their land and other possessions to peasant households.

Mao tried in 1958 to push China's economy to new heights. Under his highly touted "Great Leap Forward", agricultural collectives were reorganized into enormous communes where men and women were assigned in military fashion to specific tasks. The Great Leap Forward quickly revealed itself as a giant step backwards. Over-ambitious targets were set, falsified production figures were duly reported, and Chinese officials lived in an unreal world of miraculous production increases. By 1960, agricultural production in the countryside had slowed dangerously and large areas of China were gripped by a devastating famine.

For the next several years, China experienced a period of relative stability. Agricultural and industrial production returned to normal levels, and labor productivity began to rise. Then, in 1966, Mao proclaimed a Cultural Revolution to "put China back on track". Under orders to "Destroy the Four Olds" (old thoughts, culture, customs and habits), universities and schools closed their doors, and students, who became Mao's "Red Guards", were sent throughout the country to make revolution, beating and torturing anyone whose rank or political thinking offended. By 1969 the country had descended into anarchy, and factions of the Red Guards had begun to fight among themselves.

2.1.1 The period 1978–1990

Reforms began with Li Xiannian and Deng Xiaoping, Chinese leaders in 80s. Once he consolidated his power, Deng began to put his pragmatic policies to work, determined to bring China back from the devastation that the Cultural Revolution had wrought.

Since 1978, China began to make major reforms to its economy. Political and social stability, economic productivity, and public and consumer welfare were considered paramount and indivisible. In these years, the government emphasized raising personal income and consumption and introducing new management systems to help increase productivity. The government also had focused on foreign trade as a major vehicle for economic growth. In the 1980s, China tried to combine central planning with market-oriented reforms to increase productivity, living standards, and technological quality without exacerbating inflation, unemployment, and budget deficits. Reforms began in the agricultural, industrial, fiscal, financial, banking, price setting, and labor systems.

A decision was made in 1978 to permit foreign direct investment in several small "special economic zones" along the coast. The country lacked the legal infrastructure and knowledge of international practices to make this prospect attractive for many foreign businesses, however. In the early 1980s steps were taken to expand the number of areas that could accept foreign investment with a minimum of red tape. This additional effort resulted in making 14 coastal cities and three coastal regions "open areas" for foreign investment. All of these places provide favored tax treatment and other advantages for foreign investment. Laws on contracts, patents, and other matters of concern to foreign businesses were also passed in an effort to attract international capital to spur China's development.

2.1.2 The reform in the countryside

When Deng came into power, China's vast peasantry was still organized in communes, work brigades, and production teams. Procurement prices were too low to cover even production costs, Deng allowed farmers to produce on their own and sanctioned the sale of surplus production and other cash crops in newly freed markets. State procurement prices were raised, and prices for many agricultural goods were left to the dictates of the market. Within a decade, grain production had grown by roughly 30%, and production of cotton, sugarcane, tobacco, and fruit had doubled. In the 1980s, it had transformed its vast and inefficient agricultural sector, freeing its peasants from the confines of central planning and winning them to the cause of reform. In the 1990s, it had likewise started to restructure its stagnant industrial sector, wooing foreign investors for the first time.

2.1.3 Rural industrialization and enterprise reform

Prior to 1978, enterprises were almost all owned by the state in one form or another. At the top of each sector were the State-owned Enterprises (SOEs), answerable to the national government. Below these were other enterprises reporting to provincial, municipal, or county authorities. Private enterprises, meaning family-run shops, were not allowed until after 1978, and even then they were limited to seven employees.

Inefficient, overstaffed, and with outdated technology, they functioned not only as industrial units but also as social agencies, providing housing, daycare, education, and health care for the workers and their families. The update of this system was that Chinese workers could expect both lifetime employment and an extensive, firm-based welfare system-the so-called "iron rice bowl".

2.1.4 The period 1990–2000

In the 1990s, the Chinese economy continued to grow at a rapid pace, at about 9.5%, accompanied by a rapidly increasing inflation, which reached over 20 percent in 1994. The Asian financial crisis affected China at the margin, mainly through decreased foreign direct investment and a sharp drop in the growth of its exports. However, China had huge reserves, a currency that was not freely convertible, and capital inflows that consisted overwhelmingly of long-term investment. For these reasons it remained largely insulated from the regional crisis and its commitment not to devalue had been a major stabilizing factor for the region. However, China faced slowing growth and rising unemployment based on internal problems, including a financial system burdened by huge amounts of bad loans, and massive layoffs stemming from aggressive efforts to reform state-owned enterprises (SOEs).

Despite China's impressive economic development during the past two decades, reforming the state sector and modernizing the banking system remained major hurdles. Over half of China's state-owned enterprises were inefficient and reporting losses. During the 15th National Communist Party Congress that met in September 1997, President Jiang Zemin announced plans to sell, merge, or close the vast majority of SOEs in his call for increased "non-public ownership" (feigongyou or privatization.)

2.1.5 The period 2000–2010

Following the Chinese Communist Party's Third Plenum, held in October 2003, Chinese legislators unveiled several proposed amendments to the state constitution. One of the most significant was a proposal to provide protection for private property rights. Legislators also indicated there would be a new emphasis on certain aspects of overall government economic policy, including efforts to reduce unemployment (now in the 8–10% range in urban areas), to rebalance income distribution between urban and rural regions, and to maintain economic growth while protecting the environment and improving social equity.

China launched its Economic Stimulus Plan to specifically deal with the Global financial crisis of 2008–2009. It has primarily focused on increasing affordable housing, easing credit restrictions for mortgage and SMEs, lower taxes such as those on real estate sales and commodities, pumping more public investment into infrastructure development, such as the rail network, roads and ports. By the end of 2009 it appeared that the Chinese economy was showing signs of recovery. At the 2009 Economic Work Conference in December 'managing inflation expectations' was added to the list of economic objectives, suggesting a strong economic upturn and a desire to take steps to manage it.

2.1.6 The period 2010–present

By 2010 it was evident to outside observers that China was poised to move from export dependency to development of an internal market. Wages were rapidly rising in all areas of the country and Chinese leaders were calling for an increased standard of living.

In 2010, China's GDP was valued at $5.87 trillion, surpassed Japan's $5.47 trillion, and became the world's second largest economy after the U.S. China could become the world's largest economy (by nominal GDP) sometime as early as 2020.

Economic development has generally been more rapid in coastal provinces than in the interior, and there are large disparities in per capita income between regions. The three wealthiest regions are along the southeast coast, centred on the Pearl River Delta; along the east coast, centred on the Lower Yangtze River; and near the Bohai Gulf, in the Beijing–Tianjin–Liaoning region. It is the rapid development of these areas that is expected to have the most significant effect on the Asian regional economy as a whole, and Chinese government policy is designed to remove the obstacles to accelerated growth in these wealthier regions. China is the largest creditor nation in the world and owns approximately 20.8% of all foreign-owned US Treasury securities.

2.2 Characteristics of Chinese economy from the superpower economy features

China's rapid growth in its economy and its emergence as a global economic power plays an important role in world economy development. East Asia is the fastest-growing region in the world over the past two decades. China survived the East Asian currency crisis relatively unscathed. China is one of the very few socialist countries that have made a successful transition from a centrally planned to a market economy—the 10th Five-Year Plan is only indicative and not mandatory; the rate of interest (the price of money) and the exchange rate are the only prices that are still administratively determined on the margin.

The private (non-state) sector accounts for more than 65% of GDP and an even greater percentage of employment in 2001—non-state-owned firms face hard budget constraints and ordinary citizens can make a good living without being beholden to the state. China is the 6th largest trading country in the world (exports of US$266.2 billion and imports of US$245 billion, totaling US$511.2 billion in 2001).

Ever since China implemented reform policies and opening up its economy to the outside world in 1979, its economy has maintained robust growth, with the average annual growth rate in GNP reaching 9.6 percent 28 years in a row. Such growth gave China an opportunity to make increasingly significant contribution to the world.

  According to the statistics released by the World Bank, China has made the largest contribution to the growth rate worldwide over 13% on the average since China joined the WTO in 2001. In 1983, its percentage of world GDP dropped sharply, lowest as 2.6% in 1913. Now, China's economy ranks at the fourth largest in the world in terms of gross domestic product (GDP) at current exchange rates. Ever since, China’s entry to WTO in 2001 and open up its closed door economy, its output rate had consistently grown throughout the recent 20 years. In 2005, China contributed 14.3% to the world economy growth as the second largest country to contribute the world economy growth after USA. China’s percentage of world GDP had increased by 5.5% in 2006 and experts projected that China will eventually account for 25.6% of global output by 2020, becoming the world’s second largest economic nation after U.S.

China’s trade integration has of late been more with Asia rather than with the advanced countries. Even the share of Hong Kong, which used to be treated as a corridor for China’s trade with the industrialized countries, has diminished in recent years. Given the pattern of growing instability in advanced economies, this may work out as a favorable factor for China in terms of withstanding the potential hazards of a sudden collapse of export markets in the advanced countries. The pattern, however, is very different in regard to capital flows. China today is integrated closely with the financial markets of advanced economies, both with the long-term FDI and the short-term portfolio capital flows. While FDI forges links between China’s real sector and the rest of world—especially with China’s exports and capital formation, as well as employment generated from the FDI controlled units—portfolio flows open up the possible dangers of a sudden flight of capital. The latter makes the country’s economy vulnerable to shocks from outside and can affect the domestic financial structure, including the exchange rates, as well as monetary management in future.

On balance, the new pattern of China’s integration with the rest of world is thus beset with both positive and negative signals for the Chinese economy. Given that China’s growth and stability have assumed a degree of importance for the rest of world that was never as significant as it has of late been, the future of the Chinese economy remains an important issue for the world as a whole.

In recent years, the Chinese economy has transformed away from an export-driven economy towards a domestic consumption- led economy. That trend is expected to continue. Net trade is decreasing as a driver of growth for a few reasons. There has been a surge of imports, and the global economic downturn has dampened demand for exports. At the same time, the government has deemphasized export processing (i.e., importing raw materials, adding a small amount of value, and then exporting) in favor of more value-added exports. It is important to recognize that China’s economy is closely integrated with other Asian economies. Companies are increasingly developing dispersed supply chains with operations in China and other Asian countries.

The domestic consumption estimates for the Chinese market are staggering. The automobile market provides an excellent illustration. In 1997, there were 1.5 million automobiles sold in China. By 2007, annual auto sales had grown six times, to over 8.5 million. With annual growth in the 20% to 25% range, in five to ten years China will be the largest auto market in the world. Foreign companies recognize that the Chinese market is a

critical source of growth.

Despite China’s sustained growth, significant challenges still exist for the country and for foreign companies wanting to do business there:

Infrastructure: the Chinese infrastructure is still not what it needs to be to support

an industrial economy of the scale of China’s. There is tremendous investment in infrastructure of all types (roads, railroads, airports, ports, etc.); China is investing the highest percent of GDP in infrastructure of any country in the world. While much of this investment is occurring in the major cities, farther west and in rural areas much work remains to be done. While progress is being made in improving the “hard” infrastructure, the soft infrastructure, such as inconsistent licensing requirements and laws across provinces, still must be improved.

Unfamiliar business structures: in the United States, companies are accustomed to

competitors who are focused on profit. In China, the environment can be very different. There is a mix of private companies, state owned companies which lack a profit motive, and hybrid businesses. Government businesses exist to provide employment, rather than to create profits.

Limited management skills: although the quantity and the quality of the human

capital in China is very strong—with abundant skills and a strong work ethic— the country is lacking good middle- and upper-level managers. This lack of managerial expertise is due in part to the cultural revolution which shut down universities for a ten-year period. Because of the shortage of good managers, foreign companies often must bring in large numbers of expatriates to support operations. This can be expensive.

Corruption: there remains a great deal of corruption in all elements of Chinese

business. It is considered the norm, but slowly that is beginning to change. Concerns mentioned by the panelists that could negatively affect China’s sustained growth include: if China were to move away from an outward orientation to an inward focus; if there were a shift breakdown in U.S./Chinese relations; and if China were to fail to establish a social safety net for its citizens.

Urbanization: the Chinese government has a goal of moving 1% of the population

to cities each year, which represents 13 million people per year moving from rural to urban locations. At the same time, the country wants to avoid urban sprawl. The goal is to create high-density urban centers that are connected by a high-speed rail.

Use of English: it is believed that the language used in China for software will be a

telling sign regarding if China is inwardly or externally focused. The use of English is needed to sustain an external focus.

China and alternative energy: It is said that in 20-30 years, the likely fuel source

for cars will be hydrogen. Evolving to hydrogen will require a public/private partnership. This will be difficult in many countries, but due to the heavy involvement of the government in the economy, China may be well positioned to pull off such a partnership.

The close integration of China with the world economy over the last two decades has raised concerns from different quarters which relate both to (a) the possible effects of the recent global downturn on China and (b) the second-round effects of a downturn in China for the rest of the world.

If affected adversely by the crisis, the Chinese downturn will directly impact nations that are its major trading partners. A majority of these supply-chain countries are in developing Asia. China was and might have been heavily affected by the global crisis. As argued, “China is supported by a three-legged stool, but two legs (exports, real property) are now broken.” The last of these include government spending. “So what is left is government spending…. but can increased government spending make up for the other legs of the stool?”. A similar position, offered in 2009, ran as follows: “China’s real exposure to the global financial crisis is huge and has many dimensions […which include…] international trade […] as well as foreign direct investment.” Moreover, China’s foreign reserves, at about $2.58 trillion in 2010, with more than half invested in US government and agency bonds, does matter for the United States and hence for the rest of the world. Finally, “… over 25 million Chinese employees now work for overseas companies inside China”. This makes it important for China that FDI flows do not dry up.

Going by an opposite view offered in December 2008, “China…is in a very unique position in that it has $1.9 trillion in foreign currency reserves. China…can now…divert the

focus away from an export-driven economy to one that begins to focus on domestic demand.” Moreover, “…while every other country is desperately trying to formulate a rescue plan fuelled with an increase in the national debt, China does not have this worry and this will form its primary advantage”.

China over the last few years has been on a path of capital account opening which has drawn larger inflows of capital from abroad, both FDI and portfolio types. Of late, a surge in these inflows has introduced problems for the monetary authorities in continuing with an autonomous monetary policy in China, especially with large additions to official reserves, the latter in a bid to avoid further appreciation of the national domestic currency.

Liberalization of capital flows has also changed its composition, with volatile flows of portfolio capital having a much larger share. Summing up, China today seems to be closely integrated with the outside world, not only with its huge exports and FDI inflows, but also in terms of short-term capital flows. The first two contribute to output and employment, while generating foreign exchange, contributing substantially to the $2.58 trillion in official reserves of the country. FDI has also been instrumental in providing a major share of exports and gross domestic capital formation, apart from providing employment.

2.3 China in the global economy

China occupies an unique position among growing countries in the developing region for at least four reasons. These include:

(a) its large volume of exports and trade surplus, the latter at around 10% of its GDP, the huge official reserves at $2.58 trillion by end of February 2010 (with $2.28 trillion invested in securities, large portions in US Treasury bonds);

(b) the growing trade, as well as investment links with Asia (especially with Hong Kong, the self-governing territory of the Peoples’ Republic of Mainland China);

(c) the country is a major importer, especially of intermediate goods from neighboring countries in Asia; and

(d) China’s success in achieving reasonable stability in the financial sector since the beginning of reforms in 1979 and also of late, during the recent global financial crisis. The latter, however, had given way to signs of potential instability, especially since the onset of the global crisis in the autumn of 2008. This has been with efforts on the part of the monetary authorities to cope with free capital flows while maintaining national autonomy in monetary policy and management of exchange rates.

The growth of China’s economy can be characterized as follows. In 1980, the GDP per person in China was just a little over $300 per year, less than 86 cents per day per person. In 2008, the GDP per person (assuming a population of 1.5 billion) was almost $3,000,3 or over $8 per day per person. Meanwhile, consumption has been growing, but not as fast as the GDP has grown. Retail sales in China have increased at a 17 percent rate each year since 2008, according to the National Bureau of Statistics of China. Auto sales accelerated 40 percent in 2009, according to an article in the New York Times. While consumers are buying more, overall consumption as a share of the GDP has fallen for the last 10 years. It now accounts for roughly 35 percent, half the percentage in the United States. (In the 1980s, consumption in China was more than 50 percent of its GDP.) In part, this is attributable to thrift. Most Chinese are prudent, precautionary savers, and they live on a fraction of their take-home pay. In the aggregate, consumers and institutions in China save around $2.5 trillion every year.

China, in the earlier years of financial opening (until about 2005), provides a unique example of liberalizing its financial sector with close state monitoring, which we have described elsewhere as a situation of “guided finance”. Banks in China have continued to remain as the main conduit of financial intermediation within the country, until recently handling 80% or more of financial flows in the country, with four major state-controlled banks (SoBs) controlling 70% of deposits and advances in the banking industry. Thus the security sector in China remained at a nascent stage until recently and no Chinese bank was permitted to invest in securities. Again, despite having access to the market for securities, the state-owned enterprises (SoEs) relied on banks rather than the stock market for finance. China’s positive balance of trade has been created by a number of factors working in concert.

In the first place, the central government promotes industries that generate exports. Second, consumers exhibit relatively high savings rates. Chinese households in late 2009 were estimated to be saving up to 40 percent of their income.

Third, the Chinese use credit far less than Western consumers.

Fourth, wages have been kept low. According to James Surowiecki, the financial columnist for the New Yorker: “While [China’s] boom has been extraordinary, ordinary workers have not reaped the gains one might expect. In the past decade, . . . the share of GDP that goes to wages has actually fallen.”

Tracing back the changes in the shares of different regions, it is revealing that the relative share of the industrial and developed country exports in China trade has been changing dramatically over 1990–2007. While the developing region absorbed nearly two-thirds of China’s exports in 1990, the share got reduced to less than half by 1999, while exceeding half again by 2007. Incidentally, continuing the earlier pattern, the United States has continued to absorb nearly one-fifth or a little less of China’s exports and Hong Kong also has remained a major trade partner. Asia today stands out as a major export destination for China, catering to more than one-third of exports in 2007. However, the share of South Asia in China’s total exports has been consistently low. China’s trade links with the rest of world also rely on her growing imports, with Asia staging a comeback as a major source of imports. Incidentally, unlike the case with exports, Hong Kong was never a major source of imports for China. As for industrial countries, their share had fallen behind those of developing countries since 2000. The United States, as can be expected from its large trade deficits with China, is not a major import source for China. This may reflect China’s low-end manufacturing exports and US’s high-end manufactures.

China’s recent financial developments paint a rather awkward picture when one views the country’s integration to the world economy, especially after the global economic crisis. One witnesses declines in both portfolio and FDI flows to the country since the onset of the global crisis in the fall of 2008. As for FDI, there has been a change in recent times with advanced industrialized countries—which have been China’s major investors through Hong Kong —now staying away. According to some sources, “China’s main FDI sources viz. the United States, Europe, and Japan are languishing and there is no sign that their economies are bottoming out. This has blurred the prospects for FDI into China.” However China is still considered as the most favorable destination for investment by foreigners. The fact that foreign investments to China have been hit by the global economic crisis is rather evident by now.

China, like some other developing countries, today faces the “impossible trilemma” of managing the exchange rate with near complete capital mobility and national autonomy in their monetary policy. However, while China is able to sustain the current spread between its prime lending rate at around 5.36% in the face of the US rate at 0.25%, it does not signify China’s success in avoiding the hazards of a typical trilemma as arises with open capital flows, managed exchange rates, and an autonomous monetary policy. China has been steadily sterilizing a significant part of the rising capital inflows by selling government bonds and with higher rates of cash reserves which partly reduces the related expansion of high-powered money (reserve money) and money supply. However, selling government bonds is bound to face its own limits, especially in terms of the related fiscal burden of the rising interest costs. These developments indubitably indicate the seriousness of the trilemma currently faced, as well as handled, by China—keeping its capital flows free and managing both monetary policy and the exchange rate in the interest of the national economy.

As for the role of China as a growth propeller, integrated with the rest of world, the highgrowth Chinese economy has still been propelling growth elsewhere. Concerns expressed by the rest of world on the trade-displacing effects of the cheap exports alone, however, appear exaggerated if we remember that China is also a large importer, especially of intermediate goods. Its exports are import-intensive, much of which is generated by operations of the subsidiaries of foreign firms in China. While it is too early to have a total picture, the growing alliances within Asia between China and other Asian countries in terms of trade integration signifies a decoupling tendency between the industrialized and the developing countries.

However, this may also go with further changes in the composition of trade within Asia, with Chinese manufactures displacing those from other Asian countries. The new pattern of Asian economic integration may also dampen the impact of further decelerations in the West on Asian economies, at least via the trade route, if not via capital flows. We also need to remind ourselves that growth in China is not just a case of a typical export-led process as happened in some other countries in Asia. It is an instance of a state-led industrialization, as in Japan earlier and more recently in Korea, along with the opening up of large domestic, as well as external, markets. Also, industrialization in China has not remained confined to an export enclave, especially with its vast territory and the swarming population providing the base for economic expansion from within. As pointed out by a recent study, much of the domestic activities (as well as exports) are generated by domestic demand. Of late, the second-generation FDI inflows from the EU, Japan, and the United States have been directed to a niche within the home market, unlike the first-generation flows that catered more to export markets. The “three legs” (exports, property market, and government spending) are considered to support the Chinese economy; of these, government spending seems to be functioning better. One needs to focus on the changes in the rising value as well as the composition of such spending in China since the onset of the global economic crisis. As mentioned earlier, with problems faced in devising and sustaining autonomy in monetary policy, China has been using expansionary fiscal policy to tackle the impact of shrinking export demand. The recent drive the on part of Chinese authorities to boost real demand in the countryside and to revamp the domestic market shows a promise much different from the rescue packages for the financial sector in advanced nations. Of late, China has announced a four trillion RMB ($586 billion) package of fiscal expenditure, which represents about 16% of China’s economic output last year and is roughly equal to the total of all central and local government spending in 2006. New spending of even half that amount would be next to China’s six trillion RMB annual budget for this year. Strategies as above aim to bolster domestic demand and help avert a global recession by spending on housing, infrastructure, agriculture, healthcare, and social welfare, along with tax deductions for capital spending by companies. Concerns, however, have been raised on the inadequacy of those measures on employment and poverty in the countryside, one which may not be achieved much by the priorities in achieving infrastructural development. On the whole, it is possibly too early to identify the possible impact of this expansionary spending on China’s economy. However, questions are raised as to how the overall growth satisfies the needs of the economy, especially with what is described as a “jobless recovery” and with migrant workers continuing to face serious crisis.

CHAPTER III

CHINA IN THE FUTURE

3.1 Future predictions/scenarios about China’s economy, growth

Explanations of China’s economic growth tend to focus on economic transition. The “success” of the reform process is explained by transition facts and strategies, where success is usually taken to imply economic growth (or a rise in living standards). For example, Wing-Thye Woo (1994) lists as crucial the creation of non-state firms in every sector of the economy, a high savings rate, good initial conditions (such as a small extent of central planning, unemployment in the countryside that could be taken up by township and village enterprises, or a limited social security net), historical conditions, and the Chinese Diaspora. Qian Yingyi (2000, 2003) ascribes much of China’s reform success to the unorthodox economic policy measures adopted by China’s leadership; the key to China’s economic growth was the unleashing of incentives and competition while making reform interest-compatible for those in power.

Growth patterns identified by economic theories of development and trade perhaps offer firmer ground. Economic transition could then be viewed as the removal of constraints that prevented well-known development patterns from unfolding. The argument has two foundations: one is a focus on standard growth patterns, the other is a cross-country comparison with countries with which a comparison is likely to be meaningful. The growth patterns are structural change, catching up, and factor price equalization. These three patterns are not independent of each other, nor do they hold irrespective of the larger economic environment. They represent uni-causal explanations of economic growth that have the advantage that they do not rely on individual transition measures and have been identified by development economics and trade theory.

Thus while China provides an alternative to the US modernisation model based on liberal democracy by having incorporated capitalism into a socialist polity, it has still to present an acceptable human rights face to the world. This may be managed through adoption of a contemporary Confucian humanism. An obvious way to show this is in helping less developed countries such as those in Africa, as had been the case under Maoist China when infrastructure projects were being built by the Chinese. Domestically, too, greater attention needs to be paid to the needs of the ordinary people. This attitude has been adopted by the fourth generation leadership, under President Hu Jintao. As Li Genxin pointed out: “Before small groups were encouraged to get rich and lead development. But now attention has shifted to the majority.”

Under such circumstances of good international citizen and humane governance internally, China's steady rise in global influence will likely move from the material to the spiritual. As to the fear of China as an economic threat, this must be balanced by the realization that the China market does exist and that it is becoming more entrenched in Western consumer culture. China’s improved economy is also creating a new class of business people who will be able to invest in regional economies to their benefit. It was not long ago when Japan was seen as an economic threat and American manufacturers experienced great anxiety over the popularity of Japanese cars and electronics. China as an economic threat needs to be balanced against the opportunities it provides and the services it seeks for its development.

Extrapolation into the future of China’s reform period economic growth suggests that the size of China’s economy will exceed that of the U.S., in purchasing power parity terms, in less than ten years. Per capita, the point of time when China catches up with the U.S. is much further into the future, thirty to forty years from now, although the coastal areas, especially the in the past fastest growing five provinces together with Shanghai, with a population exceeding that of the U.S., may catch up in as little as two decades.

China’s economic development in the reform period fits well with the broad development patterns of structural change, catching up, and factor price equalization, not least in comparison with other Asian countries earlier in their economic development. On all accounts, China has twenty to forty more years of gains in economic growth to reap. Re-composing China’s economic growth from growth in income components suggests that China’s continued growth is inevitable. Based on the year 2000 population census combined with past and current trends in education, the quantity and quality of China’s laborers can be predicted with near-certainty through 2015, and with high reliability for the years after. These forecasts suggest economic growth between 2005 and 2015 in the range of 7-9%, high enough for China to catch up with the U.S., in purchasing power terms, within a decade or less.

Growth accounting illustrates the correlation between (and potential impact of) changes in the educational structure of China’s population and (on) economic growth. China’s population is four times the size of the U.S. population. If talent is randomly distributed among the world population and if China’s education system is able to identify the brightest students, then China has a larger pool of talent to draw from than any other country in the world. If innovation depends on the agglomeration of talent (geographically, nationally, culturally, or linguistically), then China is in an excellent position to grow and innovate.

Demographics also matters in terms of market size (and 80% of China’s population lives in the densely populated Eastern part of the country). Size of the domestic market should allow unprecedented variety and economies of scale. It is likely to have a positive impact on competition and, thereby, rationalization and innovation. The large pool of laborers, compared to other countries, could in time lead to a highly efficient allocation of labor in that each labor market niche can be filled by the appropriate talent.

Domestically, China’s continued economic growth means that one-fifth of the world population will continue to experience significant improvements in their living standard. A share of China’s population that exceeds the size of the U.S. population will enjoy living standards close to the level of developed countries in the near future. Others will rise out of poverty, while the sweatshops of early industrialization disappear sooner rather than later. Internationally, China’s economic growth will continue to affect relative prices and production structures around the world. China’s trade volume is exceptionally large by international standards. In 2000, China’s ratio of ‘exports of goods and services’ to GDP was 25.90%, compared to 11.21% for the U.S.60 By 2003, China’s ratio of exports of goods and services to GDP at 34.24% was almost ten percentage points higher (while imports stood at 31.69%).61 Even if this ratio only stays constant in the future rather than rises further, China’s economic growth means that China will soon be the world’s largest exporter and importer.

While some in the West fret about the “China price” and its impact on Western economies, some firms in Western economies will benefit from the increasing division of labor, as will those who have a stake in these firms (for example, the typical pension fund of citizens of Western countries). Two-thirds of China’s imports originate in Asia (where it sends half of its exports). China’s economic growth, therefore, induces economic growth in other Asian countries. India may be tempted by China’s example into sustained, growth-promoting economic reforms. It appears only a matter of time (ten years?) before the center of world economic activity, as measured by GDP, shifts to Asia.

These developments appear little different from the economic rise of other nations in the past, except perhaps the speed at which they occur, and the breadth of implications due to the size of China. But what may cause particular discomfort in the West is the fact that China is, following its Constitution, a “people’s democratic dictatorship … under the leadership of the Communist Party of China.” As China’s FDI abroad grows, political questions may become more pressing, such as to what extent Chinese investors abroad are simply extensions of the Politburo (which appoints the managers of 53 of the largest state-owned enterprises), or to what extent the world plays by the rules of China’s dictator(s) a few years down the road?

But the influence goes both ways. In 2003, 16.48% of value-added in industrial enterprises with annual sales revenue in excess of 5m yuan RMB (USD 0.6m) within China was produced by foreign-funded enterprises, a figure which excludes an additional 11.15% in enterprises funded by Hong Kong, Macau, and Taiwanese entrepreneurs.62 For years to come, China is likely to want to enjoy the benefits of access to foreign capital and foreign technology. China is adopting international standards and practices on a scale and at a speed as perhaps no other county in the world ever has. A larger share of China’s bureaucrats and enterprise managers are likely to have a foreign education or work experience abroad than in Western countries. On many measures, China is an extremely open economy.

3.2 Will China take over the world after all

China’s rapid economic rise is not guaranteed. Economic problems range from bad loans in the banking system to an under-funded pension insurance scheme, the lack of a rural health care system, and bankrupt local governments. Yet China’s leadership has a track record spanning more than two decades of rising to economic challenges and addressing problems as they become urgent. At a 9.37% average annual real growth rate, furthermore, GDP doubles every eight years; if the absolute size of a financial deficit stays constant during this period, its significance, as a share of GDP, is halved. This provides all the more reason for China’s leadership to stay focused on economic growth.

Economic growth also does not necessarily come with the connotation “good.” Much of GDP growth could be accompanied by significant environmental degradation and resource exhaustion. A “green GDP” growth rate could be several percentage points lower.63 At some point, China’s leadership may no longer wish to trade off China’s environment and resources for GDP growth. But even once that happens, it is likely to be a gradual process.

Political constraints may yet pose greater constraints on China’s economic growth than economic or financial imbalances. Growing inequality or increasing dissatisfaction with widespread government/Party corruption could lead to a breakdown of political governance in China. From a more continuous perspective, China’s severe control over access to information is unlikely to advance economic growth. At least social scientists work within a framework of relatively scarce information; information is more freely available only to those who are part of internal circles. Consequently, public scientific discourse is limited and a significant Chinese language research community centered around Chinese language research publications has yet to emerge. When China’s economy is ready to move from catching up to innovation on a larger scale, these information constraints are unlikely to be helpful. A second aspect is the Party’s control over key appointments across the economy, from state-owned enterprises to the banking system (and, naturally, all leadership positions in government). The consequences of the appointment of, when in doubt, “red” rather than professional managers, and the absence of effective control mechanisms is unlikely to be conducive to economic growth and efficiency; evidence in form of corruption scandals abounds. These political constraints not only threaten to have a direct impact on the operation of China’s economy, but are also likely to continue to induce some of the best Chinese-born talents to move or stay abroad.

CHAPTER IV

CONCLUSIONS

4.1 Is China the 21st century new superpower?

The rise of China as the second most economically powerful country is occurring in a historically short amount of time. The Middle Kingdom passed Germany, France, and the United Kingdom in 2008, and it raced ahead of Japan in 2009 to become the second largest economy on Earth.

Furthermore, the Great Recession of 2008 to 2009, and the slow economic progress thereafter by the United States and the West, accelerated China’s pace. China is closing the gap with America in terms of gross domestic product. While forecasters such as PricewaterhouseCoopers and others differ on exactly when China will overtake the United States, they agree that it will occur and that it is only a matter of a few decades.

In regard to China as a likely contender for 21st Century superpower status , the evidence is not only material, as seen in a prospering China with global economic reach. Quantitatively, China has the raw capacity for becoming a superpower. Its population of 1.3 billion renders it the most populous nation on earth, accounting for a fifth of the world’s population; while at almost 10 million square kilometers it is the third largest country after Russia and Canada. Its 2.25 million troops form the world's largest armed force – though not the most advanced.

China's reputation as a major military power is crowned by the possession of nuclear weapons that are capable of all ranges and delivery modes. Economically, it is the world's fourth largest trading nation, having risen from 32nd in 1978 and 10th in 1997.

Qualitatively, however, there is much to be done. The most important task concerns

population. There needs to be continued control of the growth rate so that population increases do not outstrip the capacity to support it – including the environment. The onechild policy which was implemented in the late 1970s has helped in managing China’s population growth. Increased employment opportunities and more productive use of the labour force are also needed. This relates not only to enhancing China’s vast human capacity.

It also removes a social source of insecurity. It is now widely acknowledged that China’s emphasis on developing the Eastern coast first has resulted in a huge wealth gap between the booming East and the much poorer Western interior of the country.

It is also civilisational – particularly the contribution of contemporary Confucian humanism to address human rights and the issues of values in global governance. Above all, it is Chinese culture which is especially concerned with the cultivation of harmony. There is a huge market for harmony and stability in the post 9/11 world.

China can make a contribution in this respect, just as it had for 500 years before the spread of European political power on this planet. The present time represents an intersection in China’s path to renewed greatness. It can go the way of culture and help to advance a human-centred world or it can become selfcentred and defensive within its regional buffer zones.

Globalisation and China’s modernization tend to favour the former. As China modernises and grows more connected with the global system, it will be compelled by its own internal logic and dynamism to instigate a shift in the international political system. Like the European Union, which found strength in pluralistic unity rather than fragmented

sovereignties, China will soon be in a position to cross the threshold of an international system in which states are self-serving to the more Confucian view of ‘self-cultivating’ in an interactive global system.

The proverbial ‘struggle for power’ thus converts to ‘networks of power’; it is now more profitable to connect than to clash. This ethos applies as much to civilisations as to states and their citizens. It may be concluded that China has the qualifications to become a 21st century superpower as it is already acknowledged as a great power in the traditional sense, it is modernizing its huge military giving it the qualification of hard power, and it also can be a transnational performer if the politics of control give way to the soft power of attraction. This has meant a China that shows its strength not through conquering others but by accommodating them.

By being true to its history, China can gain the legitimacy it lacks in the present era. Rather than accumulating the power to act unilaterally, a 21st century superpower needs to be a force for engaging human energies toward addressing global needs. This is the direction that should be encouraged by the international community. This is also the direction that best serves China’s interests.

It is unlikely the US will persist in such a self-destructive path of loss of legitimacy, and in many ways it is already seeking legitimate authority rather than mere material dominance. But it is possible that China will capitalize tactically on the slippage in US legitimacy in order to make strategic gains in its own legitimacy enhancement. Critics of China have argued that such calculated kindness is part of China’s grand strategy, making opportunistic use of Washington’s unpopular unilateralism. This casts China in an unwarranted threatening light.

On the contrary, China’s tactical employment of the prevailing superpower’s foreign policy weakness may be seen more positively as a productive (but only tactical) move in a strategy that seeks to bring balance back into the state system in which China must survive, develop and exercise its great power functions.

To gain legitimacy of the order exercised by the US, there would need to be: an acceptance of an Oriental superpower, the issue of dissent in its various forms would need to be addressed, China’s championing of international law and diplomacy would need to be maintained and visibly supported, as would a consultative management style in global affairs and the overcoming of threat perceptions in economic and military affairs.

Bibliography

Books

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