The Hindu Business Line : The miracle and mystery of China

CHINA'S scorching rate of economic growth has become the stuff of legend. It has been in excess of 8 per cent for nearly two decades. China today stands near the top of the heap among the world's economies.

The Chinese miracle has drawn the attention of opinion-makers around the world.

Fortune magazine has devoted its October 11, 2004 issue to discussing the wondrous developments inside new China. The increasing importance of China is reflected not only in the media but also in the place accorded to China in meetings of the world's leading economies, like G-7 — to which it is invited as a participant.

China today is a country, which boasts of economic magnitudes in superlatives. Starting from the ill-starred experiments of steel plants in backyards, which were abandoned later, China is now the world's largest steel-maker, producing 220 million tones a year.

Its gargantuan appetite for steel is still not satisfied. It imports an additional 40 million tones a year. Its production alone is equal to that of Japan and the US combined. China is also the world's largest coal producer. It could, however, become a net importer of coal in a few years.

China's scorching pace of growth in the recent decades started with President Deng Xiaoping's insightful decision to open the China's economy. The inveterate survivor that Deng was, he had just emerged from exile in the 1970s when he visited Shenzhen, then a little more than a fishing village at the mouth of the Pearl River in China's southern coast, just across the border from Hong Kong.

Deng chose Shenzhen for the first special economic zone where foreign trade and foreign investment can flourish. His solution — to revive Chinese communism with limited capitalism proved potent and started the second Chinese economic revolution. Investment poured in from Hong Kong. Shenzhen became a boom-town — a paradigm for China's eventual glorious expansion.

Shenzhen today is a city with a population of eight million, outstripping Hong Kong's and its economy is growing by double digits. Deng's contribution to China's emergence from economic stagnation had been truly revolutionary.

The miracle of China's growth is all the greater because it does not seem to be governed by any well-designed plan. Pragmatism marks every step in China's new long march. Deng stayed away from the centralisation that had characterised the great helmsman, Mao's policies, particularly in regard to agriculture.

In Deng's own picturesque words, he adopted an ad hoc approach, which he called "crossing the river by feeling the stones". In a large measure, he retained the public sector even in foreign collaborations. It is typical of China's foreign investment policies that both the Government and foreign investors prefer to collaborate with State-owned or town and country enterprises.

For one thing, these enterprises have easier access to credit and can have a priority in getting Government controls. Foreign investors have also learnt to work with their public sector partners, so to say, to cross the river "by feeling the stones".

The Fortune issue specifically cites the Shanghai Automotive Industries Corporation (SAIC), which has a collaboration with GM and another with Volkswagen. (It has ambitions of being one of the world's largest auto producers in a few years.) An arrangement, wherein a collaborating entity has collaborations with two different partners in the same field, would be relatively rare in other countries.

Can we think of Maruti having a collaboration with Honda besides Suzuki? But SAIC is unabashed about its "bigamy". It is going ahead with its plans to produce yet another version, beyond GM and Volkswagen — a car of its own design. It is one of the enterprises responsible for the soaring auto population of China. China will be the world's second larger automobile market touching 8 million car sales by 2012 against USA's annual sales of 17 million.

Shanghai Automotive Corporation is but one example of the creative energy unleashed by Deng's innovation of "combining State enterprises with foreign investment and technology". It is important to remember that China did not copy Japan in its growth story. It opened out its markets to foreign investment and enterprise, unlike Japan, which had severe restrictions on them.

Also, China had a strategy with uniquely Chinese characteristics. It decentralised the powers to decide to various State entities and town and village enterprises, while keeping a watchful eye on how they behaved.

China has shown the advantages that come with foreign direct investment, provided it is organised in the right fashion. While our Leftists have their own logic for opposing FDI in India, they might be able to learn a thing or two from the Chinese miracle.

China has literally leapfrogged a century in its transition from a Third World economy to a First World country by marrying its state-controlled institutions with foreign technology capital and marketing skills. Visitors to China in recent years are flabbergasted by the sheer pace and energy of the transformation — the like of which no nation in global economic history has ever seen.

We look on China with pride as a fellow Asian nation that has overcome its obstacles to progress. It is up to us to draw the relevant lessons from China's unique history. Will Manmohan Singh prove a Deng for India, the Left and God willing?

The Chinese miracle has its own wrinkles. While enough has been written about China's competitive strengths — its cheap labour, high productivity and investment-friendly administration — China's gains from foreign investment and trade are not a one-way street.

As the Fortune article points out, China's low cost exports have helped the US consumer to obtain his consumer durables at low price and incidentally helped Fed Chairman Greenspan to keep the interest rates low, which in turn have stimulated the economy and grown US jobs and the housing boom.

Chinese exports have been a double blessing to the US — its corporates, which have invested in productive enterprises in China, have raked in profits and the consumer has benefited.

There are downsides too. China's scorching expansion is straining its financial system. 85 per cent of the credit for China's enterprises comes from its banks, which are relatively financially fragile and whose risk assessment is rather weak. The fragility of China's financial system is a threat, which cannot be minimised.

The Chinese Government is fully aware of the risks faced by this financial system's fragility. It is, however, worried that in applying its brakes too sharply, the consequences for growth may be severely adverse. Ultimately, the jobs matter and while financial fragility is to be feared, a jobless explosion can be even more politically threatening.

China's adjustment process will be keenly watched around the world. It is already taking measures to cool the credit growth by sending panels of "examiners" around the country. It is, however, clear that China's cooling off will mean a disaster for many countries that have got used to a high level of exports of commodities to that economy.

It is essential that China engages on a dialogue with the rest of the world even as it applies the break to this own plans of expansion.

As the Fortune article points out, other changes are coming fast. As at the end of March 2004, Hong Kong banks were given permission to accept deposits in Chinese currency, an important step towards full convertibility down the road. And the head of the central bank plans to move faster in deregulating interest rates.

Due to excessive regulation, China's institutions did not have the flexibility to price financial products. In addition, home-owners have now to keep deposits of 20 per cent for high-end properties. Government has also ought to cool the pace of home-lending by banning the resale of new apartments till construction is finalised.

There are other suggestions under consideration. What China does to cool its overheated system will be a subject for study by various countries, which face similar trends. The Chinese medicine chest is always handy for those in similar distress.

One basic question remains. What will China do with the exchange value of its currency? It has the option of revaluing the remninbi — which means it will make imports into China cheaper and China's exports costlier.

This may have serious repercussions on the economy of China's export-oriented industries to which the banks have lent heftily. This can itself be a threat to their financial viability.

China has, indeed, to tread warily, to "cross the river by feeling the stones". On its success depends the fate not only of China, but of the world, which depends a great deal on China's exports and imports.

China has, indeed, come a long way Mao's days when it proved itself on its isolation. It has become a factor to reckon with, for good or for evil in the global economic scene. Whether it crashes or makes a soft landing makes a big difference indeed to how the world economy turns out. Deng's simple revolutionary change has become a significant factor in global economic trends.