Economic analysis - China and the Global Economic Equilibrium

The importance that China embodies does not only lie in sixty years of communist rule, or in its human tide of 1.3 billion people, the earth’s demographic centre of gravity. Nor does it solely lie in its heritage that is deeply rooted in time or its giant projects that go hand in hand with China’s sheer size. Rather, China’s role is particularly important as the world’s saviour from the fatal recession, when it has, alongside India, pushed the global growth rate to about 2.5 percent this year.

Nonetheless, some leaders in the ruling Chinese Communist Party questioned the figures related to the growth rates and which were announced by the party’s executive branch, especially on the level of the Chinese provinces, since most of these figures were found to be exceeding the national growth rate. Despite this, the IMF’s estimates are ever adjusting the forecasted growth rate for China upwards and toward 10 percent, the highest growth rate achieved worldwide.

In the meantime, however, China is facing major challenges that go beyond the issue of growth rates: It is in fact now placed under the test that was put forth by the American President, and which was adopted by the most recent G20 summit (in Pittsburgh, Pennsylvania). This test started with the call for exporting countries to feed their domestic demand, and thus restore the balance to the global economy.

Such a balance occurs when the exporting countries reduce their transcontinental export of goods, while diverting some of their export volume to their domestic consumption markets, in return for the United States boosting its domestic savings, and reducing their imports in order to address the discrepancies in its foreign trade balance and shrink its cumulative deficit – something that constitutes a dire economic burden. The U.S proposal in this regard supports certain economic inclinations within the Chinese ruling cast, and which aim to boost the national purchasing power, while another faction within the party is trying to maintain the cash flow into the coastal areas which depend on exportation. Ultimately, the partial retention and diverting of Chinese goods into the domestic consumption market would allow the enhancement of the national purchasing power, and the rebalancing of production versus consumption. This is while noting that China is also seeking to increase its industrial output.

In fact, the high-tech companies in China still focus on “assembly”, where the components of electric and electronic appliances are imported from Japan, Korea and Taiwan, and which are then assembled into end products that are re-exported to developed countries. But China does not want to limit its role as such to being the world’s workshop. Rather, China is aspiring to also become the world’s research laboratory in order to address the fact that it is lagging behind when it comes to worldwide innovation and creativity. To this end, Chinese officials have increased spending on research and development (R&D), reaching the equivalent of 1.43 of its GDP in 2000, and then plans to increase it to reach 2 percent of the GDP in 2010 and 2.5 percent in 2020. China thus doubled its spending on R&D in the first five years of the new millennium, advancing to the 4th rank worldwide in terms of the size of R&D, and to the 8th rank in terms of its ratio to the GDP. Also in this regard, the Chinese government is betting on the expansion of R&D in private companies, which housed around 60 percent of researchers in 2007. China is also prioritizing industrial research by establishing a science park which would be the backbone of creativity and innovation, and that would develop international technical standards. Meanwhile, another challenge facing the Chinese state lies in improving the quality of postgraduate education and its globalization, with a focus on engineering sciences. This is while noting that the number of researchers in China has increased to 1.1 million following a 60 percent increase in their number between the years 2000 and 2005, and is now approaching the number of researchers in America (1.4 million) and the European Union (1.3 million)

Yet, the results obtained from this ambitious policy are still far from the objectives it has set out for itself, especially in what regards the ratio of researches compared to the rest of the population (1.4 researchers per thousand, compared with 9.2 in the United States and 5.7 in the European Union). This is in addition to the ratio of patents and scientific research papers, prompting the Chinese Premier to quickly allocate 88 billion dollars for major research projects between the years 2006 and 2020. This also had the aim of increasing spending on R&D which remains until now low when compared to China’s competitors in the OECD, and also to enable China to re-attract its highly skilled citizens who now prefer to work in the United States and Europe.

Meanwhile, China realizes that its dependence on the U.S and European markets will not last for very long. For this reason, China is meeting other emerging market countries in striving to gain a foothold in Africa, Latin America and the Asian markets, where China and these countries would form an impenetrable economic belt. China as such also contributed in funding a large portion of the aid fund established by the ASEAN group. In fact, China’s trade volume with Africa rose from 10 to 100 billion dollars in the first decade of the new millennium; China is thus constantly investing in the tanned continent, surrounding it with further oil well exploitation and mining contracts, all in order to secure raw materials for its factories at competitive prices. Also under the scope of this cooperation, is the dumping of Chinese goods and the swarming of Chinese businessmen into Africa. The Chinese Diaspora also thus carries with it its culture to Africa, teaching the Africans the alphabet of the Chinese economic empire.

Other challenges also face China, such as controlling the extent at which it finances the U.S deficit, and how to tackle the environmental problems and pollution.

* Al-Hayat, 5/10/2009