The Rise of China C.P. Chandrasekhar

In an announcement that sounds tiresomely routine, China has been identified as having crossed one more economic landmark. In mid-March 2011, consultancy firm IHS Global Insight released a study which suggests that China has become the world’s largest manufacturing nation. The data from IHS Global Insight estimates that in current dollars, world manufacturing output in 2010 was $10,078 billion. That reflects an inflation-adjusted growth of 9.7 per cent relative to 2009. That is good news for the US and other G8 governments looking for signs of a recovery. But what may not be good news for them is that China accounted for 19.8 per cent of that production, which places the country for the first time, after (reportedly) more than 150 years (Financial Times, March 14, 2011), at the top of the global league in terms of manufacturing output share. The US which followed with 19.4 per cent has been displaced from its more than 100 year presence as the largest manufacturing nation in the world. With manufacturing might still considered a reflection of a nation’s true economic strength, this does constitute an important milestone in China’s development history.

This news comes not long after the announcement that, measured in terms of nominal GDP converted to dollars at official exchange rates, China had, in 2010, overtaken Japan as the world’s second largest economy. Figures from Japan released recently showed that Japan’s nominal gross domestic product was worth $5,474 billion in 2010 compared with China’s $5,879 billion. That too was a significant milestone. For many years before that China had been ahead of Japan only when GDP was measured in purchasing power parity (PPP) terms. PPP is an indicator that takes into account relative prices and therefore the command over goods that a dollar of income provides. Since with lower wages and prices, a dollar in China when converted to RMB delivers more purchasing power, Chinese GDP measured in PPP dollars is significantly higher than at official exchange rates. Hence, becoming the world’s second largest economy at official exchange rates did mark an important transition. There are only two features that seem to discount this achievement. The first is that though it has overtaken Japan, China is far behind the US, with less than two-fifths of its GDP in nominal terms. The second is that with a population of more than 1.3 billion, when compared with Japan’s 128 million and the United States’ 307 million, China’s per capita nominal GDP in 2009 was less than a tenth that in both Japan and the US.

Assessments of this kind are likely to be invoked to dilute the significance of China’s achievement. The arguments that would be resorted to would be diverse. One of course would be that China has managed to garner this success not because of its technological prowess or manufacturing discipline, but because of the use of its large and cheap reserve of labour as well as hidden and/or open subsidies from the state. That argument would be strengthened by referring to the role of US (and other) multinationals which have relocated capacities to China in the latter’s manufacturing export success. The latter is crucial.

Exports have been particularly important for manufacturing growth in China. The exports of manufactured products rose at 20 per cent per annum between 2000 and 2009, and the share of manufactured exports in total exports rose from 88 to 95 per cent. It is also true that foreign-invested firms account for a large share of manufactured exports from China and that the ratio of manufactured exports to aggregate and manufacturing GDP has been high and rising, till the recent recession. According to China’s Ministry of Commerce (MOFCOM), foreign invested enterprises, which were responsible for over half of China’s exports, accounted for 30 per cent of the country’s industrial output. This dominance increases in the case of high technology exports. According to one estimate, as much as 40 per cent of exports from foreign invested enterprises consist of high technology goods. If that be true, as much as 70 per cent of the $377 billion worth of hitech goods exported by China in 2009 was produced by the FIEs. China, therefore, may be engaged in the production of a diverse range of manufactured goods, but the knowledge required for that production is in substantial measure controlled by firms originating in the US.

To boot, licensing the use of this knowledge delivers significant revenues to firms from the USA, far exceeding that received by other countries. What is noteworthy is that both receipts and payments of royalties in the case of the US are in transactions with affiliated firms. That is, the US is reaping the benefits of its control over knowledge through transactions conducted with affiliates abroad. It continues to be a net exporter of manufacturing technological know-how sold as intellectual property.

Underlining this becomes important because of the remarkable performance of China in terms of the relative share of the high technology sectors in its manufacturing sector. In the world as a whole that ratio rose from 11.66 per cent in 1985 to 19.08 per cent in 2005. The EU’s performance tracked this trend well, with the relevant share rising in its case from 9.66 to 14.26 per cent. The US performed better, with the share in its case rising from 13.7 to 24.2 per cent. But it was China’s performance that was remarkable, with the hi-tech share in its case rising from 8.4 to 29.4 per cent of manufacturing value added over this 20 year period.

Even over this long period, China’s rise in the global league tables for hi-tech manufacturing was the result of a rapid expansion of exports. The ratio of export sales to revenues rose from 25 per cent in 1985 to more than 75 per cent in the mid-1990s, only to moderate later as domestic consumption of high technology products rose along with incomes. By 2005 that ratio had fallen below 60 per cent, because of a rise in domestic consumption and not because of a decline in exports. Even if led by US transnationals, it delivers foreign exchange revenues to the Chinese economy.

It is this export success that leads to the visible fear of China outside its borders. Exports of goods and services were estimated at close to two fifths of GDP before the 2008 crisis broke. But that figure has come down since and is likely remain low as China seeks to redirect growth and rely more on home demand. Yet the fear of the emerging giant is unlikely to subside. This is because its low per capita income and large population makes its rise more ominous in the eyes of its global rivals. Being low on the per capita league table allows China to aspire to high growth rates for decades to come. When growth occurs at that level of per capita income, the demand it generates tend to be more intensive in manufactures, energy, and mineral resources. Add to this the fact that the size of the population that will benefit from that potential growth is immense and the pressure this puts on the world’s resources, besides its environment, is likely to be huge. The threat that this poses to countries that rose to dominance in a context of cheap and ample resources and raw materials should be obvious.

However, as of now they are likely to put a brave face on, declaring that China’s success is not China’s but that of the United States.