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News : International Last Updated: Apr 24, 2009 - 5:31:05 PM


China celebrates remarkable transition at  XXIX Olympiad; Economy forecast to be world's largest from 2015 - regaining position it lost in 1890
By Michael Hennigan, Founder and Editor of Finfacts
Aug 11, 2008 - 7:33:16 AM

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The Opening Ceremonies of the XXIX Olympiad, Beijing, China, August 8, 2008 -- Fireworks light the sky above the latticed steel National Stadium known as the "Bird's Nest" where an estimated 91,000 spectators, athletes, executives and world leaders were gathered - - Photo: Xinhua

China's spectacular Opening Ceremonies of the XXIX Olympiad was as expected, a showcase of its remarkable transition into a modern economic and political powerhouse. Claimed to be the most-watched event in television history, with four billion people around the globe viewing the events, the Chinese people were entitled to feel proud about a symbol of the transformation of their country from decades of chaos and abject poverty. China had the world’s largest economy until 1890 and it is expected to regain that position from 2015.

The Irish and every other nation would use the opportunity of an international audience to showcase achievements and the Chinese shouldn't be criticised for that. China is run by a dictatorship and there remain concerns about human rights but it would be foolish to ignore the raising of hundreds of millions of people out of grinding poverty as a singular improvement in human  rights. Besides, there is a process of transformation that takes time and parallels economic growth and social advancement.

For example in Europe, Ireland is still far behind the Scandinavian countries in the area of political corruption and transparency.

It is of course appropriate that China as a world power is subject to scrutiny, including its resource driven foreign policy, in particular in relation to Africa and Burma. Unfortunately, unless there is an American angle to an issue, many shrug their shoulders. The recent death of Russian writer Alexander Solzhenitsyn, who in The Gulag Archipelago had presented the tyranny of the Soviet labour camp system, highlighted again how the armchair idiots of the European Left, conveniently ignored any reality that collided with their fantasies of a Soviet paradise. Just this year, wealthy Irish journalist Tom McGurk, penned a pean to Fidel Castro and the Cuba "where the tyranny of consumerism does not exist." The real tyranny didn't concern McGurk. Castro's former revolutionary colleague Mario Chanes de Armas, who had opposed his former comrade's restriction of liberties and the embrace of communism, said after spending 30 years in prison:  “I watched men get shot, point blank, beaten with bayonets, arbitrarily pulled out and punished. But we were alone. The world didn’t know.”

The Workshop of the World

Modern China is the workshop of the world but as a market, there is limited potential for Ireland.

Most Irish-related exports to China are from US multinationals and decisions on the overseas destination of Irish produced products, are generally not made in Ireland. In the era of $100+ for a barrel of oil, there are transport cost impediments and other barriers referred to below, that it can take many years to overcome.

In the early period of the current modernisation programme, it became a cliché in the West for marketing people to talk about a billion plus potential customers but that dream was the easy part. Big Chinese companies are now increasingly becoming multinationals but Ireland faces a challenge in this area as well, given its status as the fourth most expensive economy in the world - in particular from an Asian perspective, where living costs are low.

Stranded train passengers wait outside a railway station in the southern city of Guangzhou on Friday, February 1st. Millions of Chinese were stranded by snow ahead of the Chinese Lunar New Year, which began on February 7th. Guangzhou is the provincial capital of Guangdong, the Chinese manufacturing heartland that hosts 19m migrant workers - - Photo: Xinhua

The value of Chinese imports to the US quintupled between 1997 and 2007, rising from $65 billion to $342 billion. By comparison, during the same period, the value of such imports from other countries doubled, growing from $825 billion to $1,664 billion. By 2007, China was the largest supplier of US imports, accounting for 17% of all imported manufactured goods. A further indication of the growing competition to manufacturers in the United States and in other countries is that in 2006, China’s mounting current-account surplus with the world reached $250 billion, or 9% of its gross domestic product.

There is a big multinational company component in Chinese manufacturing and a US report says that the average domestic value added of Chinese exports to the United States is probably between 35% and 55%.

The Chinese edition of the OECD Development Centre’s Chinese Economic Performance in the Long Run was published in March 2008. The book, produced in association with the Shanghai People’s Press, is an update of the 1998 best-selling volume by Professor Angus Maddison for the Centre. For this edition, Professor Maddison has extended his projections for China to the year 2030 and revised some of his growth figures upwards.

Also last March, Hans-Werner Sinn, Professor of Economics and Finance, University of Munich and President of the Ifo Institute, wrote in an article published on Finfacts, that many argue that a US recession will no longer affect the world because China has supplanted America as an engine of the global economy. Wrong. Although China is growing fast, its economic power remains tiny. While the US contributes 28% to world GDP, China accounts for only 5%. The whole of Asia, from Turkey to China, contributes 24%, less than the US alone.

At some stage, the world may no longer catch a cold when the US sneezes, but that is far from being true now. Twenty-one per cent of China's exports and 23% of the EU's exports to non-member countries go to the US. Thus, the world cannot help but be pulled down by a US slump. SEE: Global Economic Party is Over; The whole of Asia, from Turkey to China, contributes 24% of World GDP - less than the US alone; China accounts for only 5%

However, China's economy is bigger than conventional yardsticks suggest.

Instead of using the exchange rate to measure the level of Chinese performance, which greatly understates China’s role in the world economy, Angus Maddison uses purchasing power parity (PPP) to convert yuan into US dollars and finds that China accounted for 5% of world GDP in 1978, 15% in 2003 and that this is likely to rise to 23% in 2030.

Prior to 1890, China was the world’s largest economy. Chinese Economic Performance in the Long Run: 960-2030 AD uses a comparative approach to explain why China’s role in the world economy has changed so dramatically in the last thousand years. It concludes that China is likely to resume its role as the world’s largest economy by the year 2015, thus regaining the position it had held until 1890.

Professor Maddison says that China is still a relatively poor country. In 2003 its per capita income was only 17% of that in the United States, 23% of that in Japan, 28% of that in Taiwan and 31% of that in Korea. Countries in this situation of relative backwardness and distance from the technological frontier have a capacity for fast growth if they mobilise and allocate physical and human capital effectively, adapt foreign technology to their factor proportions and utilise the opportunities for specialisation which come from integration into the world economy. China demonstrated a capacity to do this in the reform period and there is no good reason to suppose that this capacity will evaporate.

"The pace of Chinese progress will slacken as it gets nearer to the technological frontier. I have assumed that per capita income will grow at an average rate of 4.5% a year between 2003 and 2030, but that the rate of advance will taper off over the period. Specifically, I assume a rate of 5.6% to 2010, 4.6% between 2010 and 2020 and a little more than 3.6% a year from 2020 to 2030. By then, in our scenario, it will have reached the same per capita level as western Europe and Japan around 1990, when their catch-up process had ceased. As it approaches this level, technical advance will be more costly as imitation is replaced by innovation. However, by 2030 the technical frontier will have moved forward, so there will still be some scope for catch-up thereafter.

 With such a performance, China should overtake the United States as the world’s biggest economy before 2015 and by 2030 account for about a quarter of world GDP. It would have a per capita income like that of western Europe in 1990. Its per capita income would be only one third of that in the United States, but its role in the world economy and its geopolitical leverage would certainly be much greater," Maddison said.

The Challenge of Job Creation

The US Conference Board said in a report last December that while much is often made about manufacturing jobs being offshored from the US to lower-wage countries such as China, in reality, the loss of manufacturing jobs was taking place in both countries simultaneously. On average during each year of the study, China lost 1.3 million jobs out of 30.8 million workers in large and medium production firms while the US lost 263,000 jobs out of 18 million.Cumulatively, China lost 10 million workers in those firms over 9 years-which means a loss of more than five times the size of the total manufacturing job loss in the United States over that period.

More than one in four industrial jobs were either destroyed or created over an average one-year interval for China, while roughly one-in-five manufacturing jobs was reallocated in the U.S. This indicates enormous job shuffling and resource shifts associated with China's reform process.

China's National Development and Reform Commission (NDRC) study said in 2006 that China needs to create 25 million new jobs each year - equivalent to the combined population of Australia and New Zealand.

The report said that this was the country's worst employment crisis ever, as the children of baby boomers flood the job market seeking their first jobs. Their parents were born in the early 1960s, and they themselves in the late 1980s.

China can generate only an estimated 11 million new jobs this year, according to the NDRC. And at no time this decade did they exceed 10 million a year. This means that despite a record number of employment openings about 11 million jobs have to be found for about 14 million people more.

Guo Yue, a researcher with the Institute for Labour Studies under the Ministry of Labour and Social Security (MOLASS), told China Daily: "The government is racking its brains to create jobs as it braces for a real tough year."

An even greater challenge is that the crisis will continue for more than just one year, said Du Yang, a researcher at the Institute of Population and Labour Economics of the Chinese Academy of Social Sciences.

Demographer said that China's labour population above 16 years old will remain at about 900 million every year for the next 20 years. The pressure of unemployment is a long-term challenge, and it demands a long-term solution.

Of the 25 million people who need urban jobs, according to the NDRC, 9 million will be those joining the job market, 3 million will be former rural residents who have recently moved to cities, and the remaining 13 million are workers let go or about to be retrenched by their employers, mainly as a result of the continuous restructuring of State-owned enterprises.

Of the 9 million newcomers, 4.1 million will be graduates, more than at any time in China's history, and an increase of 750,000 over last year.

An analysis in China Daily said that to make its development more employment-friendly, China needs to accelerate the development of the service sector, which is what developed economies use to tackle unemployment. According to the National Bureau of Statistics (NBS), the tertiary industry, which is more labour-intensive, can create five times the employment provided by industry.

In 2004, the output of China's service sector accounted for 42% of GDP after the NBS adjusted up its GDP statistics. It is still significantly lower than the ratio of developed countries. It is around 75% in the United States and 68% in Japan.

In this sense, employment is an issue that hinges on long-term economic restructuring in the right direction.

Even with Asian currencies that are kept low against the US dollar and the Euro, the period of falling imports prices that have benefited developed countries for two decades, is at an end.

The prices of China’s exports have been rising for almost five years. “[China trading] partner country data uniformly show imported footwear, toys, furniture and textile prices falling by around 3% in US dollar terms until 2003, and then rising at 3% to 4% per year thereafter,” Jonathan Anderson, Head of Asia-Pacific Economics at Swiss banking giant UBS.

Anderson says migrant workers' pay is increasing by as much as 15% a year, against low single-digit growth a few years earlier

Stephen Green, Standard Chartered Bank economist in Hong Kong, said earlier this year that higher wages now represent basic catch-up for workers.

And China remains relatively inexpensive, with wages 25% below those in Mexico, for example.

"China will still retain much of its competitive wage edge over the next five years," Green said.

The average shoe industry wage in Southern China is RMB 960 (£67, €88, $135) a month but despite a warning from China's Labour Minister last March, who said that the employment situation will be difficult in 2008 (SEE: China says employment situation will be "very severe" this year; 12m new jobs created in urban areas annually but 20m new job seekers emerge in urban and rural areas every year), the labour market remains tight in China's industrial heartland.

The Labour Ministry in Guangdong, part of China's industrial heartland in the Pearl River Delta, said that 11% of migrants had not returned after the Chinese New Year holiday in early February.

Chinese Economic Performance in the Long Run
Read the Preface (pdf) and the Summary
The World Economy: A Millennial Perspective 

Dec 2007:World Bank study says 12 economies account for more than two-thirds of world’s output; Chinese economy size cut by 40%; Ireland is fourth most expensive world economy- - including detail on PPP - Purchasing Power Parity.

Software and Hardware

A Chinese remarked to me recently that the software has a lot of catching up to do with the hardware and he wasn't talking about computers.

In East Asia, ethnic Malays dominate in the warm regions of the south stretching from Malaysia and Indonesia, east to the Philippnes. They are generally warmer and more relaxed than their Chinese cousins from the colder north and the disposition of the Chinese Diaspora in the region may have been influenced by it. Back home, it's still common to encounter a shop manager shouting abuse at staff in front of customers and in the provinces, it's reported that the village communist party head can often be more than a petty tyrant.

The rule of law is evolving and freedom of expression has expanded but much progress remains.

There is much more to China than Beijing and Shanghai.

In Southern China, across from Hong Kong to Guangdong, the main spoken dialect is Cantonese and migrant workers have to learn the language while fluency in both Mandarin, China's official language, and Cantonese is much greater among Chinese Malaysians for example, than most residents of Hong Kong who are known as Hongkies by China's Asian Diaspora.

Chinese are learning the world's commercial language - English - in large numbers, but if the Irish want to have an impact in future years, outside the big cities in particular, then knowledge of Mandarin and Cantonese would be a start. The challenge of course will remain that there are few areas where we can hope to make an impact.

HSBC - Hong Kong and Shanghai Bank - one of the world's great banks, opened for business in Hong Kong in 1865. The following HSBC advertisement illustrates what can happen when a "gwylo" (white person in Cantonese) is confused by Chinese customs!

                                                                                                

Michael Hennigan first visited Asia in 1986 and encountered descendents of the original Aeta (means black in Tagalog) people near the then US Naval Station at Subic Bay, north of Manila. The Aeta people had settled in the main Philippine island of Luzon, long before the arrival of the now predominant ethnic group, the Malays.

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