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Asia Economy Last Updated: Jan 16, 2013 - 7:06 AM


China's remarkable rise and challenges -- Part 1
By Michael Hennigan, Finfacts founder and editor
Jan 15, 2013 - 7:21 AM

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Zhou Enlai, left, and Henry Kissinger in Beijing in 1971: Kissinger Archives/Library of Congress: Henry Kissinger (b. 1923), the German-born American statesman, who as US national security adviser, paved the way for the normalisation of relations between the United States and China in 1971/1972, wrote in his book 'On China,' which was published in 2011, on Zhou Enlai, China's then prime minister: “In some sixty years of public life, I have encountered no more compelling figure than Zhou Enlai. Short, elegant, with an expressive face framing luminous eyes..." Zhou met Kissinger in Beijing in 1971 and the received wisdom is that when the Chinese premier was asked about the impact of the French Revolution, he remarked that "it was too early to tell." The apparent comment is often used to suggest China's long-distance vision. However, at a seminar in Washington DC, coinciding with the launch of Dr. Kissinger's book, Chas Freeman, a former foreign service official who was an interpreter, set the record straight. “I distinctly remember the exchange. There was a mis­understanding that was too delicious to invite correction,” Freeman is reported by the Financial Times as saying. In 1968, three years before the Kissinger-Zhou encounter, Paris had been rocked by student riots and the 'French Revolution' and the 'Paris Commune' were terms used about the revolt against the old order.

Guangzhou: In the capital of China's Guangdong province, in the Pearl River delta, northwest of Hong Kong, it was 17°C on Monday at noon and the sky was blue with a slight haze. In Beijing, 2,298 km away by rail and 8 hours on the high-speed train service that began last month, the sky was murky and air quality was hazardous. Xinhua, the official news agency said "China will take effective measures to limit the total amount of nitrogen oxide emitted by vehicles" and it also announced that China remained the world's largest producer and market for cars for the fourth consecutive year in 2012, with car sales at 19.31m units and production at 19.27m vehicles. The pollution is one downside to the remarkable growth of recent decades but the growth is likely to continue as the urban population expands.

It was also 17°C on Tuesday morning at 1:20 am at Kuala Lumpur's international airport and China's reemergence has also engendered growth in the rest of Asia and in both Latin America and Africa.

The World Bank says that in the next 15 to 20 years, China is well positioned to join the ranks of the world’s high-income countries. China’s policy makers are already focused on how to change the country’s growth strategy to respond to the new challenges that will come, and avoid the “middle income trap.”

Over the last three decades China's growth has been impressive. GDP growth averaged 10% a year, and over 500m people were lifted out of poverty. China is now the world’s largest exporter and manufacturer, and its second largest economy. Even if growth moderates, China is likely to become a high-income economy and the world’s largest economy before 2030, notwithstanding the fact that its per capita income would still be a fraction of the average in advanced economies.

China's research and development (R&D) spending is forecast to match that of the United States in 2022.

Guangdong is responsible for about 30% of Chinese exports and during the period of modernisation, Gunagzhou, Shenzhen, its neighbouring giant city, Shanghai and Beijing, have been the main focus of rapid growth but that is changing.

In Guangzhou in recent days, I visited a number of the trading clusters that draw buyers from across the world  and from Monday in this series in Finfacts Premium, I will analyse the challenges facing China as well as doing business with China.   

China's Qing dynasty was overthrown after 267 years in power by a republican revolution in 1911. It was a colonial power with the Manchus from northeast China ruling the majority Han people. Technological advances stalled and in 1793, the emperor rejected the request of a British delegation led by George Macartney, an Irishman, to open diplomatic relations with the British.  

Macartney wrote in his journal: "The Empire of China is an old, crazy, first-rate Man of War, which a fortunate succession of and vigilant officers have contrived to keep afloat for these hundred and fifty years past, and to overawe their neighbours merely by her bulk and appearance. But whenever an insufficient man happens to have the command on deck, adieu to the discipline and safety of the ship. She may, perhaps, not sink outright; she may drift some time as a wreck, and will then be dashed to pieces on the shore; but she can never be rebuilt on the old bottom."

Stranded train passengers wait outside a railway station in China's southern city of Guangzhou on Friday, Feb 01, 2008. Millions of Chinese were stranded by snow ahead of the Chinese Lunar New Year in 2008 - - Photo: Xinhua
Finfacts wrote in 2009 that according to the late eminent economic historian, Angus Maddison, until 1800, about three fifths of the world’s commerce and production took place in and around China and India. So did much of the world’s scientific and technological progress, including the Chinese invention of paper, explosives, and printing, and medieval India’s launch of modern mathematics. In the early 1830s, when President Andrew Jackson sent the first US envoy across the Pacific to Siam (Thailand), Asia still accounted for over half of global GDP (gross domestic product).

More here...

Maddison showed that from the early 1500s until the early 1800s, China’s economy was the world’s largest. By 1820, it was one-fifth again as big as  Europe’s and accounted for a third of world  gross domestic product (GDP). But the next  two centuries were tumultuous for China.  The country experienced catastrophic  decline between 1820 and 1950 and then, starting in 1978, a meteoric rise. Today, China is once again among the biggest economies of the world, having overtaken Japan in 2010.

Michael Cembalest, a senior strategist at JP Morgan, the US investment bank, said in his 'Eye on the Market' report last July that at a client event in Beijing, he had the opportunity to interview Henry Kissinger on the 40th anniversary of his secret 1971 mission to meet with Zhou Enlai, and 1972 summit meeting with Richard Nixon and Mao Zedong. Cembalest says that there are not many missions as impactful as this one was: within a few years, China’s re-opening began, propelled by Deng Xioping’s economic reforms. Reintegrating 20% of the world’s population following China’s central planning disasters of the 1950’s and 1960’s has not been easy for China or for the West, which has since benefited from lower imported goods prices from China, but saw an end to post-war manufacturing-led prosperity. The US-China relationship is likely to be one of the most important issues of the 21st century.

Cembalest said:

One topic we discussed was the question of whether conflict between the US and China is inevitable, a theme which has permeated a lot of academic and political science journals over the last 20 years. The “inevitable conflict” view has been advanced in different degrees by Yale’s Paul Kennedy, Princeton’s Robert Gilpin and most forcefully, by John Mearshimer at the University of Chicago. Similar concerns are found in “The End of China’s Peaceful Rise”, a 2010 article in Foreign Policy magazine by Elizabeth Economy, Director of Asia Studies at the Council on Foreign Relations. The inevitability view is sometimes explained by the thesis that countries rarely rise economically without also doing so militarily. The chart above looks at the major economic powers of the world since the year 1 at various intervals. Ignore for the moment some of the abstract issues which this kind of data involves; it’s pretty clear that China’s rise, fall and subsequent rise is something that hasn’t happened a lot over the past 2,000 years, and that the United States is on the front lines of having to adjust to it.

Any discussion of China’s engagement with the world needs to factor in China’s troubled relations with the West during the 19th century. Kissinger spoke about the impact this era continues to have on China’s political consciousness, which you can grasp by looking at some data and charts: opium imported into China which addicted up to 25% of its adult population, the exodus of Chinese silver to England and India to pay for it, and the collapse in China’s trade surplus. The Chinese Imperial Commissioner sent a letter to Queen Victoria asking her to cease the opium trade, which was banned in China in 1729 and again in 1836. Britain ignored the request. After a Chinese blockade of opium ships, the British invaded in 1840, and easily defeated the Chinese. China was forced to sign the Treaty of Nanking, one of the more one-sided treaties in history. The opium trade then doubled, leading to another war (and Chinese defeat) 20 years later. The Opium Wars played a large part in the collapse of the Qing Dynasty and subsequent occupation by foreign powers. This is not seen as ancient history in China.

With this backdrop, Kissinger encouraged our guests to understand how China might define its interests in different ways than the West would, whether they relate to global energy security, North Korea, global warming, currency management or trade. Kissinger acknowledges the pressures that come from an ideological predisposition in the US to confront the non-democratic world, and Chinese tendencies to sometimes view cooperation with the US as being self-defeating. However, engagement with the West is now central to China achieving its economic goals, and incoming governments in both China and the United States have every incentive to maintain the status quo. According to Kissinger, while conventional theories of realism in international politics point to potential conflict, it would be an overly literal interpretation to consider conflict inevitable. Both sides have a lot to lose and little to gain from conflict escalation, creating conditions in which compromises should be able to be found. If he’s right, US-China relations would be another thing that could go right in the world, confounding more negative expectations.

Hans Rosling a professor of international health at Sweden's Karolinska Institute, and founder of Gapminder, now owned by Google, that brings vital global data to life: Stats that reshape your world-view:

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