A V Rajwade: The rise and rise of China

WORLD MONEY

It is no longer just an assembler of low-cost electronics but is emerging as a power in high-tech exports.

Much has been reported, and even more will be, about the rise and rise of China as an economic power. To recount a few macro numbers:

GDP grew at an annualised rate of 12.5 per cent in May, and the estimated growth for 2007 is 10.8 per cent "" and this despite some credit curbs and hikes in interest rates.

The current account surplus could amount to $250 billion in the current year, and the reserves are going up at a billion dollars a day. There are enormous pressures from the US and EU to upvalue the currency; China continues at a speed of its own choice, but has cut some tax rebates to exporters.

One new power plant is coming into operation every week! From importing almost 40 million tonnes of steel as recently as 2003, its exports of steel will be almost 50 million tonnes in the current year!

China has overtaken Japan as the world's second largest automobile market, and has also overtaken Japan in research and development spending, at $136 billion.

It promises to be the number one country globally in IPOs, estimated at more than $50 billion in the current year. The stock market fell sharply (and the rest of the world markets shivered) when the authorities imposed a tax on equity trading. But the fall was temporary.

Numbers apart, I find some of the qualitative changes even more remarkable. One is the composition of exports. While it is the most costcompetitive manufacturer and assembler of garments, toys and electronic and other consumer goods, high-technology exports like aircraft parts, microchips and automobiles are growing even faster!

China has now become perhaps the most influential external power in Africa, helping countries with money, financing infrastructure and industrial projects, and so on. In the process, it is securing the supplies of raw materials it needs badly and which Africa is rich in. Its role in Sudan, in particular, is attracting western criticism as it constrains the west from imposing a tougher line on the Sudanese government for its human rights abuses. Africa apart, China has become a very large investor in other raw material suppliers like Brazil, Australia, central Asia "" and Iran, another perceived enemy of the west.

One other major qualitative difference is in the remarkable turnaround of the public sector. The entry into the WTO and the consequent need for a competitive economy, were used to rationalise manning levels and increase efficiency. By creating a State-owned Assets Supervision and Administration Commission (SASAC), ownership was separated from management (no ministerial or bureaucratic interference in the name of Parliamentary accountability). The profits of 161 companies under SASAC have tripled since it was created in 2003, to a projected $100 billion this year!

Take, lastly, the creation of super-efficient supply chains. More and more retailing companies in Europe and the US are shifting their supply chains to China, where the goods are manufactured or assembled. Historically, the goods were shipped to the importing company and sorted, labelled and dispatched to individual stores at the importing end. Increasingly, this work is being moved to China, so that the shipments to individual stores, of the goods needed in the desired assortment, are directly sorted and shipped from China. This saves time and expenses for the importer; for the Chinese, this means that the importing company is becoming even more dependent on its supplier. This makes it more difficult for the EU or US to put more pressure on China on the exchange rate front. These economies have become so dependent on China today to keep inflation in control; to keep stores supplied and consumers happy, that Europe and the US need Chinese supplies as much as China needs their markets!

There is one dark cloud: adulterated food and drugs, poisonous pet food, toxic toothpaste, environmental pollution, and so on. But make no mistake. Once Beijing becomes serious on the issue, there will be rapid progress. One sign of seriousness: the former head of the Food and Drug Administration was hanged last week for bribery!

Tailpiece: I have always been in awe of the Left leaders, with their dour and serious faces and brows furrowed with the burden of carrying the world's worries. It was therefore a relief to know that they also have comedians like the Kerala chief minister who withdrew his crusade against encroachment of government land after finding that the ruling parties themselves were encroachers. Even more amusingly, he recovered with great fanfare the land allegedly occupied by Tatas illegally, only for his revenue minister to claim in the Assembly that the land has been with the forest department all along!

avrajwade@gmail.com