China - An Economic Giant?
Singapore Senior Minister Lee Kuan Yew talks
about China's history and future at Global Forum
Fifty years ago, China was a war-torn economy, emerging from one of the most tumultuous periods in its history. Even 20 years ago, in the twilight of the Mao era, the outlook was harsh and grim. Today, China is the world's fastest developing nation, growing at rates unimaginable 50 years ago, a dramatic transformation no one predicted. This should caution anyone from making any confident forecast of China in the next 50 years.
The Chinese people have raised their expectations and aspirations. Every Chinese wants a strong and rich China, a nation as prosperous, advanced and technologically competent as America, Europe and Japan. This re-awakened sense of destiny is an overpowering force that will drive China's economic reforms and its integration into the global economy.
China's economic development over the last 50 years was uneven. The 29 years up to 1978 when Deng Xiaoping opened up the economy, were mostly lost years. It achieved growth by mobilising labour and capital in a Soviet-style command economy, one of the most wasteful economic systems in history. Market forces and the profit motive were systematically rejected. The ideological divide denied China the knowledge, capital and technology of the thriving non-communist world, yet internally, there were few incentives for people to innovate or to excel. With centrally stipulated production targets as the official yardstick for measuring performance, size and scale were emphasized at the expense of efficiency and cost. Factories churned out massive amounts of goods for which there was little or no demand.
While there were occasional spurts of rapid growth, these were offset by periods of economic chaos. China's share of world GDP actually declined from 5.2% in 1952 to 5% in 1978 - a dismal performance given China's low starting income. In 1978, about 600 million Chinese or 60% of the population lived below the international poverty line.
From 1978 - Economic Reform and Fast Growth
Deng Xiaoping realised that isolation had left China stranded and backward. He opened China to the world and began a process of market-oriented economic reforms. He had seen how the economies of Taiwan, Hong Kong, Singapore, South Korea and Japan had thrived through free markets, trade and foreign investments. Deng's open-door policy released enormous energies and talents among the Chinese population. It also attracted foreign investments, brought in foreign technology, and increased exports and growth. Per capita income grew at an annual average rate of 8.3%, more than double the rate before 1978. China's share of global output doubled from 5% in 1978 to 11% in 1995. By 1996, the proportion of Chinese living below the poverty line had fallen from 60% to 22%.
Standards of living in China have risen five-fold over the last 20 years. Never have they enjoyed so much economic freedom and choice. They take pride in the country's achievements when comparing themselves to other transition economies. No Chinese government can ignore the aspirations of the ordinary Chinese for economic progress, not after what they have experienced.
China's future will be determined by its internal developments, the changes in the international environment, and the interplay between the two.
China's Policy Trend
Given its broad policy over the past 21 years despite changes in the leadership, it is likely that China will continue with its social, political and economic reforms based on pragmatism.
From its current low base, China's economy has the potential to grow at 5% to 7% a year over the next 20 years, moderating to 3% to 5% in the following 30 years. Despite fast growth over the last two decades, China is still a relatively poor country.
The reform process will not be problem-free. Those in charge of the new enterprises have learnt to work in a free market economy. Those whose managerial and work habits were formed during decades of running a command economy are finding it difficult to change. There may be setbacks and even financial crises but as long as the country is not reduced to chaos, the leaders can pull the people together and restore economic growth.
China has to integrate itself further into the world economy, to liberalise trade and investments, decentralise economic power by relying more on market mechanisms, and move towards a society based on the rule of law.
Although China's talent pool is large in absolute terms, its education levels are significantly lower than those of the NIEs. Enrollment rates in secondary school are only about 67%, compared to over 80% in the NIEs. Enrollment rates in tertiary institutions are only about 5%, much lower than in either ASEAN or the NIEs. Investments in human capital will yield high returns.
If it grows at an average of 4% to 6% annually, China will overtake Japan as Asia's largest economy by 2040. Japan, however, will by then have a per capita income 11 times higher than that of China.
China's high saving rates and export-oriented economy mean that it has the potential to run massive account surpluses. The question is: can the world, particularly the OECD countries, cope with such a China? Such global imbalances will put the world's trading system under stress.
Trade Integration with the World
China's integration into the global economy will pose severe challenges for many countries. In the past 20 years, China's trade expanded at double the rate of world trade. It is now one of the world's top 10 trading nations, accounting for 4% of total world trade, compared with 1% in 1980. However, China's exports and trade surpluses are reaching politically sensitive levels, and more emphasis on export-led growth may not be sustainable. China itself is still a fairly closed market, both for imports of goods and more so of services. Opening up China's markets to imports, especially as a member of WTO, can provide more balanced growth and ease the international stresses arising from China's transformation.
Financial Liberalisation and Integration
From almost zero foreign direct investment (FDI) in 1978, China became the world's second (after the U.S.) largest destination for FDI, with an estimated total of US$ 217 billion. Foreign commercial lending to China also expanded as perception of its credit worthiness improved. Total external debt grew to US$146 billion by end-1998.
Liberalisation in telecommunications, transportation, retail and wholesale banking and finance, will yield significant gains for China. It will open up the economy to competitive practices, increase the use of technology, improve the allocation of resources, and benefit its consumers.
WTO membership will speed up China's economic growth. Having to abide by a WTO timetable will de-politicise what could otherwise be politically a difficult process. It will be a more stable world if China must abide by WTO rules requiring it to open up its markets, and allow freer foreign investments in goods and services. Such cross-border stakes will make a retreat into protectionism less likely.
China must improve its legal and administrative system, with public servants separated from private business to avoid conflicts of interest. They have to enact and enforce laws that are standard in developed countries. For example, to facilitate transfers of technology, China needs to recognise and protect intellectual property rights. This requires a strong and independent legal system.
China has also to restructure its financial system and reform its state-owned enterprises (SOEs). The cosy links between its banks and inefficient SOEs must be severed. SOEs currently owe about four-fifths of outstanding loans in the state-owned banks; a large part of which is non-performing. These SOEs must be closed, restructured or privatised. Keeping inefficient companies alive, especially through state-directed bank lending increases the risk of a banking crisis and erodes investor confidence. China's banks must be re-capitalised and run on sound banking principles.
The government must strengthen its finances. Government revenue as a share of GDP has declined from 26% in 1980 to about 12% in 1998. A strong fiscal position will provide more flexibility to economic policy, reduce the dependence on debt, particularly foreign debt, and finance investment in public infrastructure. Compared to other developed economies, China needs to spend more for its social safety net to cushion the impact of enterprise reform.
By 2050, China would have completed three transitions--from a planned to a market economy, from a mainly agrarian to an industrialized society, and from a centralized to a more participatory system of governance- an enormously complex set of tasks to accomplish.
What will China look like in 2050 after these transitions? No one in 1949 could have foreseen what China is today. It is with this caveat that I venture one scenario, on the assumption that China's leaders continue to place economic development at the top of their agenda.
In 2050, China's economy, at about US$20 trillion in today's dollars, would be about four-fifth that of the United States. China's income per capita would reach US$12,000 equivalent to the average Korean's before the Asian financial crisis. The economic region of Hong Kong, Macao and Guangdong alone can have a GDP rivaling that of France. Given the size of the Chinese economy, by 2050 the renminbi is likely to be a major international currency, floating freely against the other three major currencies-- the US dollar, the euro and the yen. The world's trade and reserve holdings will be dominated by these four currencies.
If the rule of law becomes firmly established in China in the next two to three decades, by 2050 Shanghai could be a global financial centre. Projections of the size of the banking system are staggering. With capital controls gradually dismantled the domestic market opened, and the renminbi fully convertible, Shanghai could rise to the ranks of New York and London.
Economic integration will speed up the rate at which China will absorb new technology and knowledge. In another two to three generations, Chinese scholars, scientists, and entrepreneurs will themselves become a major source of new ideas and inventions.
China's fortunes will be linked to the rest of the world. Investor countries will become major stakeholders in China's success. China's membership of global institutions will reduce the risk of volatile policy changes during times of political stress.
Sources of Discontinuity
There are, of course, downside risks. China has problems that could cause serious disruptions: a collapse of the banking system, huge unemployment following reforms of state-owned enterprises without adequate social security nets, serious environmental problems and an aging population that will place an enormous burden on the one-child family generation. China's arable area is shrinking with urbanization, so unless there is another green revolution, China will become a large food importer.
For a successful transition China needs bold and imaginative but also realistic and pragmatic leaders, determined not to be diverted from their primary goal of China's modernization. However, several developments could deflect China from its present track of catching up.
The first and the most important is Taiwan. If China's leaders feel that Taiwan is likely to split away permanently, nationalistic feeling could sweep aside their objectivity, with incalculable consequences for all. The fuse could be lit by Taiwan if its leaders believe that they can or will get US support for their moves towards independence.
The second risk is widening differences in incomes, infrastructure, quality of life and rates of growth between the coastal and riverine provinces on the one side, and the less prosperous interior on the other. The government will build roads, railways and airfields to bring industries, trade and investments, and tourism into inland areas. But some parts of China will always lag behind the coastal and riverine areas; this can increase peasant discontent and cause tensions and massive migrations. In the provinces occupied by China's minorities such as Tibet and Xinjiang, the further problem is how to manage increases in the numbers of Han Chinese.
The third source of discontinuity will be the change in values and aspirations that will come in 30 years with a change in the generations, and as a large middle class emerges in the cities. Higher education and global exposure will result in a different society, one that has frequent and multi-faceted links with other societies. Traditional Chinese values and behaviour norms will be challenged and may be eroded by popular lifestyles of Americans and Europeans, as has happened to varying degrees in Taiwan, Japan and South Korea.
The people's desire to have a better life equal to that of the Japanese, South Koreans and Taiwanese in standards of living, quality of life and personal freedoms, is a powerful driving force that Chinese leaders are harnessing to push the nation forward. Because of history and similarities in race and culture, how these East Asian societies are governed - their successes and failures - will have a profound influence on the Chinese people's aspirations for reforms in the governance of China. Unless the system can adjust itself to meet the increasing demand for good government, its legitimacy will be questioned.
I base my optimism for China's progress, in the near term, on the determination and increasing pragmatism of China's leadership that I have witnessed over the last two decades. Over the longer term, my hopes are placed on the many highly talented people among China's younger generation, especially those who have studied abroad or traveled widely in their impressionable years. Over 100,000 Chinese students are now in America, Western Europe and Japan.
The present leaders of China have had their worldview shaped by the anti-Japanese war and did their studies in Russia. It is difficult to totally alter their mindsets. The best placed are those in their 20s and 30s who have had extensive exposure to new ideas in different societies. They are the generation that will decide China's shape in 20 to 30 years. They will realise that even after China has been restored as a great industrial power, it will not be a Tang or a Han China, the centre of the universe. China will be but one of several more advanced countries.
But the most pernicious problem of all is corruption that has become imbedded in the administrative culture, hard to eradicate. Not only will corruption severely impede economic progress, but more dangerously it is a political powder keg, a grievance around which anti-government sentiments can easily coalesce.
Despite all these problems, a pragmatic, resolute and capable group of leaders has steered China through many perils since 1978. They command authority and credibility. They have successors in place, as competent and resourceful, and better educated. If these future leaders remain pragmatic, and establish their right to govern China, they are likely to overcome their difficulties.
In the 23 years since my first visit, I have seen China transformed. It is hard to believe how different are people's attitudes, habits and willingness to speak their minds. Books are written and published today that would have been treason in the 1970s or 80s. There is a growing middle class in the cities. The free market and modern communications have brought about more openness and transparency and will make China as different again in another 20 years.
China has the potential to realise its goal of becoming a modern economy by 2050. It can be engaged as an equal and responsible partner in trade and finance, and become one of the major players in the world. If it is not deflected from its present concentration on education and economic development, China could well be the second largest, if not the largest, trading nation in the world, with commensurately greater weight and voice in international affairs. This is one vision of China in 50 years - modern, confident and responsible.