Written evidence submitted by Dr Linda
Y Yueh, University of Oxford, and London School of Economics
It is my pleasure to make this submission to
the Foreign Affairs Committee. The focus of this memorandum is
on the wider economic impact of the People's Republic of China,
concluding with a discussion of the ensuing policy implications.
I. THE
RISE OF
CHINA
The remarkable economic growth of China has propelled
it to become the fourth largest economy in the world in the span
of just 27 years. With economic growth averaging 9.5%, GDP will
be expected to double approximately every eight years. However,
GDP per capita in China is estimated to be just under $2,000,
which places it within the ranks of the world's developing countries.
Although this suggests that China will face numerous challenges
as both a developing country as well as an economy undergoing
transition from a centrally planned economy, it also indicates
that the growth potential of China will be significant as it is
starting from a much lower level than comparable economies in
terms of aggregate GDP.
China's economic power as a result of its remarkable
growth is increasing its importance in the Asian region and in
the global economy. Coupled with its significant political influence,
most clearly seen in its position as one of the five permanent
members of the UN Security Council, its economic development raises
questions concerning the wider impact of China's economic growth.
The dimensions of China's economic impact can
be divided into at least four areas: international trade, international
capital flows, effects on global markets for raw materials and
commodities, and effects on global economic growth. In terms of
international trade, China has become in the span of a decade
the world's third largest exporter and importer. China also holds
the third largest stock of foreign direct investment (FDI) in
the world behind just the US and UK. In recent years, it has often
been the leading destination for global FDI, particularly since
China joined the World Trade Organisation (WTO) at the end of
2001 when it began to implement greater trade and financial liberalisation.
China is a leading consumer of major commodities, after only the
United States in its consumption of oil. Finally, although China
accounts for less than 5% of world GDP in 2005 as compared with
the US whose share is around 28%, its contribution to global incremental
growth is substantially above its weight in the global economy.
From 1980-2000, when calculated on the basis of purchasing power
parity (PPP), China's contribution to world economic growth accounted
for around 14%, second only to the US which generated around 20%
of global growth. In the past few years, China's contribution
to global growth in PPP terms was around 30%. When calculated
at market exchange rates, its contribution to global growth was
13% on average from 2000-04 and 14% last year. The attention increasingly
paid to China as one of the so-called twin engines of growth in
the global economy is a result of these figures. However, it is
worth keeping in mind that China remains substantially smaller
than the US despite its rapid growth rate.
These areas of potential impact will be discussed
with respect to the Asian region, the global economy, and then
specifically with respect to the UK and EU. This paper will conclude
with an assessment of policy considerations for the UK. Given
the scope of the enquiry, the emphasis will be on placing China
in its regional context.
II. ECONOMIC
IMPACT OF
CHINA ON
THE ASIAN
REGION
Although it began in 1979 with the first waves
of market-oriented reforms, China's "open door" policy
did not take off until 1992 following then President Deng Xiaoping's
famous southern tour where he inspected and admired the success
of the early Special Economic Zones, which were essentially export-processing
areas for manufactured goods, in Guangdong and Fujian provinces.
A common perception of China's rise since then is that it will
be accompanied by the decline of its neighbours who had fuelled
their growth by exports and particularly manufactured exports.
China would be a lower cost producer and thus could threaten the
global market share of other Asian economies.
Over the period 1990-2000, Chinese-manufactured
exports grew by 16.9% per annum, compared with 10.3% for the rest
of East Asia, and its world market share tripled during that period.
China's share of the global export market grew even faster after
2000. By 2005, China accounted for around 6% of global markets
in manufactured goods. Moreover, China's transformation from a
relatively minor exporter of electronics in 1990 into one of the
largest in the region a decade later is remarkable not only on
account of its speed but also because electronics has been the
chief engine of the East Asian region's export-oriented growth.
Even before WTO accession, China's electronic exports grew by
16.9% year-on-year in 2001, while those of the rest of Asia fell
by 18.8% for the same year. Accession to the WTO is also expected
to improve market access for Chinese textiles and garments abroad
as well as open the domestic market to trade. This suggests that
China could expand its global market share of textiles and clothing
considerably above the estimated 15% that it held before the phase-out
of the Multi-Fibre Agreement on 1 January 2005. Estimates place
the potential market share of Chinese goods in these two areas
in the region of 50% of the global market.
Moreover, medium and high technology goods have
been growing quickly in China, and the below figure gives a picture
of the market share of Chinese goods vis-a"-vis its
neighbours in 1990 and then a decade later. The economies covered
in East and Southeast Asia are the old "Tiger" economies
of Hong Kong, Singapore, Taiwan and South Korea, and the new "Tiger"
economies of Malaysia, Thailand, Indonesia and the Philippines.
Although Japan is a considerable economy in the region, due to
its status as a developed country, it is less likely to be affected
in the same way as developing Asia. China's economic relationship
with Japan will be discussed later in the submission.
Source: WTO.
Despite the general perception outlined above,
the data on trade patterns from the 1990s onward suggest that
China's rise has not harmed the global market share of its neighbours
except for the rather unique exception of Hong Kong. Instead,
China's rise has been accompanied by the growth of global market
share in manufactured goods of the rest of Asia. In terms of market
share of global trade in manufactured products, China has grown
from having a mere 1.87%-4.70% between 1990 and 2000. Despite
the global import quota system, China gained the most market share
in low technology products, such as textiles and clothing. Also
impressive has been its gain of export markets in medium and high
technology goods as well as resource based goods. The rapid growth
in market share of high technology goods, which has been the main
engine of growth of the Asian Tigers, in particular is noteworthy.
In the span of a decade, China grew from having 0.69% of the world
market, a percentage similar to the New Tigers (eg, Thailand with
0.74%), to 4.06% in 2000, a market share that is threatening to
the old Tigers. For instance, South Korea has a market share of
4.48% and Taiwan holds 4.87%, while Singapore has 5.88%. Alone
among the new Tigers, Malaysia has achieved a similar share of
3.75% in 2000, although it started with a greater share in 1990
of 1.59% of the market. This adds support to the ability of China
to engage in the rapid technological upgrading of its manufactures
as well as expand in its established labour-intensive products.
It currently has a share of global trade that is comparable to
that of the established Tigers. The four new Tigers of Malaysia,
Thailand, Indonesia and the Philippines began with less than 1%
of global trade in 1990 and have grown quickly to account for
more than 1% in overall manufactures market share in 2000. However,
this falls behind China which started with a slightly larger share
mainly in textiles at the start of the 1990s and has reached an
impressive 4.70% of global market share in all manufactured exports.
Analysing manufacture exports as a whole, it
appears that China's share of global trade has not come at the
expense of the rest of the region. Aside from Hong Kong which
is somewhat unique given its new status as part of China, the
rest of Asia's overall exports of manufactures grew rapidly during
the 1990s. When individual sectors are examined, it becomes more
evident that the mature Tigers are experiencing shifts in their
export capacities that will cause them to begin to recede in some
industries and gain in others. For the newly industrialising Tigers,
their strong growth in nearly every sector reflects their comparative
advantage as lower cost producers of manufactures in contrast
to the mature Tigers which are characterised by rising real wages
and related increases in operating costs and real estate, to name
a few factors.
The mature Asian economies exhibit shifting
patterns of comparative advantage that would be expected with
economic development. The might of China, though, has played a
role in the resulting pattern of trade. In contrast, the new Tigers
of Malaysia, Indonesia, Thailand and the Philippines have had
rapid and impressive export growth over the past decade. For these
countries, there appear not to be large effects from China's manufacturing
strengths. As the old Tigers are increasingly characterised by
rising labour, land and capital and costs which normally accompany
economic development, the new Tigers appear more attractive as
centres of production with their lower wages and operational costs.
The shift from the older to the newly industrialising nations
is most apparent in the Philippines and Malaysia. They are producing
less or the same amount of resource based manufactures, but more
high tech goods. In fact, the global market share of Malaysia's
high tech exports was 3.75% in 2000, a share which is not much
less than the current shares of the old Tigers. Similarly for
Thailand and Indonesia, they have both had rapid growth in all
export sectors, ranging from resource based to low/medium/high
technology products. Indonesia, in particular, witnessed tremendous
growth of exports of high tech goods starting from a base of having
only 0.05% of the global market share in 1990 to achieving 0.54%
by 2000. The evidence since the 1990s suggests that China's strength
in producing low technology goods such as clothing and textiles
may have facilitated the shift in comparative advantage of the
new Tigers into high and medium technology goods. South Korea
has even increased its production of resource based goods, perhaps
on account of the slower growth of its low tech exports as well.
Therefore, the evidence indicates that China's
growth of manufactured exports has not inflicted the widely perceived
harmful effects on its neighbours. The old Tigers have matured
and experienced structural changes in their economies normally
associated with development. This scenario is mirrored in the
position of the new Tigers. Despite China's impressive gains in
all export sectors, the global market shares of its neighbours
have mostly grown as well. The evidence of both complementarities
and specialisation predicted by trade theory is best seen in the
remarkable gains in global market share of the newly industrialising
Asian countries. The gains of Indonesia in market shares of low
tech goods exceeds that of China over the period 1990-2000, and
all four new Tigers experienced substantial surges in manufactured
exports in medium and high technology goods. These complementarities
derive not only from the usual prescriptions of trade theory,
but also from the behaviour of multinational corporations and
foreign investment.
When economies of scale and global production
chains are considered, the needs of risk diversification and utilisation
of national capacities would predict rising intra-industry trade
among the Asian nations. There is indeed evidence of increasing
economic integration in the region, including movement to formalise
ties between China and ASEAN. With growing intra-regional trade
and investment, China and its neighbours should begin to converge
in technology and level of skills. It follows that intra-industry
trade will increase in importance. In fact, China's own efforts
at developing the high tech sector through attracting foreign
investment have been successful thus far. Starting from a position
of possessing minimal global market share, China's exports of
high tech goods now rival the volume of the old Tigers while efforts
continue to promote the development of high technology centres
such as the Pudong area near Shanghai. Looking ahead, the division
of production among Asian nations will likely be increasingly
characterised by intra-industry trade.
Intra-industry trade as a percentage of total
trade growth averaged over five years
| | |
|
| 1986-90 | 1991-95
| 1996-2000 |
| | |
|
| East Asia | 42.5% | 46.9%
| 75.0% |
| South Asia | 31.2% | 21.8%
| 34.5% |
| | |
|
| | |
|
Source: IMF.
There is already evidence of this trend. Intra-industry has
grown significantly over the past decade, particularly in the
second half of the 1990s. Intra-industry trade accounts for three-quarters
of total trade growth from 1996-2000 in East Asia, rising rapidly
from under 50% in the previous decade. South Asia has seen rises
as well in the degree of intra-industry trade. The prominence
of multinational corporations plays a significant role in generating
such trade as do existing large companies such as those constituting
chaebols or conglomerates in South Korea.
Indeed, multinational corporations are important players
in the export sectors of Asia's developing nations. An estimated
50% of China's manufactured exports have been produced by foreign
invested firms since the mid 1990s. Granting tax and other concessions
aimed at encouraging foreign investment characterises the general
growth strategy of industrialising Asian nations. Taiwan, Hong
Kong and even new Tigers like Malaysia have focused on attracting
foreign investment in their export sectors.
In short, China's rise has not generated a decline in the
rest of Asia. Instead, China should prove to be a strong centre
for attracting FDI and multinational production facilities that
could have positive spillover effects for its neighbours. The
development of cross-border supply chains and the trade deficit
that China runs with its Asian neighbours are testament to this
trend.
III. ECONOMIC IMPACT
OF CHINA
ON THE
GLOBAL ECONOMY
An area where China as well as other developing countries
have contributed to the global economy is in terms of producing
cheap manufactured goods which have lowered prices worldwide.
The low inflation, low interest rate environment in many developed
countries, particularly in the UK and Europe which are relatively
open economies, is at least partly attributable to the low level
of world prices and correspondingly cheaper imports.
The earlier discussion covered some of the effects of China
on international trade. The evidence since WTO accession in 2001
suggests an additional phenomenon. Due to the lifting of import
restrictions, imports in China have exceeded the growth of exports
in the past few years. Although China had a stronger than expected
trade surplus in 2005 of $101.9 billion, there is evidence that
imports and their effects on domestic consumption are an increasing
important policy focus. After decades of central planning which
restricted private consumption, consumption levels are low in
China. Consumption accounts for less than 50% of GDP, which is
considerably less than the 2/3rd of GDP in developed economies.
The change in economic policy focus is geared toward increasing
aggregate consumption and reducing the focus on investment. China's
growth in imports has already been felt in the market for food
where China became a net importer and also in global raw materials
and commodities markets.
China's impact on these global markets (eg, oil, copper,
iron ore, aluminium, steel) is considerable, and though some of
the demand is driven by exports, the bulk is attributed to China's
continuing industrialisation. Due to the period of central planning,
China is industrialised to a large extent including in heavy industries.
However, the reforms of the past 27 years have been geared at
attempting to change the type of industrialisation in China toward
more high tech and consumer goods, including real estate and housing.
The transformation of an already industrialised economy is a difficult
task and depends on interest rates which have only been recently
liberalised in China. In terms of global markets, China's growth
process starting from a low level of GDP per capita and continuing
urbanisation suggests that it will likely continue to affect world
markets in raw materials and commodities for some time.
China has also a saving rate which is 50% of GDP, and its
trade surplus accounts for about 8% of GDP. The corresponding
accumulation of foreign exchange reserves of more than $800 billion
underscores the anxiety surrounding China's role in an unbalanced
global economy. Moreover, China's attractiveness to FDI continues,
as seen in the rise to 60% of the share of exports from China
produced by foreign invested enterprises last year and in the
high profile investments in the banking sector in anticipation
of the opening of its banking sector at the end of 2006 due to
the terms of its WTO accession.
In addition, the exchange rate regime in China was reformed
in July 2005, but it continues to be a source of contention. The
move to increase the flexibility of the exchange rate resulted
in a depegging of the RMB from the US dollar and instead the Chinese
currency became linked to a trade-weighted basket of currencies.
Although the precise contents are not known, the US dollar is
understood to comprise of less than 50% of the basket. With China's
considerable trade surplus with the United States, this issue
is likely to continue to plague the global economy. The recent
moves in China to reform financial markets to ensure domestic
stability before further liberalisation takes place will be closely
watched.
The other major area of China's impact on the global economy
is attributed to the "going out" policy of its enterprises.
Since the mid 1990s, China has permitted outward FDI. The amount
of FDI was small relative to the inflow of FDI, totalling just
$2 billion before 2004. Since WTO accession, China has increased
the amount of overseas investment in both commercial and also
strategic sectors. For instance, TCL's deal with Thomson in 2003
and Lenovo's purchase of IBM's PC business in 2004 are examples
of China's "national champion" policy going global.
China has also actively promoted investment in oil and natural
gas reserves in countries ranging from Nigeria to shares in Canadian-listed
PetroKazakhstan as well as a high profile failed bid for US company,
UNOCAL. Although China's energy use is predominantly derived from
coal, its requirements for energy will double by 2020 and security
of supply is considered to be important to safeguard growth. This
has caused tensions in the global economy not just due to China's
relationship with states such as Sudan, but also the resultant
competition with India and Japan. The relationship with Japan
is also intertwined with historical political tensions, despite
the booming economic relationship where Japan increasingly relies
on China as a market for its exports which have fuelled its growth
in recent years.
Finally, although there are numerous issues, this section
will conclude with a discussion about China's impact on the global
economic cycle. China's disproportionate impact on global incremental
growth was mentioned earlier. Another facet is the correlation
between China's economic cycles and the global economic cycle.
During the reform period, China's economic cycles ranged from
peak GDP growth exceeding 14% to lows of 4%. However, these cycles
were not driven by market economy forces such as those seen in
real business cycles, but by the features of a planned economy
that included soft budget constraints and decentralisation. In
addition, until 2004, China's largest trading partner was Japan,
and its economy was more closely aligned with the Asian region
than the west, as was seen in the Asian financial crisis in the
late 1990s. China's economy was thus somewhat counter-cyclical
to the global slowdown at the start of the 2000s. However, since
WTO accession and continued reforms, China's institutional structure
has become increasingly marketised and the combination of state
and market makes its cycles more complex. As of 2004, the European
Union became China's largest trading partner followed by the US
and Japan. Growing trade with the EU and US further suggests that
economic cycles could become more closely aligned among these
economies. Coupled with the growing view that the U.S. and China
are the twin engines of growth in the global economy, these changes
imply that a slowdown in China could well be aligned with a global
slowdown.
IV. ECONOMIC IMPACT
OF CHINA
ON THE
UK AND EU
Despite the growing amount of trade, there remain numerous
issues which affect the relationship between China and EU. These
can be divided into direct competition in manufactured goods,
and access to Chinese markets. For instance, there have been high
profile conflicts between Chinese and European manufacturers in
traded goods such as shoes. This competition raises concerns about
manufacturing jobs in some developed economies in Europe. This
issue is further complicated by the new accession states and the
supply chains which are causing some firms to relocate facilities
to Eastern Europe. The impact on jobs will depend on employment
structures, the needs of consumer markets, and productivity, among
others. There are also ongoing issues concerning intellectual
property rights and transparency of laws in China, as well as
the pace of its liberalisation of domestic markets. However, given
the diverse structure of the European Union, particularly with
the new accession states, the scope for trade with China is considerable.
Europe's pattern of trade is likely to continue to shift toward
the east since China is already the second largest trading partner
of the European Union and accounts for 40% of Germany's trade
position, which is expanding at 20% per annum.
In addition to the notable trade relationship between China
and the EU, China's trade with the UK is also growing. The UK
runs a trade deficit with China in the region of £8 billion.
However, it also has a trade surplus with China in the export
of services of around £1 billion which is likely to grow
as China increases the degree of financial liberalisation in its
economy and opens its domestic economy to foreign investment.
In terms of UK investment in China, there are an estimated
4,000 British firms in China. However, in terms of both overall
investment and exports to China, the UK lags behind Germany and
also France in some respects. Because of the smaller size of the
manufacturing sector in the UK, there perhaps had been less scope
for trade than other European countries. With the anticipated
opening of China's services sector, including professional services
such as law and accountancy, education, banking and financial
services, there will be more opportunities for Britain to engage
with China. In particular, the internationalisation of Chinese
firms means that they will seek advice to operate in foreign markets
and stock exchanges. And, China is increasingly keen to improve
corporate governance and its regulatory structure, which will
draw on international best practice. These are areas in which
the UK has considerable expertise.
Finally, because technological progress and competitiveness
are crucial issues in the long-run growth prospects of any economy,
the UK should consider China's impact in this area. UK labour
productivity has lagged behind the US and some other developed
economies for some time. The noted skills deficit in the UK adds
further concern to this area. China, by contrast, graduates two
million engineers and scientists each year and has begun to invest
considerably in research and development (R&D). However, the
evidence on productivity growth in China is not necessarily overwhelming
as it is a poor, developing country which has grown by mostly
extensive growth. Its investment in human capital and R&D,
though, suggests that it will eventually begin to improve the
productivity element of its competitiveness which would enhance
its low cost advantage. There are also concerns about the extent
of domestic innovation despite the rapid expansion of high tech
goods production in China. It is thought that foreign technology
is largely responsible for the rapid upgrading of China's high
tech goods, and not domestic innovation. Although China is now
the leading exporter of ICT goods globally, having surpassed the
US, some sectors of high tech exports are dominated by foreign
invested enterprises which produce around 80% of all such goods.
In any event, the impact on the UK, and indeed other countries,
should be to stimulate investment in human capital and innovation,
as international trade and globalisation can enhance the drive
for competitiveness.
V. CONCLUSION AND
POLICY IMPLICATIONS
Just as China's growth did not pre-empt the growth of its
Asian neighbours, there is scope for gains from trade for the
UK, EU and the rest of the world from China's rise so long as
each country focuses on its productivity and contemplates how
best to engage international trade to take advantage of the specialisation
and exchange which generates gains from trade. Although this is
a difficult proposition particularly for developing countries,
it is possible and certainly worth focusing on as globalisation
progresses.
A recent Deloitte/YouGov poll found that 79% of 2,704 people
identified China as the largest threat to the UK. The non-economic
impact of China is also considerable and outside the scope of
this submission, but would certainly play a role in these perceptions.
The poll perhaps also suggests that there is much to be learned
still about China, particularly in the economic arena where the
concepts are not always clear and the evidence can be difficult
to interpret. Given that China is the world's most populous nation
and its fastest growing economy, the question should not be if,
but how, to engage this country. On account of the UK's openness,
tradition of internationalism, and comparative advantage particularly
in the fast growing area of services, I hope that this submission
has suggested that China poses challenges but also considerable
opportunities.
References
International Monetary Fund, World Economic Outlook, September
2002.
Lindsey Hilsum, "Re-enter the Dragon: China's new mission
in Africa," Review of African Political Economy, July 2005.
Paul Krugman, "Competitiveness: A Dangerous Obsession,"
Foreign Affairs, 28-44, March/April 1994.
Linda Yueh, "China and Intra-regional Trade: Threat or Opportunity?"
Asia and Australasia Regional Overview, Economist Intelligence
Unit, October 2003.
Linda Yueh, "China's Competitiveness, Intra-industry and
Intra-regional Trade in Asia," in Globalisation and Economic
Growth in China, Yang Yao and Linda Yueh, editors, World Scientific
Co. Pte. Ltd., forthcoming.
Dr Linda Yueh
Pembroke College, University of Oxford, and
London School of Economics
8 February 2006
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