Wednesday, January 04, 2006

Threat of China's Economy

By Frank Ching
The Chinese economy, which has been growing at about 9 percent a year, took a big leap forward last week when the government announced that, as a result of a year-long national economic survey, it had revised its GDP upward to about $2 trillion for 2004, an increase of 16.8 percent, making the economy the sixth largest in the world, overtaking Italy.
Given the higher base for 2004, it appears highly likely that when the final figures for 2005 come in, China will have overtaken France and Britain as well, to become the world’s fourth largest economy, after the United States which last year registered a GDP of $11.7 trillion, Japan and Germany. In purchasing power parity terms, China is already the world’s second largest economy, exceeded only by the United States.
On a per capita basis, however, China is still a poor country. Li Deshui, head of the National Bureau of Statistics, said at a news conference last Tuesday that although the revised figures resulted in a considerable increase in total GDP, on a per capita basis, China still ranked only about 100th in the world. Using International Monetary Fund figures, China ranks 107th while the World Bank says China ranked 134th in income per person in 2003.
In fact, China’s per capita GDP is only 3.6 percent that of the United States and 4 percent that of Japan. The Chinese economy overall in 2004 was only 16.6 percent that of the United States.
Mr. Li emphasized that China was still a developing country, with 100 million peasant farmers and more than 20 million city dwellers roughly 10 percent of the population still struggling with poverty.
Interestingly, the revised figures show that the country had previously grossly undercounted its service sector. The revised figures for 2004 showed that the service sector including real estate, transportation and restaurants accounted for 40.7 percent of the economy, not 31.9 percent as previously reported. The increase in service output accounted for 93 percent of the total GDP increase.
“The revised statistics show that China’s economic structure is more reasonable and healthy than the previous figures showed,” Mr. Li said at the news conference. He explained that China had long used the Material Product System to calculate GDP. This method was developed under the centrally planned economic system and resulted in “very weak” figures for the service sector.
The new figures have been widely accepted by outside analysts, many of whom have long said that China has been underestimating the size of its service sector. The new figures show that agriculture, instead of accounting for 15.2 percent of the economy, accounted for only 13.1 percent. The share of industry (including manufacturing and mining) fell from 52.9 percent to 46.2 percent, leaving a very sizeable service sector.
As a result, economists said, China actually has a more “ordinary” economy than was previously thought to be the case. Now, there is less concern about the danger of overheating or that investment rates were too high vis-a-vis the size of the economy. There has been concern that China was investing too much and consuming too little and that the growth rate was unsustainable in an unbalanced economy. The new figures go far to ameliorate such concerns.
Apparently to allay concern that its new GDP ranking will spur a new round of “China threat” speculation, two days after the GDP announcement, Beijing released a white paper entitled “China’s Peaceful Development Road” in which the government made a “solemn promise” that its growing power will never become a threat to other nations.
The 32-page document said “peaceful development” is the inevitable way for China’s modernization, and declared that China’s goal was to build a harmonious world of sustained peace and common prosperity. “China did not seek hegemony in the past, nor does it now, and will not do so in the future when it gets stronger,” the document said. “China’s development will never pose a threat to anyone.”
The sudden jump in the country’s GDP ranking will almost inevitably spur concern about a rising China. It is also likely to fuel calls for Beijing to increase the value of its currency, which critics say is too low and so gives its exports an unreasonable advantage.
If so, it would be unfortunate because China should be encouraged to be more open and to adopt methods of calculations that are used by the rest of the world and to present an accurate picture of the size and composition of its economy rather than to engage in obfuscation.


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