The Foreign Service Journal, May 2005

Not surprisingly, China’s rapid rise has also raised concerns about its ramifications for the region and the rest of the world. In 2004 alone, China’s foreign trade grew by about 35 percent, reaching $1.15 trillion in combined two-way trade. The U.S. takes about 21 percent of China’s exports, and runs a large trade deficit with China. The PRC was the second-largest recipient (after the United States) of foreign direct investment, attracting a total of over $60 billion last year. China’s demand for new energy and raw material sources to fuel its growth has begun to have an impact on the global commodities market. Its foreign exchange reserves ballooned to over $600 billion by the end of 2004 as a result of robust trade and investment growth as well as widespread speculation on a possible revaluation or appreciation of the Chinese currency. As with Japan during the 1980s, many Americans are begin- ning to voice concerns about China’s growing reserves of U.S. Treasury bonds that “threaten” to increase its lever- age over the United States. As rapid as China’s economic growth has been, how- ever, it is important to put it in perspective. We need to remember that its 2004 GDP of $1.65 trillion is still about one-seventh that of the United States, one-third that of Japan and about the size of the British economy. Its per capita GDP of slightly over $1,000 is less than one-forti- eth that of the United States in nominal terms, and even in terms of purchasing-power parity only about one- eighth. And when we talk about China becoming a glob- al manufacturing center, we should bear in mind that U.S. manufacturing alone (which accounted for about 15 percent of U.S. GDP) produced value greater than the entire Chinese economy last year. Moreover, the pace of the PRC’s growth is likely to slow as its economy matures and its base expands in the years ahead. Beijing also faces an increasingly difficult task in reforming its financial system, with some of its four state-owned commercial banks still registering non-performing loan ratios above 20 percent (even by Chinese calculations) and a vir- tually non-existent capital market outside of its banks. Beijing is also working to restructure its relatively inefficient state-owned enterprises that still account for nearly half of its economy, and to alleviate pover- ty in the countryside, where 200 million people still live on less than one U.S. dollar a day. Environ- mental degradation — a result of rapid growth — imposes hidden costs of perhaps 8 percent of GDP or higher. Last but not least, the country faces a severe infrastructure and resource constraint, as well as an aging population, as it seeks to sustain its rapid economic growth in the years ahead. So, while acknowledging China’s rapid growth, we must be careful not to exaggerate its magnitude and its likely impact on the global economy. Helping Sustain Asia’s Development The most immediate impact of China’s rapid econom- ic growth has been on its Asian neighbors. When Deng Xiaoping jump-started economic reforms in 1979, he not only introduced the market into China but also opened up the country to foreign trade and investment. This essentially helped to build up China as a major link in the regional supply chain — first in low-end manufactured products such as textiles, toys and shoes and then, more recently, in higher-technology electronic and electrical appliance products that are primarily exported to the U.S. and other more developed economies. In the 1980s, Hong Kong basically moved its manu- facturing lock, stock and barrel to the mainland as its own production costs rose, thus accounting for up to 70 per- cent of foreign direct investment in China. In its wake, Taiwan, Singapore, South Korea and Japan also began moving more of their factories to the Chinese mainland, contributing to steadily increasing FDI. In 2004, these foreign-invested enterprises accounted for nearly 60 percent of its total exports and about 75 percent of its higher-end manufacturing exports to the West. Thus, while benefiting from increasing FDI inflows, China helped sustain Asia’s economic growth by provid- F O C U S M A Y 2 0 0 5 / F O R E I G N S E R V I C E J O U R N A L 19 Remember that China’s GDP of $1.65 trillion in 2004 is still about one- seventh that of the United States, one-third that of Japan and about the size of the British economy. Robert Wang has been the economic minister-counselor in Beijing since 2002. An FSO since 1984, he previ- ously served in Tokyo, Hong Kong, Shanghai, Singa- pore and Washington, D.C.