Rise of Chinese economy

‘Let China sleep, for when she awakes she will shake the world’, is attributed to Napolean Bonaparte. He was ahead of his time. But now the dragon is certainly stirring. The authority BRIC report (Brazil, Russia, India & China- the 4 leading countries in the world by 2050 A.D.) by Goldman Sachs has also forecasted that China will rank only after the USA as the world’s leading power by 2030. It is also the largest recipient of foreign direct investment as multinationals have moved operations to China to take advantage of its low labor costs two-thirds of all over half of all digital cameras and around 2/5ths of PCs.

China has witnessed probably the most dramatic burst of wealth creation:

More than 400 million people have been lifted out of severe poverty. Shanghai-the country’s industrial and financial capital-is perhaps the one of the most dynamic and cosmopolitan cities on earth. China’s demand for commodities has also rocketed, driving up the world prices.

The problem is that China, stranded midway between central planning and a market economy has yet to develop real capital markets to regulate credit. There is also an overheated property market given that there are hardly any instruments in the foreign exchange market to speculate.

China’s authoritarian communist government has achieved surging growth by relaxing state:

For purchasing power, China has grown to be 70% richer than India In 1990 China’s share of world exports was 1.9% and of imports 1.6%. By 2004 its share of exports had increased to 5.8% and of imports to 5.3%. India’s two way trades were only around $ 150 billion, less than 1% of the global total. China’s foreign exchange reserves are almost five times the size of India’s having increased by $ 207 billion in 2004 to reach $ 610 billion at the end of the year. The World Bank estimates that 35% of Indians live on less than $1 a day, compared with 17% of Chinese. Infant mortality is 65 per 1000 in India against 30 in China; life expectancy is 63 in India, 71 in China; and adult literacy is 57% against 91% in China.

India with its expert human capital has produced IT firms like Infosys, Wipro and TCS that are among the world’s best. There is no Chinese equivalent yet although it is now the world’s third-largest spender on research and development. Firing workers remain hard in India which deters firms from hiring them in the first place.

When China first started dumping goods on the Indian market, the volumes quickly fizzled out due to shoddy quality:

For both domestic and foreign investors, India’s poor infrastructure remains a huge barrier. But a fiscal deficit of about 10% of GDP for the past 7 years leaves little leeway to build for growth. In the case of China, the infrastructure was financed by bankrupt local governments who borrowed heavily from the banking system. Indian IT services and outsourcing requiring English speakers will retain their lead for a long time. But the industry as a whole will have to prepare for an invasion from the Chinese synthetics juggernaut where it is strong.

It is difficult to believe but true that Chinese exporters have engaged the services of some Kanjeevaram saree weavers from south India and plan to make inroads into our lucrative and traditional silk saree market! China pioneered the SEZ(Special Economic Zones) model to record spectacular growth in exports. These are specially delineated zones where world class broadband connectivity. Etc is provided so that any entrepreneur can set up shop and get into the business from day one.

Although India borrowed this model from China, very few SEZ have taken off as their establishment was plagued with land acquisition and delay in providing the requisite infrastructure to merit it being called a SEZ in the first place. When China first started dumping goods on the Indian market, volumes quickly fizzled out due to shoddy quality. But the Chinese learnt fast and, now they are quality conscious, too. For instance, Haier- the Chinese white (consumer) goods manufacturer now enjoys global brand equity due to high quality.

China’s average tariffs (custom duties) have fallen from 41% in 1992 to 6% after it acceded to the WTO in December 2001, giving it the lowest tariff protection of any developing country. India needs to take a leaf from China’s book and needs to reduce its custom duties further from the present peak level of 15% if it is benefiting fully from free trade.

Conclusion:

China decided quite some time back to decrease the role of the state in running business enterprises. The continual shrinking of the state-owned sector in China is boosting productivity by ensuring better use of resources. This is especially true of the steel sector where inefficient state run mills are being sold off or being forced to compete with the private sector Here. Again, India needs to take note. Another impediment to rapid growth is India’s savings rate of 24%, only half China’s rate and too low to finance the required investment in industry and infrastructure.

The ascent of China in the economic sphere is now an accomplished fact. India needs to meet the competition fairly and squarely by concentrating on its areas of strengths to deliver world class products. Growth and the rise of the Chinese economy has been truly exceptional and most times provide sufficient glance to understand the newer concept of a world economy where even greatest and wisest amongst all economy instances learns and understands the process of accelerated growth mechanisms.


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