China

Briefing Notes for the Launch in Beijing, April 2007

Growth performance and prospects

• GDP growth showed relentless expansion of 10.7% in 2006. By far the largest contribution to global growth since 2000 has been the dynamism of China.
• Growth in China is highly dependent on exports and export-related investment. Reducing dependence on the external sector through encouraging private consumption has not yet been successful. The share of consumption in GDP declined from 60% in 1990-1996 to 52% in 2005, with most of the reduction coming from private consumption.
• Increasing private consumption requires policy measures to reduce precautionary saving and increase consumer borrowing. Precautionary saving can be reduced through fiscal policy, especially spending on education, health care, and pensions. Consumer borrowing can be encouraged through more developed financial options, by means of a wide range of household credit and insurance instruments, and greater household participation in equity markets.
• GDP growth is expected to decrease to 9.9% in 2007. Exports and investment will still be the driving forces. A stronger yuan and weaker electronics demand would reduce exports, while tighter domestic policy would slow investment.
• As the international economic environment weakens, momentum in the Asia-Pacific region is expected to come from China, India and Japan. Together, these three economies contribute over 60% of the GDP of the region and close to 45% of imports, thereby creating considerable opportunities for other Asia-Pacific countries.
• Rapid economic expansion has had an important impact on the environment in China. The economic base provided by the environment is being eroded. Economic losses from environmental pollution reached $65 billion by 2004. Water shortages have been responsible for an estimated annual loss of $28 billion in industrial output in recent years. “Green Growth” policies being undertaken by China, including a new focus on developing a resource-efficient economy and discussions on building a conservation-minded society, will be highly important.

Inflation performance and prospects

• Excessive credit growth is a key issue in China. It has fueled investment growth, resulting in fears of overheating in the economy. ESCAP analysis shows that overheating is not generalized but that it is affecting some sectors, such as steel and cement.
• Government measures to cool down the rate of investment growth are being hampered. Implementing a tight monetary policy under a managed exchange rate regime and in the face of capital inflows is making it difficult to control liquidity and ensure that investment growth is curtailed. Thus, there is a risk of further acceleration in investment growth resulting in more widespread overheating of the Chinese economy.
• China is exerting a strong effect on global inflation, in both a positive and negative direction. China's low export prices have held down global inflation. However, China has also increased global inflation through its demand for commodities, particularly oil.
• According to ESCAP analysis, in 2001-2005, China's low export prices reduced inflation in the United States by 0.28 percentage points annually, 0.37 percentage points in the European Union, 0.70 points in Singapore and 0.65 points in Japan. However, China's demand for oil during 2001-2005 increased world oil prices by 22.5% – and increased inflation in the United States by 0.23 percentage points annually, 0.35 points in the European Union, 1.11 points in India, and 0.73 points a year in Thailand and the Philippines each.

Current and capital account performance and prospects

• China's current account surplus set record highs on booming exports and cooling imports, although as a proportion of GDP it remained steady. China has seen a nearly seven-fold increase in its trade since 1990 and is now the world's third largest trading economy, after the United States and Germany.
• Trade with China provides a massive boost to many Asia-Pacific countries' export prospects. China runs significant trade deficits with many economies – primarily global energy producers and neighbouring Asian economies supplying intermediate inputs.
• Trade between China and India is expected to reach $20 billion in 2007, a fourfold increase over 2002. The comparatively low absolute value of bilateral trade between the two countries promises significant room for future increases.
• China eclipsed Japan to become the world's largest reserves holder in 2006, with more than $1 trillion. The forces contributing to accumulation of foreign exchange reserves – the current account surplus, FDI net inflows and the managed exchange rate -- are likely to remain in place in the near future.
• China has had a significant impact on United States monetary policy, by keeping United States interest rates lower through its purchases of United States government debt. According to ESCAP analysis, China's purchases of foreign assets reduced the interest rate on United States 10-year treasury bills by 0.15 percentage points annually between 2001 and 2005.

Policy research piece: China's wake-up call to exporters in the Asia-Pacific region

• China's size and the rapid growth of its exports and imports are reshaping trade patterns in the Asia-Pacific region. Its exports compete with those of other countries in the region in third-country markets. But its imports offer opportunities for Asia-Pacific exporters.
• China represents either a direct or potential export challenge for all countries in the region.
• High and middle-income regional economies have great opportunities to export to China. The highest potential is for Japan, the Republic of Korea and Singapore, followed by the middle-income ASEAN economies.
• China is still not specialized in sophisticated hi-tech products, for which the high-income economies of Japan, the Republic of Korea and Singapore are the largest exporters and are therefore best placed to benefit.
• Technology-intensive intermediate-input exports currently present a substantial opportunity for middle-income economies, as well as a possible future challenge from China. These exports are mainly intermediate inputs for China's production of technology-intensive final goods.
• There are clear export opportunities for countries in natural resource-related and agricultural products. China has emerged as a major importer of these products. Major natural resource exporters include Indonesia, Mongolia and the Russian Federation. Agriculture is a major export for countries such as Thailand and Indonesia, as well as for many low-income countries in the region.
• ESCAP analysis indicates that China is the hub for assembling technology-intensive products that are then exported as final exports to the region and the rest of the world. China thus appears to display a comparative advantage in labour-intensive assembly processes that convert intermediate inputs into final goods for onward export. China has not yet definitely moved up the technological value chain to specialize in technology-intensive intermediate goods.
• ESCAP findings show that China´s exports are still dominated by labour-intensive products and processes, even in technology-intensive subsectors. Competition is intense in low-skilled labour-intensive products in third markets, and China may be displacing regional competitors.
• Countries in the region need to sharpen their competitiveness in order to compete on a level playing field with China and other economies. A conducive business environment that enhances firm flexibility is crucial. Exporters need to have access to both hard infrastructure and soft infrastructure. Countries should also ensure flexibility by transforming their export structure through giving priority to education.
• Some countries have coped with export competition from China by identifying niches within specific product groups. In textiles, Cambodia identified an international niche by emphasizing socially responsible labour practices, and Sri Lanka focused on quality products.
• Labour-intensive production in regional economies may develop in response to rising wage costs in parts of southern coastal China. Although China has a large supply of low-cost unskilled workers, they are based further inland and producing in these areas raises transport and other costs. There is some evidence of relocation of coastal production from China to lower wage-cost regional countries. Countries creating a conducive business climate can hope to acquire the labour-intensive production that is becoming costly in parts of China.

 

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