Rising China, grouchy partners

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Saturday , April 05, 2008 at 2145 hrs China's astonishing growth rates over two decades have attracted the international spotlight. Much less attention has been paid to another remarkable feature of the Chinese economy, namely, the exceptional degree of its interdependence with other major economies. Yet, the full political implications of China’s economic rise cannot be understood without reference to this.

China’s economic development since the 1990s has followed an export-led pattern, similar to the Far East’s earlier models. When Deng Xiaoping launched China’s economic reforms in 1978, its foreign trade accounted for a mere 0.6% of world trade. By 2004, China’s share had shot up to 6.5%, making it the world’s third biggest trading country after the US and Germany. It is now set to overtake the latter.

China’s vast trade volumes and domestic market size already spell interdependence between China and its principal trading partners. This is enhanced by a unique feature of China’s recent development. To a greater extent than any of its Far Eastern neighbours, China’s export-led development has been dependent on massive overseas investment flows. By World Bank data, net FDI inflow into China was $79 billion in 2005. Some of this is believed to involve “round tripping”— or the re-routing of funds transferred overseas by Chinese individuals/firms to gain tax benefits granted to foreign investors—but the figure still dwarfs that of any other country at a similar stage of development.

It’s estimated that foreign-funded enterprises accounted for as much as 55% of China’s exports in 2003. In contrast, such businesses contributed 25% of South Korea’s manufactured exports when it was at a similar stage of development (1974-78). In the case of Taiwan province, the figure stood at only 20% in the mid-1970s. This means that foreign companies have a much greater stake in China’s economic and export performance than was the case with Asia’s other “tiger economies”. So, while Japan’s stellar export performance in the 1970s triggered lurid fantasies of a new “yellow peril” (a US bestseller even warned of the “coming war” with Japan), China’s exports have generated no such hysteria. Yet, the imbalance in US-Japan trade did not even remotely approach the $124 billion deficit registered by the US in its trade with China in 2003. The few protectionist calls against China heard in the US originate mainly from smaller firms, not MNCs.