Higher infra investment made the difference but smart outward investment is the real separator
A recent OECD report puts China ahead of the US in terms of becoming the largest economy in the world by 2016. In spite of being four times the size of the Indian economy, China?s economy is growing at around 8% in comparison to India?s 5%. China?s GDP is $8.3 trillion in comparison to India?s $2 trillion. At a time when higher inflation number and CAD is slowing down India?s growth rate, China is doing well in keeping these numbers in check. Currently, India?s CAD is around 5% of GDP in comparison to below 3% for China. Inflation for China is at 2.6% in comparison to India?s 7.5%.
However, things were not this hunky-dory for China few years ago. Soon after the financial crisis of 2008, China faced problems in terms of falling exports, rising CAD and high inflation?similar to what India is experiencing now. It would be interesting to see how China responded then, and more importantly is there something that we can learn from China.
Much of China?s economy depends upon exports. The crisis of 2008 brought bad news for China. The financial crisis has seriously affected world trade, with some governments resorting to protectionist measures such as anti-dumping and countervailing measures to protect their domestic industries. Such protectionist measures were hurting China. During 2008, Chinese exports to the EU and the US fell by 19.4% and 12.5%, respectively.
Global Trade Alert?a database tracking protectionist measures?has indicated that as many as 659 measures were initiated against Chinese exports after 2008. Most of these measures originated from Russia (31), Germany (18), France (16), the UK (17), Spain (16), Italy (15), Netherlands (15), Sweden (13), Austria (13), Belgium (13), Finland (13) and the US (9). Numbers in parenthesis indicate numbers of non-tariff barriers targeted against Chinese exports. China?s trade surplus fell from $298.12 billion in 2008 to $195.84 billion in 2009.
Falling exports contributed to a rise in CAD for China. To make things worse, China had to fight inflation. During 2008, Chinese economy was overheating. Property prices were rising, and so were the wages of workers, land, property rents and power prices. Property prices were rising despite the government?s ownership rights on land?indicating a possible real estate bubble. Foreign fund managers kept investing in China, in anticipation of renminbi appreciation. The Chinese central bank frantically tried to keep the renminbi from appreciating further by actively intervening in the foreign exchange market. However, such active intervention and a rise in income in China led to inflation.
On a year-on-year basis, during 2010, labour costs were up by 21%, and home prices across 70 cities in China went up 7.7%. Estimates made in 2010 suggested minimum annual wage rates for Cambodia, Laos and Vietnam at $600, $434 and $1,200-1,500, respectively. If one were to add the mandatory welfare allowances to the minimum wages, in 2010, the Chinese labour costs were at least double when compared to other regions in the neighbouring Southeast Asia.
Chinese policymakers realised they needed to do things differently. One important step they undertook was to start investing heavily in Southeast Asia and Africa. This meant four things. First, as cost of production was lower in Southeast Asia, it meant Chinese firms could gain by shifting their production base outside China. Second, investing in these regions meant a bigger market for Chinese firms. Third, Chinese firms could evade protectionist measures targeted against their exports if they started exporting from Southeast Asian countries. Fourth, investing in Africa and Asia also eased out some of China?s energy requirements, enabling the Chinese to access cheaper foreign energy (oil and power) and minerals. Since 1996, Chinese firms have constructed six hydropower plants and one thermal power station in Myanmar. China has also invested in power transmission and copper processing activities in Vietnam.
Things panned out well. Complementarities in the trading and investment relation have worked wonders for China, more because the Southeast Asian region is one of the least restrictive regions, with few non-tariff barriers. Most of the items are traded at zero tariffs. Thailand, Laos, Cambodia, Vietnam and Myanmar are all part of Asean, which means Chinese firms that are set up in any of these Southeast Asian countries will have easy access to the rest of Asean. Since October 2003, China and Thailand have taken the lead in implementing zero tariffs on agricultural products, covering 200 types of fruit and vegetables. China has also granted zero tariffs treatment to Cambodia (83 products), Laos (91 products) and Myanmar (87 products). Investment undertaken by China in developing world-class roads and ports further reduced the cost of doing business. Free market access for Chinese exports into this region meant a larger market for Chinese manufacturers.
Access to the Southeast Asian market also meant a balanced regional growth for China. When compared with other provinces like Shandong, Guangdong, Hainan, Jiangsu, Beijing, Shenzhen and Tianjin, the provinces of Yunnan and Guangxi (bordering Southeast Asia) were relatively underdeveloped. Through better economic tie-ups, China was able to develop even these remote areas.
Most analysts point out China?s higher investment in infrastructure?48% of GDP in comparison to India?s 36%?is separating out China from India. Although investment is important, smart investment is more important. The result from these outward investments and developing economic tie-ups is now showing for China. Since 2011, Chinese exports were up 24.3% (in dollar terms), translating to an impressive 14% growth of exports in real terms. Imports also went up but at a much slower pace?growing around 5% in real terms. This explains a lower CAD value for China. No wonder the Chinese dragon is roaring.
The author is professor, Institute for Financial Management and Research, Chennai. nilbanik@gmail.com