China sent 10 million enumerators and statisticians into the back lanes of China to assess gross domestic product statistics afresh, to record what had not previously been recorded. What they discovered was an extra US$285 billion that came in dribs and drabs from micro-enterprises behind the broad boulevards. Only a few feet behind the glitzy shops and giant office blocks lie the warrens of lanes and nameless little roads with curbside cobblers, hair salons, micro-grocers, impromptu bakeries and restaurants with oil drum braziers burning yesterday’s chopsticks and lumps of coal. It was here the newfound treasure was located.
Once the numbers were crunched, Beijing restated its entire GDP – upwards by 16.7%. This made China the country with the fifth-largest economy in the world, above Italy and below France. While China is growing 9% a year, other top GDP rankers are slow-growing, mature economies, so it was always a pretty safe bet that the country would end up at or around the top of the tree. What has changed is how quickly it can expect to get there: economists are now predicting that China will have reeled in the top-ranked US by 2035 rather than 2040.
But China’s new GDP is more than a matter of boasting. It is significant on other levels. The first is that the restated GDP figure is more accurate. It is true that many bankers and financial analysts had routinely added another 20% to the official "headline" GDP number, believing there was more to China than the old quasi-communist production-oriented counting system allowed.
Even when China adopted the UN system of GDP measurement in the 1980s, analysts still reckoned the number was off because developing countries find it hard to track informal economies, which represent a much larger share of output than acknowledged. For an example of the disparity, one need look no further than the statistics submitted by local governments. In 2003, the total regional gross domestic product came to US$1.6 trillion, 12-15% higher than the overall figure provided by the National Bureau of Statistics.
With this improved accuracy comes a clearer picture of individual wealth. It is estimated that the recalculation has boosted China’s per capita GDP to US$1,400, up from US$950 when it joined the WTO, and parachuted it firmly into the official global middle class. This will put pressure on China to relinquish the number of advantages accorded to it as a "less developed country" and impose new obligations demanded of "modestly affluent countries."
The GDP restatement has little or no direct impact on the economy itself because the uncounted billions found in the back streets had always been there, thus resulting in no real addition of fresh wealth to the national coffers. But consider the case of a man who turns out to be much richer than was widely assumed. This is important, not only in terms of his own sense of self-worth, but also because it increases his general standing and credit in the community. One can imagine the impact if sending 10 million statistical enumerators had produced the reverse result for China. It would have been bad news, even though the size of China’s economy would have remained relatively unchanged. Perceptions are important.
But more than anything, the GDP restatement is a big step towards statistical reliability. Henceforth, Beijing’s macroeconomic numbers and its methods of assessing them will be more in line with world accounting standards. The fuzziness of Chinese numbers has been something of a sore point between this country and its trading partners – experts have been divided over whether the lack of transparency represented an effort to disguise weakness or hide strength – and the restatement will go some way to ameliorating this situation.
While conceding that this long run of economic growth cannot continue forever, now is not the time to heed some doomsters in our midst who have again predicted a coming cyclical downturn. Their reasoning is that there is too much money in fixed asset investment, or infrastructure, and not enough in consumer spending. But the GDP restatement redresses that problem somewhat, in effect reducing the importance of fixed asset investment and therefore reducing China’s exposure to this risk.
Only last year, the doomsters were predicting a "hard landing," which didn’t happen. No boom continues forever, of course, but there are three factors that will help keep China on a course of fast growth. The first is the huge impact of acquisitive consumerism, the desire among Chinese people to spend, a spirit which is alive at every socio-economic level. Second, the "China as factory to the world" concept, and the phenomenal growth in exports and foreign exchange reserves this generates. Exports reached US$762 billion in 2005, up 28.4% on the previous year, and China’s forex reserves now stand at more than US$800 billion.
And finally, there is the vast inflow of foreign investment, which continues unabated. In 2004, this amounted to US$162 billion, up from US$124 billion in 2003. This could well increase further in 2006 with new impetus given to venture capital and private equity following the recent removal of certain restrictions.
If there is any real trouble facing Beijing on the economic front, it is looming protectionism in the world outside, and the failure of some other countries to accept that goods are best produced where price and efficiency is most favorable. But overall, China can expect a bumper year for investment and business in 2006, and the positive message given out by the GDP recalculation will help underpin this. The inevitable downturn seems unlikely to arrive anytime soon.
Fragility of free trade
An air of gloom has gathered around global trade talks after the World Trade Organization meeting in Hong Kong late last year failed to agree on much more than to keep talking positively about removing trade barriers. Leaders in the West may well agree that open markets are of benefit to all over time, but political realities routinely discard long run considerations, often leading to policy paralysis. It was also unfortunate that the Hong Kong talks only tangentially involved China, instead focusing largely on how subsidies and export financing limit African and Latin American farmers’ access to the US and to European markets. China always seems to be in the background.
Beijing has much to gain from the WTO, because free trade in the end is a win-win situation. While China issues were eclipsed by farm subsidy issues in Hong Kong, dark visions of Chinese exports dominating the world persist, highlighted by the recent news that Chinese high-tech exports have surpassed those of the United States. What will tomorrow bring, the world wonders.
The WTO must promote free trade, and rigorously work to remove supports and barriers. True, dislocations and imbalances can be expected as markets adjust, but imbalances are automatically righted over time by competition. It is not free trade that is to be faulted, but rather monopolies and other restraints on the movement of goods and services.
Sadly, WTO chief Pascal Lamy has a tough row to hoe. As much as he prefers a free trading world, many member states face frightened electorates who find it difficult to see the bright side of that vision. Nonetheless, there is a bright side to be advanced. With America and the EU owning so much of China, and eventually China owning much of America and Europe, there is a growing global asset balance. Twenty years ago, fears were expressed about Japanese ownership of western assets and debt, and 10 years before there were similar concerns over Arab petrodollars buying western assets at an alarming rate.
But over time, everything balanced out, as it will once again. In this way, each country will have a stake in each other’s prosperity and can thus wholeheartedly advance each other’s interests because it will be in the self-interest of all to do so. It is the WTO’s job to teach the world this seemingly simple lesson.
Looking back on Hong Kong, it was unfortunate that China’s huge, and hugely obvious, role in world trade was so overlooked in the deliberations as the WTO became bogged down in old agricultural policy disputes. The meeting would have proved much more productive if it had instead secured agreements from member states to open markets to China, and in turn won accords from Beijing to quicken the pace of its opening up to the world.