GDP growth has roared at high levels for years – an average 9.3% through the '80s and 10.1% through the '90s. And the growth problem persists year after year into the new century. China has no shortage of headaches, but high growth is one any other country would be thrilled to have.
Who could have imagined China, so overwhelmed for so long by a huge, poverty-stricken population, by a long history of bloody fractiousness and by often violent and bizarre experiments of re-invention in the socialist era, could today be closing in on the world's top-five economies?
The economic story is all the more remarkable because it was not 55 years in the making, but less than half that. Its beginnings date back only to 1978 and the launch of Deng Xiaoping's "Open Door" policy.
In the early years of the People's Republic, China's revolutionary managers gave people a taste of some of socialism's upside, but the economic means of sustaining these benefits turned out to be impractical, and the man who was prepared to concede that was Deng Xiaoping. After mind-numbing disasters like the Great Leap Forward and the Cultural Revolution, Communist China was indeed lucky to have survived long enough to see his return to power in 1978, for it was running out of time.
Deng started with special economic zones, the first step in what would eventually lead to a stage by stage partial dismantling of the state enterprise system, in step with an increasingly market driven philosophy.
Harking back in some ways to the China treaty ports of the 19th century, special economic zones opened up in cities along the coast, welcoming foreign investment in to put cheap Chinese labor to work making things consumers in the West wanted.
But the first "foreigners" to see the advantage of setting up manufacturing plants in China were not foreigners, in fact, but Hong Kong "overseas compatriots." After 1979, Hong Kong manufacturing migrated across the border into the Pearl River Delta, leaving the territory's working population to migrate to the services sector.
Hong Kong's services sector blossomed, for it was quickly realized that with manufacturing mushrooming on the Mainland, an impeccably functioning service infrastructure close by would be essential.
The Shenzhen SEZ, the most spectacular performing of the five, delivered an 38% annual compound annual growth from inception in 1980 to 2003.
Four other SEZs were launched at Shantou, Zhuhai, Xiamen and Hainan. Gradually, China opened up other coastal cities and inland areas to foreign investment. Free trade zones, tech zones and other economic development zones started to appear. Together, they fed China's export boom and became conduits for technology transfer into the country.
Money followed money. After Hong Kong investors claimed Guangdong and pockets of other provinces, overseas Chinese investors – from Malaysia, Singapore, Indonesia and elsewhere, came in after them; then Taiwan investors started pouring in; after them, the multinationals arrived in greater numbers, many of them recognizing that China was not just a cheap manufacturing base anymore, but potentially a vast market that would grow on the back of all the investment inflows. Reaching US$50 billion in foreign direct investment in 2003, China was named the world's leading recipient of FDI by the Organization for Economic Cooperation and Development.
Investment priorities of offshore investors, the OECD surmised, were diversifying from purely low-cost manufacturing and starting to focus on market development. And now the mainland stands poised to receive perhaps the smartest money of all – domestic Chinese money, many trillions buried under mattresses and floorboards waiting for not the next deadweight state enterprise to list, but for genuine growth opportunities. When the markets are in better shape and the banks start offering products worth buying, the term pent-up demand will explode into meaning.
Local money is smart in the sense that it is best positioned to invest in the things China needs and the market will demand, and it is perhaps less likely to be wasted in scams perpetuated by the Gitic's and D'Long's, and other giants of scamdom. These operators have dragged China's name through the mud since China took its first steps away from central planning, thanks to uneven regulation and lack of enforcement, lack of disclosure, property scams (most recently perpetuated by members of the Zhuhai municipal government) and assorted other evils that have plagued private and public partnerships and certainly China's stock markets, for years.
In such a vast, swirling country as China, it is remarkable that reforms have been put in place as fast as they have. But that pace needs to quicken if China's full potential is to be realized. Drawing on only a fraction of it, China managed to quadruple its GDP between 1978 and now. "Measured on a purchasing power parity (PPP) basis, China in 2003 stood as the second-largest economy in the world after the US, although in per capita terms the country is still poor," notes the CIA's World Fact Book, crediting China's welcoming of foreign investment and market economics for huge improvements in industry and agriculture. "The leadership, however, often has experienced – as a result of its hybrid system – the worst results of socialism (bureaucracy and lassitude) and of capitalism (growing income disparities and rising unemployment). China thus has periodically backtracked, retightening central controls at intervals."
Indeed, the leadership had been perennially conflicted by the challenge of pushing ahead with further reforms that it knows are needed, and rescuing doomed state enterprises to prevent unemployment from bursting through some unmanageable threshold. Estimates vary, but some suggest as many as 120 million workers are surplus to the economy – and that real unemployment is over 20%. Indeed, Rand Corp economist Charles Wolf recently warned that pressure to raise productivity while maintaining high economic growth would compromise Beijing's efforts to reduce unemployment and this disturbing process had already shown up in the data: whereas China used to create one million more jobs for every one-point GDP increase, Wolf said, the 1% increase now produced only 700,000 to 800,000 new jobs. From 1998 to 2002, when GDP grew an average 7.8%, and labor productivity an average 6.7%, employment rose only 1%. Rand data also showed job growth consistently falling further behind growth in the working population, severely so in China's countryside.
Everything in China is several scales removed from the experience of other economies. Its GDP grows by giant increments year after year, and no longer from a small base; its unemployment rate is higher than it would appear. Yet China is approaching the turning point, of moving from cheap labor pool to huge market, helping to shore up US debt markets, Boeing and US soybean growers. Its industrial landscape is now populated with enterprises from car makers to garment companies, fired by cash injections from offshore listings and looking to acquire assets overseas.
Like China's oil giants scouting Africa and elsewhere for promising fields, Shanghai Automobile Industry Corp (SAIC) is rumored to be looking at buying the UK's last independent car company, MG Rover. Completing the circle, China now seeks to graduate from OEM, or original equipment manufacturer, status to global brand status, stalking international properties such as Ford stalked Volvo. To get there, China will focus more on R&D, attracting more higher-value investment but also investing more – a subject this month's cover story explores.
But China must tend to other areas rigorously. Although China's auditor general has been lifting the veil on some woeful examples of corruption and waste, China's administration still has much room for improvement on transparency.
China's markets and banking systems are still a rallying ground for protected interests. The only promise that unreformed markets hold is that misallocation and waste of resources will continue at a time when the resources will be more needed than ever. Cities are choking, deforestation and desertification continue, and some rivers keep growing thicker with crud (although it can be argued that China's industrialization process is cleaner and less damaging than the equivalent process in Europe and North America a century ago).
Year after year double-digit growth cannot go on forever. It is impossible to know what the future will bring. Who would have predicted Tiananmen? Or 9/11? Or that Hu Jintao's future son-in-law would be one of China's most successful venture capitalists (the founder of Sina.com, Daniel Mao)?
The only sure thing is that when Chinese energy is allowed to get on with business, business happens fast. Speed will be needed to confront this country's more pressing problems. As China makes its collective birthday wish and blows out the candles marking its 55th, it should spare a thought for all the incredible potential just waiting to be released.