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China's Explosive Economy: Help or Harm?

by Stuart C. Strother

As the Boeing 737 descends toward the Chengdu airport, behind me sit two elderly Chinese farmers with their toddler grandson. Intimidated by the flight attendant who firmly scolded them to sit down and fasten their seatbelts for the landing, the couple spread out newspapers and allow their grandson to relieve himself right on the floor of the plane.

This crude story illustrates China’s economic miracle of quickly pulling millions of her citizens from abject poverty into the ranks of the global middle class. My fellow travelers, these farmers, probably never had the means to purchase airline tickets before, but have recently experienced what the Chinese call a wealth “explosion.” Most likely, a son or daughter moved to a major city, struck it rich in business, and can now purchase formerly out-of-reach luxuries such as airline tickets.

Just how fast is China’s economy growing? The U.S. economy typically grows by just 2–3 percent annually, but in recent years, the Chinese economy has grown by about 10 percent each year. When I first visited China in 1993, it didn’t matter how much money I had in my pockets; there was nothing to buy. In 2000, when I lived in Shanghai on a two-year teaching stint, everyone still rode bicycles. These days, store shelves are packed, the roads overflow with private cars, and the shiny new subway systems extend their tentacles across the city map. What caused this explosive growth?

China's Rise and the Global Economy

Part of the impressive growth stems from the simple math of starting near zero. The implementation of communism in the 1950s and 1960s nationalized productive industries, collectivized agriculture, closed foreign firms, and ostracized China’s most educated citizens, especially the entrepreneur class. Many fled the country. My friend Leah’s family ran a bakery in Zhejiang at the time. Mao’s Red Guards closed the business and forced the family to work on farm collectives. Mao Zedong did well to establish what many call “New China,” but his economic policies, especially the Great Leap Forward and the Cultural Revolution, resulted in deindustrialization, famine, and the ruin of the economy. Apparently, the tasty cakes at Leah’s bakery were too great a threat to communist rule.

“Poverty is not socialism; to be rich is glorious,” explained China’s new leader as he broke from Mao’s policies and enacted widespread reforms that transformed China’s economy from a dysfunctional totalitarian state to what is today mostly a market economy. Premier Deng Xiaoping’s Open Door policies attracted the return of foreign investment, and the Deep Reforms modernized and deregulated much of the economy. Today, with the exception of security, defense, and media, nearly every sector of the economy is market-based.

In the 1980s, foreign firms such as General Electric, General Motors (GM), and Volkswagen renewed their China operations, opening factories in the new Special Economic Zones that offered tax breaks and other incentives. Foreign firms engaged the Chinese economy for two key reasons: sourcing or selling. In the 1980s, Chinese labor was very cheap, so foreign firms opened factories in China to cut manufacturing costs. The consumer market, albeit large, was poor in the 1980s, but in recent years, consumer spending is on the rise. Many foreign firms from Pringles to Panerai, from McDonald’s to Maserati, derive a significant amount of their income from their China operations.

Most foreign firms entered into mutually beneficial joint ventures with local companies, and while the foreign firms were able to expand their businesses, the local firms acquired foreign technology, allowing the Chinese economy to advance up the value chain. Factories specializing in laptops and Cadillacs are replacing those that once made paper clips and underwear.

Workers’ wages and consumer purchasing power have significantly grown since the beginning of reforms. Today, China’s 1.3 billion consumers make up one-seventh of the world’s population. About half are in cities and the rest in the countryside. Aggregate national statistics, such as average per capita gross domestic product (GDP) of just $5,434, make China appear as a poor, developing nation, but the wealthiest 300 million urban consumers comprise a consumer market equal in size to the entire U.S. population with similar discretionary income.

China and the U.S.

China boasts the second-largest national economy after the U.S. and just ahead of Japan. At the current growth rates, China’s economy can equal that of the U.S. by 2021. Today, 54 of every 100 renminbi spent in China goes into investment rather than consumption. The Chinese people and their leaders understand that growing tomorrow’s economy requires forgoing consumption today and investing in the future instead. Just as in the U.S., the Chinese national government uses borrowed funds to cover some expenditures. Unlike the U.S., however, the Chinese government stockpiles foreign exchange, putting the government in a relatively strong position for future growth, especially as compared to the U.S.

China is often portrayed as a predator exporting cheap goods and refusing to purchase foreign goods. However, the aggregate data reveal China and the U.S. are peers in terms of import and export volumes. In fact, in recent months China has experienced record trade deficits, meaning they have imported more than they’ve exported. The economy relies heavily on exports, with foreign trade accounting for a third of China’s GDP. Agriculture, industry, and government typically dominate the economy, but in recent years, individual consumption also increased despite their Confucian penchant for thrift. While the older generation still saves, the new generation spends. My Chinese friends in their fifties will walk a mile or catch the bus to save a dime, whereas my younger friends will readily pay for a taxi.

Is China a Threat?

Those who label China an economic threat cite trade imbalance and devalued Chinese currency. But these weakening arguments don’t tell the whole story. In the U.S., we consume more than we produce, so we must import additional products from our foreign friends. The trade imbalance is not a result of Chinese hostility, but rather the insatiable appetites of American consumers. They send us goods like TVs, and we send them dollars. They have to do something with those dollars, so the Chinese government purchases U.S. Treasury bonds. Because the U.S. government spends more money than it collects, it must borrow money by issuing bonds. When the U.S. Treasury issues bonds, the People’s Bank of China (PBOC) is the main purchaser of the debt. In fact, in early 2012, the Treasury granted the PBOC unprecedented direct electronic access, bypassing traditional primary dealers.

Today, the Chinese government holds more than $1 trillion in U.S. debt (slightly more than Japan). U.S. politicians regularly pressure China to revalue its currency to strengthen it against the dollar. But every time they do, their dollar-denominated holdings lose value. Despite these losses, the Chinese renminbi has been devalued by nearly 40 percent since I began taking APU students to China. We certainly feel the changes in the field—an ice cream that cost $.45 in 2005 is now $1.35.

In my opinion, China is not a threat to the U.S. in terms of the trade imbalance or currency matters. Intellectual property rights (IPR) are another matter, however. Chinese industry still covets foreign technology. The battle we lost in low-tech manufacturing, especially textiles, now moves upstream. For example, in exchange for access to China’s markets, GM transferred 100 years’ worth of automotive technology to China in 5 short years. Now GM’s joint venture partner, Shanghai Automotive Industrial Group, manufactures equivalent cars right across the street from GM’s ­­­Shanghai plant.

On a recent study abroad team visit to IBM in Beijing, we asked them about IPR risks. The manager laughed and explained that IBM’s technology is so advanced that no one can pirate it any time soon. Similarly, during a student field trip to Boeing in Shanghai, we asked about IPR risks. The manager also scoffed, “If we gave you all the parts you need to build one of our airplanes, you couldn’t do it.” Innovation is the key to winning the technology wars. Like Apple products, or even the Ralph Lauren Polo uniforms for the U.S. Olympic team, higher-level activities such as design, technology, marketing, and distribution still occur in the U.S. Only the manufacturing of these products occurs in China, and manufacturing does not necessarily add greater value to the firm than these other activities. Apple understands this, which is why the backside of your iPhone says, “Designed in California, Assembled in China.”

China’s rapid economic growth is not without pain. Some of the issues include intellectual property violations, sweatshop work conditions, income inequality, environmental pollution, currency issues, corruption, and tainted products. As public governance and private compliance continue to improve, it is likely these problems will significantly diminish.

From the perspective of business and economics, China’s prosperity is a good thing. The world economic pie is not fixed. That is, when China grows, it may take a larger slice of the pie, but the entire pie also grows, and all of us end up with more pie. If China has its way, however, it might be red bean pie and green tea instead of apple pie and coffee.

Over the past eight years, I’ve had the privilege of leading 19 APU study abroad trips to China. Our 229 students have studied at Zhejiang University, visited factories and offices, and toured historic sites across the country. We have witnessed the growth of the economy, and even the transition from a backward agricultural land to a sophisticated modern place. The dark days of totalitarian rule are clearly over, and the people we meet exude an extreme optimism rarely seen elsewhere. As foreign friends, we should celebrate China’s progress, assist her in her development, and embrace her people, including the nouveaux riche farmers learning to navigate the ins and outs of air travel.

Stuart C. Strother, Ph.D., is a professor of economics in APU’s School of Business and Management. He is the author of the recent book China: Doing Business in the Middle Kingdom (Business Expert Press, 2012) and Living Abroad in China, which is in its third edition (Avalon Travel Publications, 2013). sstrother@apu.edu

Illustrations by Caitlin Anne

Cultural Fact: In Eastern cultures, the Dragon symbolizes power, strength, and good luck. The Snake represents prosperity, encouraging new ventures and connecting with new friends. This illustration combines the symbolism of both.
"The Chinese people and their leaders understand that growing tomorrow's economy requires forgoing consumption today and investing in the future instead."

Originally published in the Spring '13 issue of APU Life. Download the full issue (PDF).