Even though oil prices loom like a cloud on China's otherwise sunny economic horizon, the country's rapid growth is likely to continue
In the coffee houses and fund manager boardrooms in New York, London and Tokyo, the astonishingly rapid development of China has become one of the all-time hot topics. The range of attitudes from mainstream commentators is surprisingly diverse, from doom-mongers, who regard it as a threat to Western economic strength and stability to those who see it as an unparalleled driver of global growth. The only point of view it is impossible to find is one of ambivalence.
Even 15 years ago China was regarded by many as a penniless agrarian nation with only its enormous population, large army and nuclear capacity keeping it on the international guest list. Having decided on a radical programme of reform, moving away from a strictly controlled, Soviet-style economy and allowing foreign investment, private ownership and other free market reforms, it has become one of the manufacturing giants of the world, quadrupling its GDP since 1978. In fact, in terms of purchasing power parity, it was the second largest economy in the world in 2003 (although per capita it is still very poor).
More recently, the China issue has come into even stronger focus with the recent startling rise in oil prices. The country's demand for oil matches its appetite for all other forms of economic activity, a serious problem in an environment of $50 per barrel oil. This problem has not escaped Beijing.
"The Chinese do not want to be excessively dependent on imported oil," says Arnab Banerji, economic adviser to Tony Blair and ex-chairman of Foreign & Colonial. "They have a big nuclear expansion programme, a big coal expansion programme and they are looking for any alternative source of energy they can.
"They understand that they cannot follow the pattern of consumption that we in Europe and the US have enjoyed. Oil and other consumption is going up and they are alarmed by that."
In contrast, Western economies have been weaning themselves off reliance on oil prices. It is a well-rehearsed point that oil price comparisons are not inflation-adjusted and so are, in real terms, not at unprecedented levels. But even without that buffer, there are reasons to suppose the situation is not as dire as some commentators would lead us to believe, at least in the West.
According to John Anderson, economist and director of JO Hambro Investment Management: "For a given increase or decrease in GDP there is a figure for the increase or decrease in oil consumption and it is certainly the case that the ratio has been declining in the case of the US and Europe.
"So while a price of $40 was dangerous in the 1970s and 1980s, it is less so now. Some estimates suggest that prices would have to get as high as $60 before they start to have a major impact."
Of course, this is not the case in China, where oil price is much more important. According to Anderson, there has been research suggesting that China's demand for oil is such that a new Saudi Arabia would have to be discovered every seven years to keep up with demand if growth continued at the rate it has seen over the past 15 years, which is 8%-10% per annum.
"I know that China is trying to engineer a soft landing and they may achieve this," Anderson says. "But that would still see growth rates come down to perhaps 7%, and whether it is 7% or 9% does not make a huge difference to the oil demand."
It is not just in its demand for oil that China has caused concern among economists. There is a general fear that the country will start to dominate the global economy, to the detriment of First World countries.
"China is set upon an industrialisation programme," says Anderson. "This is leading to the same story that is told by every country that goes through an industrial revolution: a huge movement of people from the country into the cities, coupled with an attempt to make the state sector more efficient."
This movement of people away from traditional agrarian jobs has caused a huge problem in China: it has become necessary to find jobs for approximately 12 million people a year. And the easiest and quickest way to create employment is to allow unrestricted growth of the manufacturing sector.
However, the fear that China will suddenly become a dominant global economic force to rival the US is overstated, according to Anderson. This is because, firstly, there is a degree of self-correction to almost all economic phenomena and, secondly, because these things take much longer than most people expect.
"People think changes happen overnight but they don't" he says. "Japan took 30 years to recover from the war and become one of the world's largest economic powers. It is going to take China at least 30 years to do the same. But remember, we have already had 10-15 years under our belts."
Naturally enough, the issue of China's position in the world has quickly become a political one, with regional interest groups angling to defend themselves against the perceived threat of a new economic force. This is especially the case in the manufacturing industry, and the idea that Western manufacturing is going to be destroyed by China's ability to undercut every competitor has gained currency among both politicians, lobbying groups and the media.
However, according to Banerji, the fear that we will all be made poorer by China's success has come about due to a fundamental misunderstanding about the nature of global trade and the dynamic of imports and exports.
"It must be remembered that foreign capital can only be used for imports," he explains. "It cannot be used for domestic purposes. If I give a Chinese person a £10 note, they can only spend it on UK goods. Because if they spend it on domestic goods, all they have transferred is the IOU to somebody else in China. If they spend it on German goods, then the German is left with that IOU and, at the end of the day, the German must spend it on UK goods."
So all you do when you give money to a country is fund your own exports. In fact, all aid and investment must in the end fund exports from the giving country.
The worry that China will swamp the world with exports, to the detriment of everyone else's economies, is therefore unfounded, according to Banerji.
"If China, for any reason, exported, say, a lot of television sets to us, then what do we give the Chinese? Well, we give them pound notes and, eventually, the Chinese will import from us. If they do not import then they have given us a load of television sets and they are sitting on a load of paper. Sooner or later they are going to import on the same scale, pound for pound, that they exported, which encourages global growth."
A case study
Banerji continues: "Let's consider two economies side by side - let us call them A and B. A has the advantage that it has exactly the same skills as B in every area but the costs in A are half those in B - in everything from investment and banking, right down to making socks. Can the two trade profitably? This has been explored in economic theory for 200 years and the answer is yes.
"Different industries have different labour compositions, so, for example, shirt manufacturing is more labour intensive than car manufacturing. Let's say, for argument's sake, that in the UK, a car costs the same as 500 £20 shirts (£10,000). In China, they may be cheaper and more efficient at making both cars and shirts, but the internal relationship in China could be that a car costs 1,000 shirts. If it costs 1,000 shirts in China, then it makes sense for the Chinese to export those 1,000 shirts and buy import two cars, because locally they could only buy one car for 1,000 shirts. That is even though their internal unit costs are lower than ours.
"That is why when people talk about the competitiveness of nations, I want to wail," Banerji concludes. "Adam Smith dealt with this 200 years ago."
That is why the Japanese are so sanguine about developments in China, according to Banerji: it is helping drive the growth of the Japanese economy. It is having a similar effect on south-east Asian growth. It is true that the Chinese can be fiercely competitive in places where they wipe whole industries, but the paradox is that they will be forced to be severely import-dependent in other areas.
Generally speaking, economists know this but it has become a public issue, which makes rational debate difficult.
"Last year, the US Council of Economic Advisers said that outsourcing was not a problem nor is the manufacturing boom in China - it will boost US growth. But they were howled down and it has now become an electoral issue. This is despite the fact that all the economists at the World Bank and the IMF, all agree on one thing - it is not controversial."
So although coffee houses and boardrooms in New York, London and Tokyo will continue to hum with more or less informed discussion on the China question, people will not be forced into continuing their conversations in boardrooms and coffee shops in Bejing anytime soon.
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