Rise of China's economy

China has rapidly risen over the past decades ever since Deng Xiao Ping advocated the opening up of the Chinese economy in 1978. As a result, China is now the fourth largest economy in the world behind the US, Japan and Germany. It is poised to take over the pole position in the future, but the question is, when?

Many analysts estimate that time to be in 2050. In my opinion, China will definitely be the first in the future but I do not believe it will be in the next 40 years as far as current trends go by. China's growth rate has hovered around 9% for many years now. If one is to project linearly, yes, China will overtake the US economy by 2050. However, this is a big "IF". How can one be so sure that China can sustain its bullish economy over the span of four decades?

What I believe is that, unless some drastic policy measures are implemented, China's explosive growth will be derailed sooner or later. I have three points in mind to support my argument.

1)China has to stimulate its domestic consumption. The Chinese economy has been and continues to be too dependent on export-driven demand. If you need to depend on outsiders, you will not be the first. I base this statement on the way the US economy is being run. The US economy is highly diversified to include not only exports but also high domestic demand. Even if the global economy falters, US businesses can still depend on domestic consumption. This inevitably results in the US having a massive trade deficit with the rest of the world. Back to China, boosting domestic consumption is tough as most Chinese are poor and cannot even afford to buy many of their "Made in China" goods. To make this succeed, I have several policies in mind that China can undertake.

The first is to revamp its social security system. China has one of the most extensive social security systems in the world, and yet, it ranks one of the worst in terms of implementation. Officials from many levels in the bureaucratic hierarchy siphon off money meant for the citizens. The people feel so disenchanted with the system that they are unwilling to depend on it. They save every ounce of money that they earn. This effectively suppresses spending as people are locking up money in banks instead of channelling it back to the economy.

Relating to the above, China imposes strict capital controls on the way deposits are handled. People cannot simply take their money out and put it into foreign banks. To curb this, China should increase its interest rates it offers to local depositors. Although its rate has been increased recently to 2.79%(China Central Bank), it is still lower than those offered by foreign banks such as Citibank's 4.88%. China does this partly because it does not want its fragile local banks from facing a large outflow of money. Due to their large debts and uncontrolled lending in the past to state-owned enterprises, Chinese banks are facing a large chunk of bad debt that may take aeons to clear. By loosening capital controls, the very backbone of any economy will fall and bringing the Chinese market down with it. In order to effectively unravel this tangled mess, China has to first bail out all these banks as it has begun to do. This is a costly measure, but better to bite the bitter pill now then to suffer the consequences later.

2) The current system of government has to be changed. Currently, China is pursuing a slightly modified form of the Soviet-era government. History has shown time and again that the communist model of government simply cannot sustain itself in this world of liberalism and free speech. The people in China still ask themselves, since they have the freedom to trade goods and services, why are they still being denied the freedom to speak out and choose their government?

This modern world is totally different even from half a century ago. Today's world is increasingly interconnected and he who possesses the most up-to-date information is the master. No longer is muscle power or resources the only decider of which country will succeed or fail. It is the innovations of the people that will drive the future economy. Right now, China is simply relying too much on manual labour for its industrial output. Its continued censorship and suppression of media has resulted in the lack of creative thinking among its people. My instinct tells me that this is due to the current political situation in China. The communist government is trying to suppress any element of society that tries to bring in any alternative viewpoints.

You can try to censor the Internet, but I can always devise ways to break your firewall or go through proxy servers, and that is the mindset of some highly-trained-overseas IT professionals. This is the same for most overseas graduates who return to China. After being addicted to the taste of free speech in foreign lands, they will question why this is not available back home. They hate the way information dissemination is dictated by the authority. They feel that information should be freely accessible to the masses. The current younger generation of China is China's future; their demands have to be met sooner or later when the older generation is gone. I'm sure no one wants to wait for the latter to happen as that would lead to serious political upheaval.

3) The lack of enforcement of intellectual property (IP) rights is a major concern. For those who do not know what is IP, I shall explain it briefly. According to Microsoft's Encarta, IP is "original creative work manifested in a tangible form that can be legally protected, e.g. by a patent, trademark, or copyright". China currently has one of the world's highest piracy rate that exceeds 90% for software.

Right now, China is really lax in the enforcement of such rules. This is understandable considering that many Chinese simply cannot afford the exorbitantly priced American-made software. If it were to enforce these laws strictly, many Chinese people and businesses will suddenly be placed in the situation in which they have the hardware but cannot afford the software to run it.

Another reason could be the to use of this as a protest against American dominance in the world's software market. With most software being written in America, China feels that it is placed at a significant disadvantage when it comes to setting standards in one of the most value-added sector of the world's economy.

The last possibility would be to create a political bargaining chip against the US. China's economy represents a potentially huge market for US high-tech corporations and film industries. China is obviously hedging its bets on this policy to bring in benefits from the global economy that it perceives to be unfair to developing nations.

However, this policy works both ways. This has resulted in many local Chinese companies being reluctant to develop their own IP for fear of ending up in the same fate. At the same time, those who do create IP do not make much effort in continuing their efforts since they think that it will all be wasted anyway. IP is not just limited to software and the media. It is also the protection of inventions. Before people can innovate, they need to have the assurance that others will not copy their creation. To do that, there must be a comprehensive system of legislation and enforcement in place. The latter is what China is sorely lacking. If not for World Trade Organisation rules, the former would not even be in existence.

In conclusion, China will definitely attain its superpower status. But it still has a long way to go before it achieves that. There are still many milestones for it to overcome. Nevertheless, once the dormant giant has woken, there is no turning back. As a lone, insignificant observer in a little red dot on the world map, I can only learn to embrace and adapt to this new change.

On my next article, I will talk about the success and failures of the modern capitalist economy and I would be bringing back the idea of a socialist economy. Why did it fail in the past? Is there a chance we may be using this system in the near future? Stay tuned to find out.

By Yeo Kheng Meng