Value added manufacturing and services need to develop

China will leapfrog the US to become the world's biggest economy by 2020, a study by investment bank Daiwa Capital Markets predicted, adding however, that the mainland's manufacturing must become more value-added and its service sector expand fast enough for this to happen.

These are the most basic requirements the government of the now-second largest economy needs to accomplish over the next decade. Without them, the "China miracle" that has been 30 years in the making could well end up a "China crisis", said Sun Mingchun, head of China Research at Daiwa Capital Markets Hong Kong Ltd, after releasing the study Friday.

There has been much talk of China moving to the top spot after it overtook Japan as the second largest economy at the end of 2010. However, experts are divided on the exact timing. The International Monetary Fund has predicted this would happen in 2016, basing its forecast on purchasing power parity. The World Bank, however, has been more cautious, saying China would rise to first place in 2030.

China is probably well on track to become the economic superpower. Its GDP has been growing by double-digit rates for 30 years in a row. The first quarter of this year saw the economy expand by a better-than-expected 9.7 percent after the accelerating inflation and aggressive monetary tightening led economists to turn down their forecasts.

Assuming that China's real GDP expands by 8 percent year-on-year between now and 2015 and 6 percent in 2015-2020, with the US growing at the same rate as in the past, China should surpass the US by 2020 to become the largest economy, with its GDP per capita reaching a level higher than that of Saudi Arabia today, according to the Daiwa study.

In that scenario, China's nominal GDP per capita, which stood at $4,400 in 2010, should reach $8,600 in 2015 and $15,500 in 2020. But this, if it happens at all, will come at the cost of labor-intensive manufacturers. As incomes rise, low-cost domestic manufactures will find it hard to compete against rivals like India and Vietnam, Sun noted.

And lost manufacturing orders would probably not be all. Investment, which currently makes up around half of China's GDP, will be drained as manufacturers start to move their factories out of China and into lower-cost countries. Without the investment, the stellar economic growth China has so far achieved will be hard to sustain. This explains why the central government has been keen to steer the economy from investment-driven to consumption-driven.

To keep the investment home, China's manufacturing sector will have to "move up the value-added ladder", said Sun. Domestic manufacturers have in the past been merely imitating their western counterparts, he said.

But there are costs to this, Sun reckoned. Some 50 million jobs may be lost over the next decade as the manufacturing industry climbs the value-added ladder and becomes increasingly capital and technology-intensive. As such, a booming service sector will be needed to absorb the laid-off and any new migrant workers as China's urbanization drive gains momentum, the Daiwa study noted.

As at end-2009, the service sector accounted for 34 percent of the country's employment, a fairly small share compared with 70 percent to 80 percent seen in developed economies.

China Daily

(HK Edition 05/07/2011 page2)