Still full steam ahead for China

All economies continually face problems, though. The most serious one for China now is inflation, followed by the need to control the buildup of local government and other debts. But given China's GDP growth of 40-plus percent in four years, its problems are far less serious than those of the US and the EU.

This should settle the debate among non-Chinese economists on whether China, or the US and EU would emerge the most successful from the global financial crisis. Some non-Chinese economists rightly predicted that China would grow rapidly despite facing some problems, which would be overcome by economic fundamentals, and it would have a "soft landing". Jim O'Neill, former chief economist of Goldman Sachs, who coined the term BRIC, is probably the best known among them.

But others predicted China's economy would perform badly and the US would recover from the financial crisis faster than China. The most extreme among them, such as US hedge fund manager Jim Chanos, feared an economic catastrophe in China. But it is clear that China has come out of the financial crisis almost unscathed, while the US has hardly registered any growth.

The impact of the slow growth of the developed economies on China is that it will have to rely even more on a combination of higher domestic demand and growth of other developing economies. This should not be a difficult task, because seven of the 10 fastest growing economies last year (in terms of dollars) were developing ones - China, Brazil, India, Russia, South Korea, Indonesia and Mexico. The growth in the developed economies in 2010 was $1.6 trillion, whereas in the (World Bank classified) middle-income economies such as China, Brazil, India and Mexico it was $3.3 trillion.

This is not a short-term trend. If we take a five-year period starting before the financial crisis, the average annual growth in developed economies was $1.4 trillion, while in middle-income economies it was $2.0 trillion. Not only in percentage, but also in absolute dollar terms the growth in developing economies is greater than in the developed ones. The trend is of great advantage to China.

Chinese companies face tough competition in advanced markets, where they are up against globally famous brands. But in the developing economies, Chinese companies such as Haier and Huawei are building up strong positions. Their fast expansion in the developing economies, in turn, brings in rapidly increasing revenue that they can plough back into research and development to bolster their challenge in the developed markets.

Mao Zedong once said that in the struggle in China "the countryside will surround the cities". The global economic situation today could be described in similar terms. Slow growth in the advanced economies and rapid growth in the developing ones have created a situation in which Chinese companies are building up strong positions in the "countryside" of the global economy, from where they will be able to challenge its "cities".

The author is a visiting professor at Antai College of Economics and Management, Shanghai Jiao Tong University.

(China Daily 08/20/2011 page5)

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