Chinese Economy on Fast Track

The size of the Chinese economy is likely to climb, in world rankings, from its current position as the sixth largest to the second largest by 2030, said economists with global investment bank Lehman Brothers.

With its gross domestic product (GDP) growing at an annual rate of 6 per cent, China will come in after the United States to secure the second place spot, the economists said.

Such an economy stands to offer exciting business and capital market opportunities to foreigners over the next 10 years or so, said Robert Subbaraman, a Lehman Brothers senior economist who is the co-author of a newly released comprehensive report on China's economic, political, social and foreign policy prospects over the next 10 years.

At a press conference last week in Beijing, Subbaraman and his colleagues offered detailed explanations of their forecasts regarding the impact of the country's accession to the World Trade Organization (WTO), growth opportunities and how to do business in China.

WTO impact

China's economy will be disrupted in the short term, but in the long run, it can benefit immensely from its WTO entry, said Subbaraman.

Rising numbers of bankruptcies and displaced workers are likely, as increased trade competition after the WTO forces a reallocation of resources away from protected and less competitive industries to sectors where China has more of a comparative advantage, he said.

According to the International Monetary Fund, WTO accession will subtract 0.3 per cent from China's real GDP growth in the first year.

Subbaraman said potential losers from the accession include the highly protected agricultural, telecommunications and banking sectors and some of the more capital-intensive ones such as the auto industry.

Besides short-term adjustment costs, WTO accession will have a profound effect on the composition of China's balance of payments, he said.

The reduction in trade barriers will lead to a substantial increase in merchandise imports but only a modest rise in exports.

Furthermore, WTO entry will help spur the development of the legal and regulatory framework and accelerate reform in the bank and enterprise sectors, thus creating demand for foreign services -financial, accounting, management consultancy and legal-to support restructuring.

As a result, the current account surplus of US$20.5 billion in 2000 is likely to deteriorate and could sink into a small deficit by 2003, Subbaraman said in his report.

However, the deterioration in China's current account should be more than offset by an improvement in the capital account, noted Paul Sheard, chief economist for Lehman Brothers Asia.

The liberalization of China's services sector should attract stronger FDI (foreign direct investment) inflows, while measures to strengthen the rule of law and to broaden and deepen the bond and equity markets should help deter portfolio capital flight.

"On our estimates, actual FDI will soar from US$46.8 billion today to around US$65 billion by the end of 2003," he said, adding that China's overall balance of payments surplus is expected to increase steadily in the coming years.

"This means that the tendency for the RMB will be to appreciate once China begins to move toward a more flexible exchange rate regime," he said.

In the long run, WTO entry is expected to add around 1.3 per cent per annum to China's GDP growth, he added.

"We are optimistic that China will achieve an average 6 per cent growth over the next two decades," he said at the press conference.

Business Bible

In the report, Subbaraman said the answer to the question: "Should we be there?" is a cautious "yes" for multinational investors with a global foothold.

On one hand, China is steadily moving towards a market-based economy and its recent WTO entry will accelerate this, he said.

Furthermore, globalization and the information age have spurred the pace and momentum to dramatic levels.

On the other hand, there are risks, especially for foreign investors over the next two to three years. China's WTO accession will result in painful adjustment costs in conjunction with unfinished financial and State-owned enterprise (SOE) reforms, as well as rapid urbanization, he said.

"But our near-term assessment is that, provided macroeconomic policies remain accommodative, the economy will weather this difficult period, very likely averaging GDP growth of around 7 per cent," added Subbaraman.

He said there is hardly any fixed formula for success in China, but foreign investors need to pay attention to several points:

The China context: China's history, culture and present situation make it a unique heterogeneous environment, which will bear heavily on commerce and should not be ignored.

The profit motive: Chinese understand the profit motive. So once a foreign investor establishes an apparent willingness to bear a loss, it can prove remarkably difficult to turn that stance around and into profit.

Building from the bottom: There is no place for firms looking to get in, make a quick killing and get out again. The best returns are going to be made by those firms that are prepared to invest real time and effort in China.

"And keep in mind that significant amounts of both will likely be necessary to identify and then establish an initial niche," said Subbaraman.

Inevitable slowdowns: Like that of any economy, China's progress will not be smooth, for both cyclical and structural reasons. Firms operating in China should be prepared to put up with setbacks too, as the economy goes through lean years alongside the fat.

The global context: China's emergence as a major global player, both economically and politically, will inevitably bring conflicts in commercial relations.

But the overall probability is that, for the foreseeable future at least, these will be contained and defused without long-term negative impact on firms prepared to ride out the squalls.

BACK