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China’s Growth Up To 2015 Omkar Goswami
Twice a year, I have the good fortune to spend a couple of days at a time as a participant in a close-door forum called the Global Strategy Group. It comprises some really well known commentators on world affairs — Jeffrey Garten, Strobe Talbott, Fareed Zakaria, Shashi Tharoor, Josef Joffe, Fan Gang, Wang Jisi, Claude Smadja, Clyde Prestowitz, Fouad Ajami, to name just a few. At this time’s meeting, a major theme was the rise of China and what it means to the US. Here are a few conclusions that emerged.
First, barring any cataclysmic event like a pandemic human version of avian flu, there is little doubt that China’s real GDP will grow at an average of around 8.5 per cent per year in the next seven to ten years. Add to that an inflation rate of about 3.5-4.0 per cent per year, and we will be seeing China’s GDP at current prices rising from $2,585 billion in 2006 to over $7,050 billion in 2015. Just to give a comparison, if India were to grow at 8 per cent with 5 per cent inflation, its nominal GDP will increase from $680 billion to $2,040 billion over the same period.
Second, it is a fact that the Chinese political authorities are getting increasingly concerned about rising income inequalities between the haves and the have-nots, as well as between the south and south eastern sea-board and the interior provinces. Even so, lessening inequalities by creating greater domestic demand throughout China will not be a quick and easy task. At present, private final consumption accounts for less than 45 per cent of China’s GDP. At best, this will go up by five to seven percentage points in the next ten years.
This brings me to the third point. With private domestic consumption unlikely to increase beyond 52 per cent by 2015, China’s growth will continue to be heavily dependent on exports. For 2006, China exports are estimated to be $930 billion. By 2015, even if the share of exports to GDP fell from the present 36 per cent to 30 per cent (because of higher domestic demand), the country will still sell over $2,100 billion of merchandise to global markets.
Thus, China’s dependency on world trade will be huge — and especially contingent upon US and EU imports of Chinese goods. Hence, the fourth point: China will not revalue its currency in any sharp way to destabilise exports. The renminbi has crept up by 4.4 per cent since China re-valued it in July 2005. Don’t expect it to do anything other than a soporific, indistinguishable creep — a Chinese slow boat going to nowhere.
But with growing political groundswell against China in the US, trade imbalance with the US will necessitate continuing a quid pro quo. That’s my fifth point. China will seek to politically manage its growing trade and current account surplus with the US by continuously buying Uncle Sam’s treasury bills. According to present estimates, something like 70 per cent of China’s $870 billion of foreign currency reserves is in US T-bills. Don’t expect that ratio to change in the near future. China needs the US for its exports. The US needs China to finance part of its huge current account deficit. China will do everything to keep that symbiosis going.
Finally, Chinese growth critically depends on energy. Coal is not enough. Besides, it is an inefficient and dirty fuel. Realising this, China is rapidly locking into global oil and natural gas sources for the future. It is now very clear that China will be a huge consumer of Russia’s gas in eastern Siberia. Already, eastern Russia’s pipelines are being extended to south of the border. This energy nexus will create a powerful Sino-Russian axis, which is bound to have its repercussions in the US. And China will have to deal with that.
The long and the short of it: China is well on its way to becoming a global economic super-power. By 2015, if not earlier. You can bet your fortunes on that, and never go wrong.
Published: Business World, June 2006
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