IJM, Volume 2, Issue 2 (2015)

e-ISSN: 1694-2299 | p-ISSN: 1694-240X

China: Striving towards world dominance Sandeep Bhasin Amity International Business School, Amity University, Noida, Uttar Pradesh, India

Abstract The relationship between military might and world dominance has been analyzed and deliberated upon for some time now. We have witnessed Superpowers fighting it out in the battlefield to prove their dominance.

But it goes beyond the obvious. The real battles have been to corner the natural resources, which, in turn, help the owner of these resources dominate world trade. They would go to any extent to control the

resources, whether through war or those strategic tie-ups. Through this piece, I present various possible scenarios from the perspective of world leader United States and emerging leader China that could unfold in future. This is the scenario of World Dominance. These are a set of scenarios on how China would compete

with the rest, to dominate the world trade. To build the scenarios, I consider the GDP, the GDP at Purchasing Power Parity, the consumption in domestic markets, manufacturing wages, the challenges that China and United States face now and in the near future, and how China holds an advantage over others to dominate through trade.

Key Words

China, United States, Economic Dominance, GDP, Gross Domestic Product, Purchasing Power Parity, Exchange Rate Policy, Scenarios

1. Introduction

The relationship between military might and world dominance has been analyzed and deliberated upon for

some time now. We have witnessed Superpowers fighting it out in the battlefield to prove their dominance. But it goes beyond the obvious. The real battles have been to corner the natural resources, which, in turn,

help the owner of these resources dominate world trade. They would go to any extent to control the

resources, whether through war or those strategic tie-ups. Through this piece, I present various possible

scenarios from the perspective of world leader United States and emerging leader China that could unfold in

future. This is the scenario of World Dominance. These are a set of scenarios on how China would compete with the rest, to dominate the world trade. www.ijm-apm.com

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What is Economic Dominance? Economic Dominance is the ability of the state to use economic means to get other countries to do what it wants or to prevent them from forcing it to do what it does not want1. Such means include:

1. Size of the Economy 2. Size of the trade

3. Financial health (Extent to which it is net creditor to the rest of the world) Net International Investment Position (NIIP) is one such measure. NIIP can be defined as the value of overseas assets owned by the nation minus the value of domestic assets owned by the foreigners. A

negative NIIP figure indicates that a nation’s foreign liability exceeds its foreign assets. For example, United State’s NIIP was $ (-) 4,504.10 Billion at the end of 2nd quarter of 2013, which means that the value of overseas US investment was well below the value of foreign investments in the United States. Other factors include:

a) Derivatives (Military strength, which depends on overall health of the economy) b) Currency dominance

c) Fiscal strength

2. Measuring the Growth The Gross Domestic Product (GDP) has been traditionally used to measure the performance of the nation. Table 1.1 compares world’s three leading economies on GDP and related parameters: Table 1: GDP (2012)2 Parameters

GDP

Population Per Capita

Growth Rate

Inflation Rate

National Highway Network Source: World Bank 1 2

USA

China

India

USD 16.24 Trillion

USD 8.22 Trillion

USD 1.85 Trillion

USD 49,965

USD 9,233

USD 1,106

316.50 Million 2%-4% 1.20%

75,900 kms

1.40 Billion 8% - 10% 3%

85,000 kms

1.27 Billion 4% - 6% 7.50%

70,934 kms

The Inevitable Superpower, By Arvind Subramanian, Foreign Affairs, September/ October 2011 http://data.worldbank.org

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On the face of it, India needs more than a decent growth-rate to catch-up with China. By all approximation, China will overtake USA in terms of GDP by 20193 (Chart 1.1), thus becoming the largest economy in the

world. If this happens, United States will be pushed to number two slot. The population, which translates

into a ready market, may come in handy for China. At present China has a population, which is four times that of USA and will remain that way for the times to come4.

Figure 1: GDP at Purchasing Power Parity, (in Billion Dollars) Refer Annexure 1

International Comparison Programme, a part of UN, released new data on cost of living across 199 countries in 2011. On this basis, China’s PPP exchange rate is now higher than economists had previously estimated

using data from the previous survey in 2005: a whopping 20% higher5. By this estimate, China will become world’s largest economy by 2019, ending the world dominance of the United States.

Gross Domestic Product based on Purchasing-Power-Parity (PPP) valuation of China’s GDP stood at USD 12,255.87 Billion in 20126 (Annexure 1). To make a projection from 2012 forward, assuming that the US’

Real GDP grows as much as 3.5% per year and the Chinese real GDP grows at 8% per year, by 2019, China’s

GDP will exceed US’ GDP. Although in per-capita terms China’s GDP will be much smaller, total output is a more useful measure of the economic strength of a country7. 3 4

5 6 7

International Comparison Programme, IMF and estimates by The Economist Lee Kuan Yew, Once China Catches up, what then?, Forbes Magazine, October 18, 2013 Source: The Economist Magazine, May 2014 Issue; more information available on http://icp.worldbank.org/ International Monetary Fund, World Economic Outlook Database, April 2014 (http://www.imf.org/external/data.htm#global)

China as a leader of World Economy by Chow Gregory; World Scientific Publishing Company

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If we assume China’s growth is at 7.75% over the next 7 years and U.S.’ growth rate is 2.5%, and the inflation

is 4% and 1.5% respectively, with Yuan strengthening at 3%, China would overtake U.S. by 2019 (figure 1 above).

Where does India Stand?

In spite of policy paralysis by the UPA-II (United Progressive Alliance – II, which ruled India for last ten

years), India is expected to remain an attractive destination for the investors. The latest stimuli being negative interest rates imposed in Euro-Zone8. This will force part of investments out of Europe towards emerging markets including India.

Even as the per capita income of India is quite low as compared to other leading economies of the world,

between 2020 and 2035, India will be home to the largest population in the Golden Bracket (18 years – 65 years)9, called so for their high spending capacity. This ready market is what attracts global players to make their presence felt in India. The activity is expected to increase even further in the next 5-7 years.

According to a United Nations World Economic Situation and Prospects 2014 (WESP) report, the Indian economy, which accounts for over 70 per cent of total output in South Asia, slowed further in 2013. According to the report, the growth was held back by weak household consumption and sluggish

investments. India's economy is projected to grow at an expected rate of 5.3 per cent this year, much slower

than China’s. The UN study expects a mild recovery in investment as well as stronger export growth, which

will help in the gradual GDP pick-up for India. A virtual policy paralysis and inaction by the government for the last four years could have been one of the main reasons for this slow growth. Even as the National Democratic Alliance (NDA) takes over to govern India for next five years, it would take at least 18 months to

recover from the virtual policy paralysis pushed for by the predecessor government. By any estimate, it would take over a decade for India to match the growth of China.

3. The Economics of Present

About 480 Fortune 500 companies are already in China. More than 90% of multinational companies believe that China is important to their global strategies, with 52% calling it critical. Around 70% of world’s leading 50 retailers have entered the Chinese market10. With an economy three times the size of the other BRIC

countries added together, China is a country that cannot be ignored. 11 Foreign-invested businesses in China now account for 30% of industrial output, 55% of trade and 11% of urban jobs. 8

http://www.bbc.com/news/business-27717594 http://datatopics.worldbank.org/hnp/popestimates 10 http://hbr.org/2010/04/the-globe-is-it-too-late-to-enter-china/ar/1 11 Doing Business in China, Chris Torrens, Viva Books Pvt. Ltd. 9

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In some ways, China’s market is still world’s most enticing. Although it accounts for only around 8% of

private consumption in the world, it contributed more than any other country to the growth of consumption in 2011-1312. Three fundamental factors contribute to rapid economic growth of the country:

1. High quality of human capital, which helps in producing globally acceptable quality of goods at reduced costs

2. Set of functioning market institutions that help maintain China’s market share in the global economy

3. Leap-Frog effect or being in early stage of development that enables the economy to catch-up rapidly by skipping incremental technologies

These factors also explain the rapid economic growth of Japan before and after World War II, and of Hong Kong, Singapore, Taiwan and South Korea during ‘60s and 80’s.13

Negative Policy Impact

Market attractiveness comes with its own set of negatives too. Many foreign companies now present in China have realized that situation is somewhat different from what they had expected. That could be because of flagged growth and / or rising cost of manufacturing. China’s One-Child Policy of the past has made it difficult

to get talented young workers, which has resulted in soaring wages. Other act of China’s government has worked in a negative manner for select companies. The government has made life difficult for firms in some

sectors—it has restricted market access for foreign banks and brokerage houses and blocked internet firms, including ‘Facebook’ and ‘Twitter’. Hardware firms such as Cisco, IBM and Qualcomm are under pressure after Snowden released specific sensitive documents; GlaxoSmithKline, a drug-maker, is ensnared in a corruption probe; Apple was forced into an apology last year for offering inadequate warranties; and Starbucks has been accused by state media of price-gouging14.

China was already the world’s fiercest battleground for global brands but in the past five years, local firms

have joined the fray. Many of these local players have overseas experience, and some of these are taking the battle to the West by developing inventive products. Xiaomi and Huawei have come up with world-class

smartphones competing with the best locally, and Sany diggers have challenged Hitachi and Caterpillar, even as consumers no longer pay a premium just because a brand is foreign. Their internet savvy and lack of brand loyalty makes a typical Chinese customer the world’s most demanding customer. 12

http://www.economist.com/news/leaders/21595001-life-getting-tougher-foreign-companies-those-want-stay-will-haveadjust-china?fsrc=scn/fb/wl/pe/chinalosesitsallure 13 China as a leader of World Economy by Chow Gregory; World Scientific Publishing Company 14 http://www.rawstory.com/rs/2013/10/21/chinas-state-run-media-accuses-starbucks-of-price-gouging/ www.ijm-apm.com

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With a rise of host brands from China, some MNCs have decided to quit the market. Revlon decided to pull

out of China in December 2013. L’Oréal announced in January 2014 that it would stop selling one of its main brands, Garnier. Best Buy, an American electronics retailer, and Media Market, a German rival, have already

left, as has Yahoo, an internet giant. Tesco, a British food retailer, last year gave up trying to do it alone, and

entered a joint venture with a state-owned firm. Some of those who are staying are struggling. Investors no longer celebrate firms with big investments in China. The Economist’s Sino-dependency Index15 weighs American multinationals by their China revenues. Sino-dependent firms used to outperform their peers, but in the past two years their share prices have done worse than others.

Finding a Solution

The challenge for the Chinese policymakers has been to strike a balance between allowing the MNCs to

establish themselves in market and at the same time ensure local brands to fight with these multinational

brands. As discussed above, many MNCs have decided to move out of the market due to fierce competition from the local brands. But for most of the MNCs, China offers an excellent manufacturing hub with reduced cost of production although, off late, there has been an increase in input costs.

When we consider this issue from the market participant’s perspective, we can easily conclude that the CEO

would now have to choose either growth or enhanced productivity. One way to get a grip on costs is to invest in labor substituting technology, not only in manufacturing but also in services. Also, multinationals are

falling behind local firms like Alibaba and Tencent in exploiting a surge of big data coming from e-commerce and smart-phones16.

Since China offers an extremely large market, with a leader in Golden Bracket, no marketer can afford not to

make itself present in the market. These marketers are left with limited choice but to play by the rules set by the Chinese policy makers.

The marketers may have to reconsider their One-China policy. The fact remains that most of the companies

had set up their local offices when China’s economy was less than $2 trillion. Today, it is almost five times that size, and the growth has been equally spread across regions in China. Many of the MNCs established earlier are still running their operations from Shanghai. This could work against logic as with the growth of

the economy, the preferences of the local consumer vary between provinces and mega-cities that have 15

http://bambooinnovator.com/2013/07/22/the-sinodependency-index-is-exposure-to-china-still-a-good-thing/ http://www.economist.com/news/leaders/21595001-life-getting-tougher-foreign-companies-those-want-stay-will-haveadjust-china 16

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populations as big as European countries. For example, about 400 million Chinese do not speak Mandarin. This fact would force the strategist to keep a closer eye on pre-defined standards and prototyped behavior; they are now forced to localize marketing and product development. The companies that can boost productivity improve governance and respond to local tastes can still prosper.

China’s Challenges: Every growing economy has its own set of challenges. China’s problems are plenty. 1. Population will begin to age over the coming decades. The population in the age bracket of 18 years –

49 years would reduce to 70% by 2050 of its original level of 2010 (refer Annexure II). This would have an impact on the cost of producing goods as scarcity of skilled labor would have a major impact on overall costs. This could take away the cost advantage that China offers today.

2. Overall cheap capital has lead to excessive investment. The government has been working overtime

to control the money supply in the economy to maintain healthy growth and has, over the last decade, spent over 8.5% of its GDP on Infrastructure, thus creating a vicious circle of accelerated

infrastructure growth. This has resulted in ‘Ghost Towns’ in China. The country’s overbuilding has not only widely inflated the GDP numbers, but it has also led to inflation elsewhere by causing a huge

jump in prices on commodities like lumber and concrete. It is a huge economic crash just waiting to

happen. Over the last decade China’s largest airports have doubled in size. In addition to airports, the latest available data from Lodging Econometrics (2013 Q2) shows China had 1,695 hotel projects in the pipeline amounting to 435,000 additional rooms, hitting another historical peak.

3. Exchange rate has been undervalued, leading to overdevelopment of exports. This policy –which keeps the Yuan artificially low in value – allows other countries, especially the U.S., to borrow from

China the vast sums they needed to stimulate their economies 17. According to New York Times columnist Paul Krugman, China’s weak-Yuan policy cost 1.4 million American jobs, many in

manufacturing, as American producers find it hard to compete with cheap Chinese goods. It’s only a matter of time when the Chinese currency is made to move influenced by market forces and the impact of this would be devastating.

4. Energy is subsidized, leading to its inefficient use and pollution. The Chinese capital has for many

years suffered from serious air pollution. Primary sources of pollutants include exhaust emission from Beijing's more than five million motor vehicles, coal burning in neighboring regions, dust storms from the north and local construction dust18.

17 18

http://www.forbes.com/2010/01/21/china-currency-policy-entrepreneurs-finance-wharton.html http://www.scmp.com/topics/beijing-air-pollution

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5. Growing Rural-Urban income disparity. According to a study conducted by Yu Xiea (Department of Sociology, Institute for Social Research, University of Michigan) and Xiang Zhoua (Department of Sociology, Institute for Social Science Survey, Peking University, Beijing), China’s income inequality not only surpasses that of the United States by a large margin but also ranks among the highest in the

world, especially in comparison with countries with comparable or higher standards of living. They argue that China’s current high income inequality is significantly driven by structural factors

attributable to the Chinese political system, the main structural determinants being the rural-urban divide and the regional variation in economic well-being19. Chinese cities are made of two classes: a property owning middle class and a migrant underclass which toils in factories but is denied public services because its household registration is still in the countryside. Both groups distrust each other

and the ruling party. By 2030, Chinese cities will be home to about 1 billion residents. It took China just 30 years to climb from 20% urbanization to today’s 54%.

6. Widespread corruption in the form of arbitrary levies, fines and illegal land seizures: Since farmers in China have no property rights, government officials grab agricultural land on the peripheries of

urban areas and make money for themselves by selling it to real-estate developers. The vast debt of this over-hasty development is the focus of foreign worries about the country’s economic stability.

China’s Exchange Rate Policy

In 2010, United States’ lead over China was marginal; there was less than one percentage point difference

between their respective indices of dominance. In fact, if one weighed these factors slightly differently, giving slightly less weight to the size of the economy relative to trade, Chine was already ahead of the US in 2010

(Annexure One). National Intelligence Council assessed that in 2025, “the US will remain the preeminent

power, but that American dominance will be much diminished.” By keeping its currency cheap, China has managed to keep its exports more competitive than those from countries such as India, Bangladesh, Mexico and Vietnam.

China is now the world’s leading creditor nation, while the United States is the world’s largest debtor. Beijing is the largest foreign holder of US government debt – passing Japan in 2008 to become, in effect, the US

government’s largest foreign creditor. While some claim this gives Beijing unprecedented power over the

United States, others claim that China’s power is in fact greatly circumscribed 20. Having said that, the creditor status is misleading metric by which to judge China because it is usually used to describe financially open 19

Proceedings of the National Academy of Science of the United States of India, 10.1073/pnas.1403158111 China as the World’s Creditor and the United States as the World’s Debtor, Shalendra D. Sharma, http://chinaperspectives.revues.org/5346 20

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economies and China is largely closed. Countries with open economies can invest their money in many

places. Beijing, because it can’t spend its foreign reserves home, is forced to keep buying US Treasury Bond.

More so, its economy is presently less than half the size of the United States’ and its people are barely onetenth as wealthy as Americans21.

Another interesting fact that works against China is it financial books, which are divided between excessive

assets in foreign currency on one side and excessive liabilities in local currency on the other. The local governments in China have spent excessively on railroad expansion and other infrastructure projects by borrowing to fund the 2009 stimulus thus piling up huge debt.

The strategy by the Chinese government has been not to let the money flow freely because doing so would

undermine its control of ‘domestic interest rates’, reducing its ability to influence economic cycles, and all this would expose its domestic banking sector to tough competition from foreign banks.

USA’s Challenge

Presently dominating the world economy, United States needs to address its own problems sooner than later or else it could face a serious challenge from China, and to some extent from Russia. Major problems that United States’ policy makers need to address are: 1. Fiscal problem:

a. Health care programs, especially Medicaid, always make the top fiscal issues list. The reasons can vary from year to year but generally involve caseload increases, benefit changes, medical

inflation rates and policy changes. For 2014, 29 states expect Medicaid/health care to be a top fiscal issue. To top it up, the authorities unearthed a $272 Billion fraud in Medicaid, where the beneficiaries were from affluent families.

b. Education funding is another perennial top fiscal issue. It represents about one-third of state general fund budgets, so it regularly receives priority attention. There’s no doubt that one of

the most important issue to secure America’s economic future is the development of a skilled workforce. The seeds of this are laid in the classroom, which extends the length of a working person’s career. The reality, however, is that America’s K-12 education system is not adequately preparing students for careers or postsecondary education, and worker training

programs are not, in many cases, teaching the skills demanded in the marketplace. The result is a persistent skills gap that is impacting the nation’s competitiveness. 21

http://www.foreignaffairs.com/articles/136785/derek-scissors-arvind-subramanian/the-great-china-debate

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c. Social Security: Trust Fund will last for less than 25 years. Eventually taxes will be able to pay only about 75% of the benefits that are currently promised. Either benefits have to be cut, Social Security taxes have to be raised, or the growing gap between the two has to be paid for

with revenue from other taxes. By tinkering with various formulas, the 25% gap could be closed but the burden will still have to be spread between more and less affluent people, current and future retirees, and taxpayers in general22.

2. Growth problem

a. Debt and Deficit: The United States is incurring unsustainable levels of debt. By 2050, interest costs on the debt alone are projected to be more than four times what the federal government

has historically spent on education, R&D, and infrastructure – combined. Federal entitlement programs are the main drivers of runaway government spending. Social Security, Medicare,

and Medicaid costed $1.6 trillion in 2013 and will soar to $3 trillion per year in the next decade. None of these programs are projected to be financially solvent 20 years from now23.

b. Production: The number of U.S. manufacturing sites fell from 3.97 lakhs in 2001 to 3.44 lakhs as of June 2010, leaving many factories abandoned. This got further reduced to 3.10 lakhs by

the end of first quarter of 2012. Manufacturing employment, which peaked at 19.4 million in 1979, was 11.7 million in February 201124.

3. Middle-class problem:

a. George Borjas, the United States’ leading immigration economist estimates that the presence

of immigrant workers (legal and illegal) in the labor market makes the U.S. economy (GDP) an estimated 11 percent larger ($1.6 trillion) each year. But Borjas cautions, "This contribution to the aggregate economy, however, does not measure the net benefit to the

native-born population." This is because 97.8 percent of the increase in GDP goes to the immigrants themselves in the form of wages and benefits25.

b. The most recent census data shows that while a small group of rich people are getting richer, the middle class is taking a serious beating. US median income fell to $50,054 in 2011, the most recent full year in which that data is available. That's down 8.1% since 2007, just before the great recession started. Overall, median income has fallen 8.9% from its peak in 1999. Meanwhile, the middle class is shrinking. 22

http://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html Issues as presented by US Chambers of Commerce 24 https://www.mapi.net/system/files/PA-116_1.pdf 25 George Borjas, Immigration and the American Worker: A Review of the Academic Literature, Center for Immigration Studies, 2013 23

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The U.S. debt stood at $17.35 trillion as of year-end 2013 of which $1.227 trillion in U.S. Treasuries is held by

China, which makes it number-one investor among foreign governments. It may be noted that China has,

over the last five years, strategically increased its investment in U.S. Treasury Bonds. $ 81 billion were invested in 2013 and $ 281.9 Billion since 2009. With such an excessive investments in U.S. Treasury, China can virtually collapse the US economy, if it decides to liquidate the investments.

China’s creditor status arises largely from its weaknesses, not its strengths. The country’s $3.2 trillion worth of foreign currency holdings represents an imbalance between investment and consumption. Instead of

loaning money to rich countries, China should be importing capital in order to speed its domestic development and meet its sizable needs, starting with properly capitalized pension and financial systems.

China’s financial books are strictly divided, with huge assets in foreign currency (primarily dollars) on one

side and huge liabilities in local currency on the other. Local governments have incurred high debts by spending heavily on programs such as railroad expansion and by borrowing to fund the 2009 stimulus

(which came mostly from local, not national, government coffers). Beijing should be paying down this debt and addressing other domestic shortfalls with its mountain of foreign currency, but it cannot do so under its

present balance-of-payments rules, which are designed to keep foreign currency in the hands of the national monetary authorities. Due to a closed capital account, domestic holders cannot send money overseas, and foreign currency can be converted to Yuan only through the state financial system.

4. Advantage China Education

More and more Chinese are willing to take up specialty education. Over the last four decades, the strength of Chinese students has grown in United States. What attracts the attention is an increasing number of Chinese

students opted to study in China (Figure 3). One of the reasons for this has been better education provided locally. For nearly 40 years26, Chinese government has invested heavily to encourage innovation from the top. In the 1980s and 1990s, China created the National Natural Science Foundation and the State Key

Laboratory program, and revamped its Chinese Academy of Science to fund research, similar to what the National Science Foundation does in the United States.

Figure 2: Specialty Education: Students joining Chinese and US Universities 26

HBR, March 2014: Why China can’t innovate, Regina M. Abrami, William C. Kirby and F. Warren McFarlan

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In the post-world-war era, Japan built itself on ‘incremental innovation’. They borrowed the product ideas from the West and make it better and cheaper and established themselves as a dominant player in the world

market. China is now doing the same by adapting incremental innovations from the West. Adapting technologies and getting these through acquisitions, is an important new trend.

The Chinese companies, backed by the government and its effective forex policies have helped them fill major gaps in their inventive and innovative capacities through increasingly widespread foreign acquisitions

and partnerships. This could be considered as a great start but to lead the world markets in the 21st century, there’s a need to nurture the inventors and innovators of the future. That is the job of Chinese universities (refer Figure 2). The fight is for the same market share and over years, more and more MNCs have decided to

establish their Research & Development centers (R&D) in China. In 1999, there were fewer than 30 such research centers, which were increased to over 600 in 2004 but by 2010, they had over 1200 such centers27.

Table 2: Categories of Companies operating in China Category Large statecontrolled enterprises Joint Ventures

27

Description Usually monopolies or oligopolies. Minority shareholdings sold in public offerings

Frequently involving foreign partners, providing technologies in return for market access

Examples ICBC, China Construction Bank, China Mobile, China National Petroleum Corp Shanghai Volkswagen, DHLSinotrans

Source: Beijing Review, Asia Times and People’s Daily online

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Private Companies with some state influence

Often in new markets with no state-owned enterprises. Encouraged by friendly government policies and obstacles to foreign competition Companies backed Investors include foreign private equity and by publicly owned venture-capital funds as well as city and investment funds provincial governments Source: McKinsey; The Economist Magazine

Huawei, BYD, Geely, Chery Shanghai Environment group, Digital China, China WLCSP

The support to the corporates is to such a great extent that the proportion of shares issued to public is on an average no more than 30%. This helps the corporates to keep the decision-making powers with the leaders, in the company and in the government. These pseudo ‘State-owned companies’ enjoy their own advantages.

They can avail subsidized loans from state controlled banks, they are given land at less than the market value, and they enjoy a ‘sheltered’ monopoly or oligopoly. Such a model offers the government to control the

workings of the enterprises, which are critical to the performance of the economy. Such an arrangement facilitates the smooth execution of capital-intensive infrastructure projects including high-speed railways, steel plants, telecommunications networks and ports.

Figure 3: Growth in Manufacturing Wages in US and China

Source: US Bureau of Labor statistics, National Bureau of Statistics of China Over the last 8 years, we have seen a consistent increase in the labor costs in China, which directly impacts

the cost of production of goods and services. This also means that cost of manufacturing in China is gradually increasing, which, in the long run, will take away the China advantage. The policy critiques in U.S. have

already started voicing out their preferred option of shifting manufacturing to the U.S. But the China story www.ijm-apm.com

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goes beyond its positioning of a manufacturing hub and we address this issue in the concluding section of future scenarios.

5. The Economics of Future What happens in the next 10 years will define the future of world trade and world stability. When we build the scenarios, this is how they look:

Scenario One: China maintains its growth of 7.75% p.a. with the inflation not exceeding 4.5% and Yuan gaining over US dollar by at least 3% to become world’s biggest economy. U.S. tries to maintain its

dominance by building support systems in Europe, Africa and Australasia. China tries to maintain its lead in the manufacturing sector by artificially keeping the manufacturing wages lower than the rest of the world,

thus strengthening its clout in the world markets. It also uses its investments in U.S. treasury bills to control U.S.’ economy. Today, 2/3rd of its $4 trillion worth of foreign exchange are in dollars.

Table 3: China’s total export share:

How dependent is China on the rest of the world: USA

:

17%

ASEAN

:

10%

European Union Japan

Electromechanical

: :

:

Clothing, footwear, furniture, toys :

16% 7%

57% 20%

Scenario Two: Even as China builds its dominance in world trade by expanding to future markets of Africa

and strengthening its hold on U.S. economy, United States uses the tool of inflation to nullify the impact of China’s investment in its treasury bonds. If U.S. is successful in this, China will incur heavy losses on its

investments, thus impacting its own economy. This would lead to China reducing its clout on world economy. If United States decides to move all the manufacturing back to home soil, the bare minimum impact on

China’s economy will be to the tune of 17% (table number 3 above). This would give United States ample time to redesign its strategies to dominate the world trade. Simultaneously, U.S. would strive to create its support system in Europe, Asia, Africa and Australia. Even as we contemplate this strategy, the fact remains

that United States is already using China’s investments in Treasury Bonds to finance its military predominance. www.ijm-apm.com

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Scenario Three: China uses its plank of inventiveness and innovativeness to establish itself as the new hub

of innovative products. This would help China attract talent from all over the world, thus making China one

of the preferred destinations to work in, toppling United States of this position. This, together with its size as mentioned in Scenario One, would help them carve their own niche. If China continues its investment in U.S. bonds the way it does, U.S.’ economy would be too dependent on China’s funds, which in turn would restrict U.S. to take economic decisions that would impact China’s economy, thus creating a vicious circle.

6. Conclusion

China has taken over two decades to reach this position of dominance. By controlling every aspect of its growth, including the performance of its currency to establishing and controlling manufacturing plants, to

investment in gold or maintaining reserves in US Dollars, China has proved that it can become the world’s biggest economy. The fight to the top for China will not be easy as United States has its extremely strong

fiscal and trade policies to support its growth for decades to come. In this fight, the clear winners would be citizens of the two countries, who would be offered the best that their respective governments can offer because the growth of the nation is directly dependent on the wellness of the citizens.

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Appendix One: GDP of China at constant prices, PPP valuation, and unemployment rate (Unit of measurement – Billions) Country China China

China China India India

India India United States United States United States

Subject Descriptor Gross domestic product, constant prices Gross domestic product, constant prices Gross domestic product based on purchasingpower-parity (PPP) valuation of country GDP Unemployment rate Gross domestic product, constant prices Gross domestic product, constant prices Gross domestic product based on purchasingpower-parity (PPP) valuation of country GDP Unemployment rate Gross domestic product, constant prices Gross domestic product, constant prices Gross domestic product based on purchasingpower-parity (PPP) valuation of country GDP

Units National currency Percent change

Current international dollar Percent of total labor force National currency Percent change

Current international dollar Percent of total labor force National currency Percent change

Current international dollar

2012

2013

2014

2015

2016

2017

2018

2019

16,639.21

17,915.64

19,266.20

20,669.45

22,110.07

23,605.00

25,169.84

26,810.94

7.653

7.671

7.538

7.283

6.97

6.761

6.629

6.52

12,255.87

13,395.40

14,625.21

15,968.43

17,405.90

18,954.51

20,615.06

22,406.04

4.1

4.1

4.1

4.1

4.1

4.1

4.1

4.1

58,998.50

61,565.42

64,901.14

69,024.59

73,496.53

78,384.03

83,662.75

89,322.83

4.736

4.351

5.418

6.353

6.479

6.65

6.734

6.765

4,785.51

5,069.16

5,425.43

5,872.36

6,371.61

6,931.26

7,545.92

8,220.37

15,470.73

15,761.30

16,197.56

16,675.94

17,181.92

17,681.17

18,139.66

18,541.99

2.779

1.878

2.768

2.953

3.034

2.906

2.593

2.218

16,244.58

16,799.70

17,528.38

18,365.80

19,282.54

20,239.78

21,179.69

22,089.99

Source: International Monetary Fund, World Economic Outlook Database, April 2014

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Annexure II : Projection of Chinese population CHINA

AGE GROUP TOTAL M+F MALES 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+ TOTAL FEMALES 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+ TOTAL

Dependency ratio (%) Birth rate (per 1,000 people) Death rate (per 1,000 people) Rate of natural increase (per 100 people) Net migration rate (per 1,000 people) Population growth rate (average annual %) www.ijm-apm.com

2010

2015

Projection (000s)

2020

2025

2030

2035

2040

2045

2050

1,338,300

1,364,978

1,381,592

1,387,830

1,383,615

1,368,503

1,345,387

1,313,778

1,273,054

36,822 37,739 43,438 48,788 57,046 48,799 44,795 58,338 59,192 45,982 38,843 38,912 27,264 19,368 15,700 22,508 643,535

35,978 36,608 37,621 43,284 48,510 56,669 48,465 44,490 57,916 58,610 45,294 37,908 37,344 25,372 17,082 24,960 656,111

33,150 35,774 36,491 37,477 43,022 48,170 56,315 48,157 44,175 57,388 57,814 44,308 36,517 34,963 22,598 27,924 664,243

30,703 32,970 35,666 36,357 37,244 42,718 47,870 55,999 47,849 43,798 56,668 56,663 42,814 34,358 31,396 34,602 667,676

29,147 30,543 32,872 35,541 36,139 36,975 42,456 47,608 55,678 47,480 43,292 55,622 54,904 40,475 31,085 46,306 666,122

28,143 28,998 30,450 32,755 35,331 35,882 36,741 42,228 47,347 55,286 46,979 42,555 54,014 52,107 36,860 53,470 659,146

27,296 28,001 28,908 30,339 32,555 35,083 35,659 36,541 42,005 47,032 54,748 46,248 41,406 51,407 47,700 63,209 648,139

26,377 27,161 27,915 28,802 30,148 32,319 34,869 35,471 36,353 41,741 46,604 53,955 45,092 39,531 47,278 78,937 632,553

25,466 26,248 27,077 27,811 28,617 29,922 32,118 34,691 35,297 36,136 41,384 45,972 52,700 43,192 36,543 88,794 611,968

2010-15

2015-20

2020-25

2025-30

2030-35

2035-40

2040-45

2045-50

7.7

8.1

8.7

9.7

11.0

12.1

13.3

14.7

44,588 46,120 51,659 56,321 62,646 51,732 47,056 60,713 62,508 48,229 41,729 41,525 27,918 19,542 15,076 17,404 694,765

38.2

42,775 44,340 45,960 51,450 55,962 62,135 51,244 46,551 59,939 61,458 47,064 40,149 38,923 24,974 16,213 19,732 708,867

37.4 11.9

39,369 42,540 44,184 45,772 51,121 55,504 61,601 50,734 45,979 58,991 60,088 45,425 37,814 35,085 20,970 22,172 717,349

40.1 10.8

36,431 39,161 42,398 44,012 45,483 50,715 55,046 61,054 50,167 45,294 57,760 58,147 42,964 34,309 29,767 27,444 720,154

41.8 9.9

34,561 36,246 39,033 42,240 43,747 45,129 50,313 54,582 60,438 49,487 44,411 56,002 55,207 39,242 29,400 37,457 717,493

44.5 9.4

33,352 34,389 36,127 38,888 41,991 43,415 44,775 49,905 54,059 59,683 48,600 43,149 53,330 50,694 33,925 43,075 709,356

50.9 9.1

32,333 33,189 34,276 35,993 38,658 41,678 43,084 44,421 49,449 53,420 58,690 47,326 41,209 49,160 44,127 50,233 697,248

57.3 8.9

31,231 32,178 33,081 34,151 35,780 38,369 41,369 42,757 44,031 48,897 52,583 57,254 45,346 38,177 43,101 62,919 681,225

59.1 8.8

30,143 31,084 32,075 32,961 33,948 35,510 38,085 41,066 42,399 43,564 48,172 51,363 54,999 42,207 33,708 69,801 661,086

61.8 8.7

0.4

0.3

0.1

0.0

-0.2

-0.3

-0.5

-0.6

-0.3

-0.3

-0.3

-0.3

-0.3

-0.3

-0.3

-0.3

0.4

0.2

0.1

-0.1

-0.2

-0.3

-0.5

-0.6

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Total fertility rate (births per woman) Net reproduction rate (female births per woman) Life expectancy at birth (years) Life expectancy at age 15 (years) Infant mortality rate (per 1,000 live births) Under-5 mortality rate (per 1,000)

1.6

1.5

1.5

1.6

1.6

1.7

1.7

1.8

0.7

0.7

0.7

0.7

0.7

0.8

0.8

0.8

73.6

74.5

75.3

76.1

76.8

77.4

78.1

78.6

19.6

17.6

16.0

14.5

13.3

12.2

11.2

10.4

23.6

21.2

19.2

17.5

16.0

14.7

13.5

12.5

60.6

61.3

62.0

62.7

63.3

63.8

64.3

64.8

Source: World Bank (http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTHEALTHNUTRITIONANDPOPULATION/EXTDATASTATI STICSHNP/EXTHNPSTATS/0,,contentMDK:21737699~menuPK:3385623~pagePK:64168445~piPK:64168309~theSite PK:3237118,00.html)

References:                 

The Inevitable Superpower, By Arvind Subramanian, Foreign Affairs, September/ October 2011 Lee Kuan Yew, Once China Catches up, what then?, Forbes Magazine, October 18, 2013 International Monetary Fund, World Economic Outlook Database, April 2014 Why China can’t innovate, Regina M. Abrami, William C. Kirby and F. Warren McFarlan, Harvard Business Awakening Giants, Feet of Clay: A Comparative Assessment of the Rise of China and India. Journal of South Asian Development Vol. 1 No. 1 Banister, J. 2005. “Manufacturing Employment in China,” Monthly Labor Review, 11–29 China and the World Trading System, Aaditya Mattoo, Arvind Subramanian, Policy Research Working Paper, 5897Page 4-11 China’s Trade and FDI in Africa, Mary-Françoise Renard, African Development Bank Group, No 126- May 2011, Page 7-19 Export Dependence and Sustainability of Growth in China, Yılmaz Akyüz, China &World Economy / 1 – 23, Vol. 19, No. 1, 2011, Page 3-11 Ceglowski, Janet, and Stephen S. Golub. "Does China Still Have a Labor Cost Advantage?" Global Economy Journal 12, no. 3 (2012) Page 4-20 Chinese FDI in the United States: Q3 2013, Thilo Hanemann, Rhodium Group Export dependence and Sustainability of growth in China and the east Asian Production network, Yılmaz Akyüz, South Center, April 2010 The Great China Debate, Will Beijing Rule the World?, Derek Scissors; Arvind Subramanian, Foreign Affairs, The Council of Foreign Relations Employment and inequality outcomes in China, Cai Fang Du Yang Wang Meiyan Institute of Population and Labour Economics, Chinese Academy of Social Sciences, Page 4-13, 22-30 George Borjas, Immigration and the American Worker: A Review of the Academic Literature, Center for Immigration Studies, 2013 Proceedings of the National Academy of Science of the United States of India, 10.1073/pnas.1403158111 China as the World’s Creditor and the United States as the World’s Debtor, Shalendra D. Sharma, http://chinaperspectives.revues.org/5346

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Doing Business in China, Chris Torrens, Viva Books Pvt. Ltd. China as a leader of World Economy by Chow Gregory; World Scientific Publishing Company

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