China s Trade Liberalization Leads to Extraordinary Economic Growth. Where Will Such Growth Lead China?

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1 ROYAL ROOTS 贯中咨询有限公司 CHINA 2020 By Anita Tang, Managing Director, Royal Roots Global Inc. January 31, 2006 (revised) China s Trade Liberalization Leads to Extraordinary Economic Growth. Where Will Such Growth Lead China? Trade liberalization introduced by the late Chairman Deng Xiaoping in 1978 brought about extraordinary economic growth in China. The average nine percent annual growth rate in the Chinese Mainland since then helped the country s per capita income grow from 1978 s RMB 379 (US$168) to 2004 s RMB 10,500 (US$1,276). China recognizes that productivity is the determining factor in the economic development of societies. Through productivity development, China seeks to build a society of largely middleclass families by 2020 with a per capita income of RMB 25,000 (>US$3,000) in its 1.6 billion population. Why 2020? China expects the high growth to last for more than 40 years. But it also recognizes that the country needs to maintain stability to achieve a high growth rate a challenging task. The following analysis is derived from presentations made at the International Forum on Productivity Development in China, held in Beijing on November 17 and 18, Thirty-two government officials, academicians, and representatives of non-governmental organizations, among them two Americans and one Briton active in the World Academy of Productivity Science, reported research prepared in order to help China deal with the situation it faces in continuing its growth and development Royal Roots Global Inc. All Rights Reserved. 1

2 Moving Up the Value Chain from Being the Workshop of the World The traditional manufacturing industries drain a great deal of natural resources and energy; China is determined to use technology self-developed technology to optimize productivity. Forum discussion noted that manufacturing activities do not produce high income for the country; China also needs to develop its service industry. As pointed out by Qu Xianming, former Vice President of the China Academy of Machinery Science and Technology, China should learn from the examples of GE and IBM while they sell products and services, their service revenues are higher than their product revenues. Currently, the primary industry in the Chinese Mainland is less than 40% of the overall economy while the secondary industry has grown by more than five times since the liberalization to account for some 30% percent. In 2004, the service industry accounted for 31.9% of China s GDP. Developing China s tertiary industry in high-tech and services areas will help alleviate the conflict between supply and demand of capital and resources as well as provide more employment opportunities for the population. Piecing Parts Together to Achieve the 2020 Plan At the end of 2005, China s rural population is approximately 57% of its total population. To build a society of largely middle-class families by 2020 through productivity development, urbanization appears to be China s answer. Chen Shengchang, Vice President and Secretary General of the Chinese Association of Productivity Science, indicated that China s urbanization is now at 45%, a 50% improvement from 1978 s 30%. Urbanization building infrastructure, expanding transportation structure, improving industrial production, and encouraging consumer spending 1 makes China a bigger and more concentrated consumer market. But urbanization brings about negative factors as well. These include human resources shortages, low productivity, resource depletion, environmental costs, and 1 National Bureau of Statistics of China: China s consumption rate is at 50+% vs. 70+% in other countries and 80+% in the U.S.A Royal Roots Global Inc. All Rights Reserved. 2

3 lower consumption power in the rural population. These issues must be addressed, and partial answers may be found in green productivity. 2 John Heap, President of the World Confederation of Productivity Science, told the Forum that Government brings about long-term change, but complete change needs top-down and bottom-up cooperation between the government and enterprises. The following six areas are those the Chinese government is leading which require the support and cooperation of its people and from the rest of the world if changes are to be made that will facilitate China reaching its 2020 goals. 1. Sectoring China into Different Regions for Development After the proven successes of the Pearl River Delta and the Yangtze River Delta regions, the Bohai Bay region has emerged as the focus for the next phase of development. Other regions targeted for priority development include China s West and its Northeast region. China can make use of its geography in developing bi-lateral and regional trading and cooperation blocs: the three provinces in the Northeast Jilin, Liaoning and Heilongjiang serve as links to Russia, Korea and Japan; while Yunnan is a connecting point to Southeast Asia and South Asia 3 ; and, Guangxi, a part of the Pan-Pearl River Delta (PAN-PRD) region 4, is a corridor to ASEAN countries, particularly to Vietnam, Malaysia, and Thailand. When developing provincial economies, Forum advocates pointed out that it will be necessary to first determine their strengths and to help them focus on bridging China into a region of trade and cooperation. Also, being able to develop urban regions from their original rural regions and population would minimize emigration and other social and cultural issues. By creating super-cities 5, China can take advantage of the economies of scale investment return is higher and, among other factors, it is also easier to manage protection of the environment. 2 Thomas Tuttle, President, Tuttle Group International: production inputs for the traditional model are people, capital, materials, and energy; the two additional inputs for green productivity are environmental and social factors. 3 The three economic regions of China, Southeast Asia and South Asia have a total population of 3.2 billion and a combined economic value of US$3 trillion. 4 The Pan-PRD region comprises nine Mainland provinces, namely Guangdong, Sichuan, Fujian, Hunan, Jiangsi, Guangxi, Yunnan, Guizhou and Hainan, and two special administrative regions, namely Hong Kong and Macau, in the southwestern part of China. That is why Pan-PRD is also referred to as "9+2." 5 A city with two million people was previously termed a super city, while currently that status rests at five million people Royal Roots Global Inc. All Rights Reserved. 3

4 Developing the various regions is important, as is developing connectivity within the regions to link them together building infrastructure and expanding transportation structure. 2. Ensuring Energy Security and Natural Resources Security Energy security is an issue concerning national security, said Xu Shoubo of the China Academy of Machinery Science & Technology, who also pointed out in his report on Energy Security and Development of China that China has long depended on domestic energy supply. Petroleum, different from other fuels, is an important strategic material for military and national defense, and, therefore its security is the most important energy security issue for any country. From 1997 to 2002, China s self-sufficient rate on energy was high, but since 2002, due to rapid economic development, the demand for energy has risen sharply. Besides giving priority to coal usage and the policy of self-reliance, it is noted that the country s net petroleum import rate should never be higher than 50%, and, for petroleum security, China should limit the net import rate to below 30%. Even though China has an extensive supply of resources, ranking #3 in the world, its per capita resources are low. The exploration and exploitation of its resources is inefficient and poor. The conflict between resources supply and demand in the next 30 years is forecast to be serious. It is therefore important to protect supply, i.e. control exploitation, and also promote renewable energy use. Wang Mengkui, President of the Development Research Center of the State Council, asserted that China is experiencing rapid growth at the expense of excessive use of resources. The people in China should recognize that energy saving is not only a task for the government but it needs the support of everyone as it is going to affect the entire Chinese population and its livelihood. 3. Engaging in Environmental Protection China is suffering from the loss of land because of environmental issues, and this harms the economy Royal Roots Global Inc. All Rights Reserved. 4

5 The country needs to improve the quality of drinking water; upgrade its drainage system; control the mission of townships to prevent soil erosion and avoid water and lake pollution; and provide treatment of land deterioration, preserve grassland and reclaim favorable land. In the next 15 years, more than 600 cities in China will need to improve their environments. In the next few years, the country will likely start a pilot program to deal with environmental issues in the 113 cities that the State has termed atmospheric pollution control cities. According to the recommendation of the China Environmental Protection Foundation, China should set up three major principles for environmental control: (1) Those who have caused pollution should be responsible for cleaning up, (2) Improve environmental protection and management, and (3) Constitute and strengthen the system of the rule of law in environmental protection. 4. Promoting Education and Achieving National Independence in Technology Innovation Education is the key to improve productivity. Training is a means to upgrade the labor force. Technology relates to national security. China s technology talents 6 are abundant, but it lacks organization and innovation. China needs management talent to lead its companies within the Mainland itself as well as abroad but demand is far higher than supply. In the 10 years between 1995 and 2005, China s export structure has undergone drastic changes labor-intensive export is no longer #1: high-tech work is rising. In 2004, 57.1% of China s exports were goods from foreign-invested companies, but the technology is foreign-owned. There is not enough R&D activity in China 7. Big companies provide bigger R&D expenditures but this is not true of the entire economy. According to the Ministry of Science and 6 Ministry of Science and Technology: In 2003, total human resources in technology in China were 3,850,000, with 2,255,000 that were scientists and engineers. 7 Ministry of Science and Technology: In 2003, China s total R&D personnel was at 1,095,000, of which 862,000 were scientists and engineers, translating to 14.4 man years of R&D personnel per 10,000 in the labor force, while in the U.S.A., Japan, Russia, and Korea, such numbers are 8, 9, 6 and 6 times higher Royal Roots Global Inc. All Rights Reserved. 5

6 Technology, in the past 15 years, large- and medium-sized Chinese enterprises maintained an R&D budget of around 0.75%. It is only in recent years that China started to develop its own intellectual property and to apply for patents. To achieve national independence in technology innovation, China will have to organize and develop its own technology, cooperate with foreign partners, and make technology acquisitions. Adhering to its World Trade Organization obligation and responding to its own intellectual property development, China is determined to develop a legal structure including aggressive pursuance of intellectual property rights protection that will facilitate trade and business. 5. Improving Social Financial Structure and Others Apart from promoting economic development and productivity, it is important to ensure that Social Security is in place as it is the key to stability. In its process to build a society of largely middle-class families, China has to confront three major problems: uneven income distribution, issues of unemployment, and the aging population. Besides providing basic insurance to the population, it is necessary to improve medical policy and introduce commercial insurance. On the financial front, a basic Financial Framework has been established in China, but there remain aspects in the system that are not in line with the market economic development, including an unfulfilled transformation of fiscal function, an imperfect tax-sharing system and an incomplete taxation system. To build a strong foundation for productivity development, China must establish a public financial system, a comprehensive risk management mechanism, incorporate financial control procedures, and install a structure to maintain financial security. On the food supply front, Food Safety, making sure China is fed, is currently a position in which supply and demand are basically balanced. Gao Tiesheng, former Director, State Bureau of Grain Reserve, indicated that the issues concerning grain and food have a vital bearing on the lifeline of the national economy and state security as well as the people s livelihood. Therefore, to ensure grain and food security is a great strategic task in a long term. One of Gao s recommendations to ensure food security is to make the best use of both international and domestic grain markets the physical market as well as the futures market. 6. Expanding the Chinese Economy by Going Abroad 2005 Royal Roots Global Inc. All Rights Reserved. 6

7 To expand the Chinese economy, the Central Government is encouraging Chinese enterprises to build two economies one in China and the other abroad to connect with the world and to optimize productivity and world resources. Since China does not have the kind of multinationals of many other countries, and it has no experience in mergers and acquisitions, its companies need a great deal of assistance in going abroad. To swiftly secure a position in the world market, Chinese companies are expected to engage actively in investment and M&A activities overseas, and establish multinationals to help improve China s trade position. Cooperation with the Rest of the World Globalization brings the world together, making members of the global community more dependent on each other for better or worse. China s optimizing of productivity affects the rest of the world as well as China. As emphasized by George Smith, President of the World Academy of Productivity Science, at the Forum, War anywhere in the world will interrupt the supply chain, and so no one can tolerate a war, or terrorism. This notion was echoed by Li Jingwen, academician of the China Academy of Machinery Science and Technology, in his presentation Ensuring Natural Resources Security is the Premise of Realizing Economic Stable Growth. China is reaching out to its neighbors and partners with the Central government s diplomatic policy of mutual cooperation in mind: Treat your neighbors well and as partners. Make neighbors harmonious, wealthy, and safe. Foreign investment helped China in its economic development in the last 25 years. Now the Middle Kingdom is going abroad to build its second economy. It is going to benefit China and the rest of the world. Which countries or regions are going to benefit most from this phenomena taking shape in China? I believe it is going to be a competition Royal Roots Global Inc. All Rights Reserved. 7