Who'll benefit first from China's economic boom

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Years ago it was said that if you could add an inch to the shirttail of every Chinese, you could keep the cotton mills of Lancashire operating forever.

It was a bit silly remark. China was desperately poor and thus not an especially big market, despite its huge population.

Today it's not quite so ridiculous, notes Nicholas Lardy, a senior fellow at Brookings Institution, a Washington think tank.

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Foreign suppliers are finding China a more attractive market as it becomes more prosperous. China is the second-largest market in the world for cellphones. Coca-Cola is the dominant supplier of soft drinks. Kodak provides more than half of the nation's film and photo paper.

What's happened is that the Chinese economy has grown - and grown, like Alice when she nibbled on the wrong side of the magic mushroom.

Seven years ago, China produced $500 billion worth of goods and services. Today it's $1 trillion. The Chinese economy is now a little smaller than that of Britain or France. But within the next two decades, China could become the third-largest economy in the world, after the United States and Japan, reckons Mr. Lardy.

The 1.2 billion Chinese have a domestic "purchasing power" that amounts to $2 trillion or $2.5 trillion, says Chen Zhao, managing editor of The BCA China Analyst in Montreal. That's a fifth or a quarter of Americans' ability to purchase goods and services.

China was in the news last week with publication abroad of the "Tiananmen Papers" - secret documents relating to the decision to use deadly force against student protesters in 1989.

China remains a one-party, authoritarian state. Though the control of the Communist Party is gradually loosening, China won't be a Western-style democracy for at least 20 years, guesses Mr. Zhao, raised in Beijing, now a Canadian.

The Chinese leadership is aware that continued economic progress requires greater freedom - a shift to free enterprise that belies their party's name.

Signs of progress in recent years have been remarkable:

*Last year Chinese output, after inflation, reached about 8.3 percent. That's magnificent by standards of Western industrial nations. But China needs rapid growth to create jobs for the 3 million plus leaving the farms each year and those further millions laid off by state enterprises.

Nearly 800 million Chinese are of employment age, with 11 million "baby boomers" added annually.

China's growth rate peaked in the lower double digits in 1994, and then fell for seven years. But 2000 turned out to be a "turnaround year," says Lardy.

*China's export growth, which almost halted in the Asian financial crisis of 1998, reached 25 percent last year. Imports plus exports came to about $470 billion. That makes China the ninth- or 10th-largest trading nation in the world.

The US, the biggest trading nation, imports and exports a total of $2.5 trillion.

In six months or so, China is expected to join the World Trade Organization. Headline writers in China, short of space, have put it as "Entering the World." Entry will greatly reduce China's various barriers to foreign trade and investment.

China's big challenge this year could be the slowdown in the US, a major customer, and possibly elsewhere. Zhao holds that growing domestic consumption will pick up the slack.

*China's were the best-performing stock markets in 2000. For example, Shanghai's B shares, open to foreign investors only, rose 136 percent. The A shares, which can only be purchased by Chinese citizens, climbed 51 percent.

*With considerable turmoil, China's state-owned enterprises are being privatized, closed, or made more efficient. These firms employed 112 million in 1995, about 80 million now. Their profitability improved last year.

"They are less of a drag on the economy than three or four years ago," says Lardy.

Zhao figures that state-owned enterprises now account for less than 30 percent of GDP, compared with 80 percent in the early 1980s. Private enterprise accounts for more than 40 percent. Agriculture takes up 15 to 20 percent of GDP.

"These are quite dramatic changes," he notes.

*China enjoyed $60 billion of capital inflows in 2000, more than any other poor nation, Lardy says.

*For the first time in perhaps five centuries, China's farm population is declining.

China's government estimates 70 percent of the population is rural, 30 percent urban, although Zhao says a 50-50 ratio is more realistic considering the growth of small towns and millions of workers "floating" between country and city.

Such progress does not mean China's leaders are problem-free. Unemployment is probably at a record high. Social unrest is growing. Many commercial banks are shaky financially.

But one-sixth of the human race leads a better life on average than it did before.

(c) Copyright 2001. The Christian Science Publishing Society

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