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China Poised to Emerge as Pre-Eminent Post-Recession Economic Power

U.S. policymakers and the general public continue to be understandably pre-occupied with the slumping U.S. economy, but we risk ignoring the emergence of China as the world's pre-eminent economic power.

The World Bank recently revised down its forecast for world economic growth, but revised upward its forecast for China. World Bank economists now expect China's economy to grow by 7.2 percent, up from a previous estimate of 6.5 percent. Nearly 20 percent of the world's economic growth was attributed to China in 2007.

The more important point, however, is the source of the growth. China's wealth and economy was propelled by exports until the global recession. These markets have tanked. Unemployment is up in all the major export regions--Shanghai, Guangzhou most notably.

"According to the National Bureau of Statistics, annualized GDP growth in Guangdong province sank to 5.6 percent in the first quarter, the lowest level in 20 years. In contrast, development in the hinterlands is accelerating. Anhui registered growth of 11.6 percent, Sichuan 10.8 percent and Hubei 10 percent in the first quarter.

"Shanghai, the largest business city in the country, found itself second from bottom on the list of first-quarter statistics on the Chinese mainland with 3.1 percent growth, better only than Shanxi province, which recorded a minus 8.1 percent as a result of its reliance on energy resources - which suffered a major fall in product prices.

"Zhejiang province, once seen as China's cradle of private enterprise with perhaps the largest cluster of small and medium-sized private companies in the country, was third from the bottom at 3.3 percent.

"Guangdong, the largest province in China in economic strength - in both GDP and foreign trade - was only slightly better, ranking sixth from last.

"GDP in the three regions fell below the national average of 6.1 percent. Of China's high-profile cities, only Beijing's performance matched the national average."

Instead, the growth is coming from the central part of the nation: Sichuan, Chongqing, Hubei, Liaoning, Jilin and Hunan.

"Industrial output in the western region also grew much faster in April, at 12.7 percent, 6 points higher than the eastern region and 7.2 percentage points more than central China.



"The figures indicate that the main driving force of the economy is shifting from south to north and from east to west. Effects of the 4 trillion yuan ($586 billion) stimulus package in central and western regions are taking the lead for recovery, a structural change that will play a critical role as China grapples with the financial crisis.

"Part of the reason is these region's are the focus of the government's infrastructure programs. The national government has adopted a policy of building up and linking these region's to the rest of the country and, inevitably, global trade."

But this is only part of the story. These central and western provinces have large economies in and of themselves. The Municipality of Chongqing, for example, has 32 million people, and its urbanized area is expected to growth from 6 million today to nearly 10 million by 2020.

The wealth created by the export-led development of the past twenty years has generated a substantial middle class and domestic market that is increasingly capable of sustaining itself. Indeed, Airbus recently delivered its first China assembled airliner to Sichuan Airlines, in a high-profile symbol of the growing domestic market and the high-tech ecoonomy that will be needed to sustain it.

As the current high-income nations--U.S., Japan, Canada, Europe--continue to struggle to regain their economic footing, China will leverage its burgeoning domestic market to become a global economic leader as a consumer and exporter to the rest of the world.

The U.S. risks losing its competitive advantage if it falls asleep at the economic wheel and fails to recognize the need to stay globally competitive in its core competencies.

Samuel Staley is Research Fellow


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