3.10 China Economic Forecasts

China (with Lydia in Asia Minor) was the first country to use coins, the first to have paper currency, free banking, and a government monopoly of paper currency, perhaps the first to have a kind of currency board (circa 1270), and a pioneer in sophisticated forms of exchange control. {1} There were many dynasties, often of great splendor, and that of the Qing (1644-1912) brought territorial expansion, prestige and renewed power, so successfully that China in the eighteenth century was arguably the most prosperous and best-governed country on earth. {2} All changed in the following century, when land hunger, ethnic divides, western influences and declining markets for its products set in motion the vast civil wars that claimed tens of millions of lives and left the country devastated and open to outside exploitation — Opium Wars (1839-60), Taiping Rebellion (1850-64) and Boxer Rebellion (1899-1901). {2} {3}

The country, declared a republic in 1912, was split between contending warlords in the 1920s, suffered a Japanese invasion in 1931, experienced a savage civil war between the communists and nationalists in the 1930s, and finally found unity under Mao Zedong in 1949, who was no less a dictator than Stalin and whose experiments (the Great Leap Forward in 1958-61 and the Cultural Revolution of 1966-76) brought suffering and death by starvation to tens of millions. {4-7}


China's recovery began in 1975 with the Four Modernizations plan announced by Premier Zhou Enlai, and was implemented in 1978, under Mao's successor, Hua Guofeng, aided by the rehabilitated Deng Xiaoping. Four special economic zones were created a year later, offering regulations, work rules and taxation favorable to foreign investment, especially in manufacturing, assembly and textile industries, and an enthusiastic 'can do' approach. In 1984, these zones were extended to many coastal cities in eastern China. {4-6} {8}

China's recovery is the most remarkable on record. In three decades the country has become the world's second largest economy. Growth has averaged 10% p.a., a doubling every 7-8 years and an 18-fold increase in per capita income during a single generation. China has a fifth of the the world's population and has lifted several hundred million people out of poverty. {9}

To acquire cheap imports and machinery, the yuan was initially overvalued at 2.8 yuan to the dollar, and until 1984 China ran a negative trade balance with the west. Gradually the old communist guarantee of food and social security was set aside for a capitalist one of opportunity but little safety net. Exports ballooned, aided by a devalued yuan, set at 8.7 to the dollar in 1994, and continually adjusted until settling to 6.4 to the dollar in 2011. Given the low prices possible with cheap labor costs, the US began to run a large trade deficit with China: the figures are $50 bn in 1997, $124 bn in 2003 and $234 bn in 2006. {10} {11}

The yuan is tightly controlled. Chinese exporters earning foreign currency must convert all proceeds to yuan at rates set by the People's Bank of China (PBOC). Conversely, Chinese companies buying supplies or machinery in foreign currency will get those currencies from the PBOC at the set rate. Two problems arose. {11}

Firstly the PBOC had to print yuan to cover those currency accumulations, which grew to be very large: around $2.85 trillion in 2011, Reuters estimated, with $50 bn of that in US government obligations. Though controlled, the yuan was in fact tied to the inflationary US dollar.

Secondly, the Chinese government wanted safe investment for its trade surpluses, and preferentially chose US Treasury bills.

As a result, China needs the US as much as America needs China, and both face serious employment problems as their trade declines. US attempts to 'get tough with China' are muted by its immense holding in US dollars, its influence over Iran from which its buys petroleum, and its control of North Korea, which survives as a Chinese satellite.

Strengths {31}

World's largest population
Large, low paid but disciplined labor force
Extensive natural resources
Successful exporter to USA and EEC
Major base for offshored American and European companies
Large foreign exchange holdings in USA, Japan, UK and EEC
Rapidly developing infrastructure
Rapidly acquiring education and western know-how


Inequality between development and rural areas
Authoritarian regime
Restricted civil liberties


Leadership of third world
Investment in natural resources, especially Latin America and Africa
Inward investment


USA military build up in east Asia
Exposure to dollar

Opportunity: Inward Investment

Mindful of China's history, the overriding fear of the current leadership is social unrest. Millions every year leave the impoverished countryside to find work in the new cities and industries, making employment an ever-pressing concern, and western ideas of democracy unhelpful at best, if not subversive. Demonstrations are closed down promptly, and western influences (media and Internet), like the workforce, strictly controlled.

When recession in Europe and the United States reduced its export market, China turned to inward investment, pumping billions into cities, infrastructure and natural resources. The urban population increased by 300 million in 30 years. Exports shifted from primary goods (oil and agricultural products) to labor-intensive products ( textile and clothing), then to capital-intensive products (steel, machinery and automobiles) and finally to technology-intensive products ( high-tech equipment, software and green technology). {7} Investment and internal markets remain tightly regulated, however, and no doubt use industrial networks and other Internet-based methods of harnessing supply and demand to ambitious growth plans: a considerable advantage over the earlier and wasteful Soviet centrally-planned economies. {12} {13}

As domestic wages began to rise, direct foreign investment began to consider domestic markets. {14} In 2004, the secondary sector's share of foreign direct investment stood at 71%, compared with 23% for the tertiary sector. By 2008, the tertiary sector accounted for more than the secondary. The sums are large, moreover: Chongqing alone attracted an estimated US$10.8 bn in 2011. {15}The Chinese increasingly expect more from life: medium real wage have increased at 17% p.a. since 2009, and workers now take home nearly five times what they did in 2000. {44}

Though China could possibly fund development through its (currently exceeding US$ 3 tn) trading surplus, it needs foreign expertise. Thousands of its brightest students are sent to to study abroad every year, and its own universities and industrial parks meet international standards. But practical know-how is paramount, and China aims to learn from the west, not being over-scrupulous about patent and intellectual property laws in developing its own systems. {16}

The global slowdown has hurt this model, and real-estate development (accounting for over 10% of GDP), fell by 16.3% year in the first half of 2012. The knock-on effect in construction materials, furniture, and appliances caused annual growth in fixed-asset investment to fall from 25.6% to 20.4%. {17}

US Rivalry

An undeclared currency war now exists between the US, China and the EEC, which only adds to global instability. {40}

In January 2010, for example, President Obama proposed a doubling of exports, which were causing a -3% drag on the American economy but a +3.5% boost to the Chinese GDP. Consumption was to increase in China, where it accounts for only 38% of GDP, in contrast to 70% in the USA. When that appeal met only a token response, America resorted to quantitative easing (printing money: the Fed buys Treasury debt from a select group of banks, creating the money 'out of nothing' — and also reducing the money supply by selling the debt to these banks). These open market operations increased the cost structure of every major exporting nation. The inflation exported to China amounted to 9% in January 2011, an unwelcome development as inflation had been one of the catalysts of the 1989 Tianaman Square protests. Many essential commodities are also priced in dollars, and the rise in foodstuffs precipitated riots in Egypt, Jordan, Yemen, Morocco and Libya, leading to the 'Arab Spring' and the overturning of governments friendly to the USA. Inflation also spread to the eurozone countries, which were understandably uncooperative at the Seoul G20 summit. {18}

In March 2011 came the Japanese earthquake, and the yen surged further against the dollar in anticipation of massive repatriation of funds for reconstruction. Japan held $2 tn of assets outside the country, of which $850 mn were in dollars. Happily, the G7 countries moved to devalue the yen by massive sell-offs on March 18th 2011, and some of American inflation was undone. {18}

China now holds $1.7 tn of US debt. By a complex web of bank loans (in both directions) America's trade fortunes are tied to the EEC, and vice versa. China has indeed been asked to bail out insolvent members of the eurozone, and there are now moves to limit Chinese influence and encircle the country with US military bases, which supposes that China will not retaliate by selling its dollar holdings and destabilizing its opponent because the cost of doing so would be too high. {19-20} Certainly the sale of $1 tn holdings would cause the dollar to collapse on foreign exchange markets, mortgage costs to skyrocket and US property prices to fall, but China would lose an essential export market. Nonetheless, the country could avoid economic suicide by slowly shifting its mix of US Treasury purchases, replacing the long term maturities by 3 month maturities. China could also change its foreign currency holdings from dollars to yen, euros and sterling. {18}

Opportunity: Outbound Investment

Indeed it is already doing so, but since these are insufficient to meet its needs, China is buying commodities: mines and metal producers, water rights, land to grow foodstuffs in Patagonia, {21} etc. China has greatly increased its gold holdings. {22} Russia and China are in talks to price oil and gas in currencies other than the dollar. {23} China and Argentina have agreed a currency swap of yuan and peso in place of the dollar, {24} and something similar has been agreed with Brazil. {25} The IMF has called for greater use of SDR (Special Drawing Rights: effectively a basket of currencies under its supervision). {26} A report by the Rhodium Group suggested that Chinese outbound FDI could reach $2 trillion by 2020, with Europe being the favored destination. {27}

Chinese investment in large-scale engineering and construction ( 2005-10) {28}



(US$ bn)




(US$ bn)

Latin America

& Canada









Energy &






Finance &

Real Estate


















East Asia











Resource Development Model

China's overseas investment resembles the colonial model, but lacks one essential element: military force. {29} Development is being watched carefully, but far from being in a controlling position, China faces competition from Europe and elsewhere. {30} Indeed, since the US runs a large deficit, China's own dollar holdings are helping to fund a miltary threat to itself. {39}


China is following the Japanese nineteenth century model in obtaining western know-how and technological development. Trade surpluses are being invested abroad to prevent yuan inflation and to invite western development. Barring social upheaval, China will become the foremost economic power within a decade or so, {32} {41} and increasingly set the global agenda.

China has a long history, and is picking what it needs from outside models. It has learned from Singapore's experience in building a modern 'Chinese' city with foreign investment, from Japan's neo-Confucian 'industry policy' methods and disregard of Western financial disciplines, from the Nationalist Party's cultural alternative to Mao's communism and from Taiwan's adoption of some US manufacturing techniques. {33} Its tussle with US hegemony, seen by Americans as fairly won by honesty, hard work and international beneficence but very differently by the Chinese, is unlikely to be confrontational unless provoked: by NATO meddling in its western neighbour's affairs, or a needless build up of US bases and fleet in its offshore waters. Similarly, China holds too much of its savings in US treasury bills to instigate a run on the dollar, and will no doubt infiltrate world trade as debt, militarism and political conformity have taken over US governance — by stages, quietly and by outward adherence to existing institutions. Increased democracy is inevitable as economic expectations rise and the better-off return from overseas tours, but the western notion of 'one man one vote' is only one possibility to be drawn from its diverse social history. China has been both innovative and outward-looking (Han and Yuan dynasties) and morbidly xenophobic (Ming dynasty and communist period), depending on perceived threats to its existence, and a more cooperative approach by the west would be in everyone's interests, though hard to achieve in the current standoff.

eBusiness Implications

B2B is growing rapidly in China, with an estimated 16.5 million users during the six months period ended June 2012. Indeed its 12th Five-Year Plan aims to double ecommerce transactions by 2015 to US$ 2.8 tn, of which US$ US$2.4 tn will be B2B. {34} Growth slowed in 2012, however, a knock-on effect of recession in Europe and the USA, but also of industrial restructuring. {42} Nonetheless, China had 591 million Internet users by the end of June 2013, around 10 per cent growth from a year ago, and indicating that 44.1 per cent of the country's population uses the web. {45}

Facebook is banned in China, but use of homegrown social media site for business has grown from 31% to 60% in the 2008-10 period. {35} RenRen, Ushi, Tianji and Jingwei are popular, and serve as a cross between Facebook and LinkedIn. RenRen alone has 31 million monthly users, mostly college students, young urban professionals and high school students. Advertising is through big banner ads and branded micro site campaigns. Social gaming is also a part of RenRen's business model: the platform is open source, encouraging third-party developers to write applications. {36-37}

Points to Note

1. Evolution of China from inward-looking empire to superpower through models borrowed from Japan and elsewhere.
2. Growing internal market, aimed increasingly at consumers.
3. Investment of trade surpluses in internal development and now throughout the world.

Sources and Further Reading

1. A Monetary History of China by Xinwei Peng. Review by Kurt Schuler. EH Review. July 2012.
2. China
by Patricia Buckley Ebrey. Cambridge Illustrated History. 1996.
3. The Eastern Origins of Western Civilisation by John M. Hobson. C.U.P., 2004.
4. China in the 20th Century by John Bowblis. Kings College, London. August 2006.
5. Podcast of 20th Century China. BBC Podcasts. September 2012.
6. 20th Century Chinese History Timeline. Beijing Made Easy. 2012
7. Freedom, Democracy, Peace; Power, Democide, and War. Democide (R.J. Rummel 's site at the University of Hawaii). July 2012. Definitions, groupings, and conflicts with other sources, make some figures controversial.
8. China's Economic Development from 1860 to the Present: The Roles of Sovereignty and the Global Economy by Stephen C. Thomas. Public Policy Forum. 2006.
9. China Development Forum 2012 Luncheon Address by Christine Lagarde. IMF. March 2012.
10. China's Rapid Growth and Development: An Historical and International Context by Ligang Song. PAFTAD conference. December 2010. With many useful tables and comparisons.
11. Currency Wars: The Making of the Next Global Crisis by James Rickards. Penguin 2011. Chapter 6.
12. The end of deep development. Economist. August 2012.
13. Chains of gold Modern supply chains are making it easier for economies to industrialise. Economist. August 2012.
14. Luxury consumer behavior in mainland China: What exists behind the facade of new wealth? by Pierre Xiao Lu. European Business Review. 2012.
15. Serve the people. The new landscape of foreign investment into China. Economist Intelligence Unit. 2012.
16. China's Investment Overseas in 2010 by Derek Scissors. Heritage Foundation. February 2011.
17. How Should China Respond to the Slowdown? by Yu Yongding. Project Syndicate. July 2012.
18. Rickards, 2011. Chapter 7.
19. Obama's China Card? by Malcolm Fraser. Project Syndicate. July 2012.
20. So Long, US Dollar by Marin Katusa. Casey Research. April 2012.
21. China Buys Patagonia by Leon Kaye. GreenGoPost. June 2011.
22. Uncivilized' China quietly building gold reserves as gold imports from HK soar by 587% in first quarter by Tyler Durden. Zerohedge. August 2012.
23. BRICS Renew Challenge to U.S. Dollar Hegemony by Alex Newman. New American. March 2012.
24. China, Argentina Agree to Currency Swap by Taos Turner. W.S.J. March 2009.
25. China and Brazil in $30bn currency swap agreement. BBC News. June 2012.
26. International Monetary Fund director Dominique Strauss-Kahn calls for new world currency by Andrew Trotman. Telegraph. February 2011.
27. China Invests in Europe Patterns, Impacts and Policy Implications by Thilo Hanemann and Daniel H. Rosen. Rhodium Group. June 2012.
28. China's Investment Overseas in 2010 by Derek Scissors. Heritage Foundation. February 2011.
29. 'It's not colonialism' by Ning Er. China Dialogue. October 2010.
30. China steps up the Africa charm offensive by Andrew Bowman. F.T. July 2012.
31. SWOT analysis of China by Swapnil Mundkekar. Scribd. Accessed August 2012.
32. China's Economic Development from 1860 to the Present: The Roles of Sovereignty and the Global Economy by Stephen C. Thomas. Public Policy Forum. 2006.
33. China's Development: Assessing the Implications (2003+). Centre for Policy and Development Systems. A detailed examination of the evidence.
34. China's online B2B transactions hit $466.7bn. by Liau Yun Qing. ZDNet. August 2012.
35. China IT and Internet. China Today. Continually updated listing of articles.
36. RenRen: The Key Facts about the Most Popular Chinese Social Network. WhatWorksWhere. April 2011.
37. Social Media B2B Marketing in China: The Professional Networking Ecosystem. WhatWorksWhere. January 2012.
38. US in position to strangle China's maritime lifelines by Li Jie. Global Times. August 2012.
39. China's Approach to US debt and the Eurozone crisis by Nicola Casarini. European Union: Institute for Security Studies. 2012.
40. Agenda for a New Economy: From Phantom Wealth to Real Wealth by David C Korten. Berrett-Koehler, 2010.
41. China Will Overtake US as Word's Biggest Economy by 2016: OECD by Prasanth Aby Thomas. International Business Times. November 2012.
42. China economic growth lower than forecast. BBC Business News. April 2013.

43. The post-industrial future is nigh. Economist. February 2013.
44. On the Path to a Service Economy Made In Post-China by Ashoka Kumar and Alex Gawenda. Counterpunch. June 2013.
45. China's online population continues to grow rapidly. Ecommerce Europe. July 2013.