Is China's economic prowess overrated?

With China recently in the news we hereby present an alternative view on the country's economic status.

Western powers still possess a somewhat distorted view that China is of great importance economically, militarily and politically. China is already an economic powerhouse and is therefore supposed to matter. The reality is that Chinas' small market is of little global relevance especially outside of Asia.

In 1800 China accounted for 33 % of world manufacturing output, by 1900 it had fallen to just 6.2 %. For comparison during the same time period Europe as a whole rose from 28 % to 62 % and the United States from 0.8 % to 25.6 %. Using the most favorable purchase-power-parity calculations, in 1997 China accounted for 11.8 % of world GNP; its per capita ranking was 65 ^Th just behind Latvia.

Chinese economic data is trusted by few economists even the Chinese Prime Minister Zhu Rongji is skeptical of it. Routinely the Asian Development Bank deducts some two percent from China's official GDP figures. Notional current GDP growth rates are currently cited as 8 %. A more accurate figure would be 6 %, of which some two to three percent is useless goods produced to rust in warehouses. One percent of China's growth in 1998 was due to government spending on infrastructure whilst a further three percent is accounted for by the increase in productivity accompanying the movement of peasants off the land into cities.

Although China has performed better during this generation than the previous ten it's economy is still effectively in recession. Furthermore, the past twenty years of economic reforms have been stalled by the Asian economic crisis. At least a quarter of Chinese loans are non-performing and some 45 % of state industries are losing money. Economic decentralization has progressed so far that the increasingly wasteful and corrupt practices occurring in regions and specific institutions cannot be reformed. Central investment that accounts for twenty percent of total investment in China is falling. Similarly Interprovincial trade as a percentage of total provincial trade has dropped by 18 percent between 1985 and 1992.

In 1997 China accounted for only 3 % of total world trade and just 11 % of total Asian trade. Despite the illusion of China as an important market, exports to China are tiny. It receives just 1.8 % of US exports, the same level as Australia or Belgium. Within Asia China receives only 5.1 % of Japans exports, about a quarter less than to Taiwan. Only South Korea sends a significant amount of goods (9.9 %).

During the past decade China has undergone a massive Foreign Direct Investment (FDI) boom, suggestive that it is important for the global economy. However, some 80 % of the 1997 peak inflow came from ethnic Chinese living mainly in East Asia. The average U.S. or European Union investment in China works out to be less than their investment in Brazil.

The Chinese economy is contracting and the FDI falling with it. In 1998 the UN reported that China's FDI maybe halved, 1989-99 figures support this estimation. In reality Asia (except Japan) has little impact on the global economy, certainly China is of minor importance. The exaggeration of China's influence is part of the exaggeration of Asia's importance.

China accounts for 4.5 % of global defense spending (U.S. 33.9 %), it is a second rate military power. China is a regional threat to Western interests but it can be constrained. Beijing annually exports $ 1 billion worth of arms. Although this is not threatening, both France and Britain sell far more, within certain markets Beijing exerts real power. Arms transfers to Pakistan and Iran are a cause for concern. However, the military gap between the US and China is if anything growing especially for high technology arms.

China matters in that it can become a serious nuisance by threatening its neighbors or assisting anti-western forces. Not, however, because it is a potential strategic partner for the west. Moscow or even Paris nearly always out do China in obstructing Western interests in the Security Council. Beijing is clearly a threat to Taiwan. The Chinese missile threat however, is much exaggerated and even Taiwanese defense planners do not believe that China can successfully invade.

Politically China is devoid of ideological power and authority; it is in no position to matter as a source of international political power. Culturally China is of less importance to ethnic Chinese than India is to ethnic Indians. Taiwan, Hong Kong and Singapore are more important global influences than China when measured in terms of films, literature and the arts. China's continuing uncertainty about how to manage the consequences of modernity and interdependence is one of the key reasons for the country's weakness.

China believes that the world owes it recognition as a great power. "At best China is a second-rank middle power that has mastered the art of diplomatic theatre". China has been able to project and sustain an inflated image of its own importance. If China is cut down to size in western imaginations its potential threat to Western powers becomes more manageable. Until it is treated more like a Brazil or an India there is little hope of maintaining a long-term coherent policy regarding China.

Even on the internet China gets much overrated. Various business web pages in Hong Kong speak/brag about millions of hits to their pages, per month? But who are these hits? Plain Chinese housewives trading odd lot shares?

Parts of this article is based on a report by Gerald Segal called "Does China Matter"?

As was published in the Foreign Affairs Magazine, Sept./Oct. 1999.