Opinion: China's Move Away From Being the "World's Factory"

China became the second-largest economy in the world over the shortest time period in history. Leveraging on domestic supply of cheap labor, foreign investment inflows and technologies, China opened up to the world, in 1980, unleashing a three-decade-long era of blistering double-digit growth rates.

 

However, since 2011, growth has slowed in China to single digit rates, raising doubts over the sustainability of its investment-heavy and export-oriented growth model. As quarterly growth rates slow to the lowest in years, questions abound on whether a slowing China is approaching an economic crisis, emerging out of any one or a combination of its economic problems – the “real estate bubble,” runaway local government debts, shrinking corporate profits, weakening activity in manufacturing or a weak pace of domestic economic reforms, to name a few.

 

Meanwhile, China is also transforming itself in surprising and significant ways, to continue its growth story, as well as to transition to the next stage of economic development. The country wants to maintain a ‘reasonable’ rate of growth – around 7 percent – and ensure employability to about 10 million youth per year. This will help deliver acceptable levels incomes in a 1.3 billion plus country and contribute to social stability. As such, China is implementing new growth engines, even while implementing its old growth model in novel ways.

 

For instance, China sees a huge growth potential in correcting existing regional disparities by developing the comparatively less-developed central and western regions. Construction of roads, railways and airports in these areas and connecting them to the bigger Chinese cities is helping growth through continued fixed-asset investments. Similarly, the Grand Western Area Development strategy is utilizing a mix of infrastructural and foreign investments in ten relatively backward western provinces/autonomous regions of the country to push growth rates.

 

The new Silk Road economic belt is an initiative announced on lines of the ancient silk route, and seeks to connect the western parts of China with the resource-rich central Asian nations, opening these areas to international trade and commerce, to serve as a growth impetus for China. As part of the scheme, several Chinese cities including Xian and Chongqing are gearing up to develop as bustling trade, cultural and transportation hubs. The USD 16.3 billion fund to finance the new Silk Road infrastructure with a transcontinental reach will involve building and expanding railways, roads and pipelines. Further, Chinese state conglomerate CITIC Ltd has also reportedly announced 300 projects (extending from Singapore to Turkmenistan) worth USD 113 billion on the new Silk Road. This generates employment and income for people and also for construction, infrastructure related companies.

 

Urbanization is recognized as yet another powerful growth engine. In the next two decades, 310 million more Chinese are expected to migrate from rural to urban areas – an addition of 15.5 million migrants per year on an average. A rapidly-urbanizing China sees massive space for growth through an increasing supply of urban public goods and services for the migrating population, besides raising service levels for urban citizens in general. Research has revealed that urbanization boosts consumption demand in the economy, and urban citizens spend more than their rural counterparts. China has estimated that every rural resident who becomes an urbanite would increase domestic consumption by more than USD 1,587 (per year). At the same time, China has also calculated an investment in urban infrastructure and public services for each resident at the rate of USD 16,000 (RMB 100,000), which at present rate of urbanization would imply an additional USD 6.4 trillion (RMB 40 trillion) in the coming decade – equal to China’s GDP in 2011!

The other new growth engines being pushed by Chinese leaders also include building a larger services sector and moving up the value chain in manufacturing through export of higher value products – both part of much-needed structural reforms. After the success of China’s Special Economic Zones, the next development push is expected to come from the New Areas, which are special economic development zones supported by preferential policies of State Council to attract new investments.

The New Areas in the Pearl River Delta aim at transforming China from a “world factory” to a “services powerhouse”; the Tianjin-Binhai New Area aims at industrial upgradation and developing tertiary sector and so on. Chinese government also unveiled the “Made in China 2025″ strategy in May this year as yet another growth driver, seeking to enhance efficiency of Chinese manufacturing and promote high-end manufacturing in ten new industrial hi-tech areas, including robotics, aerospace, new energy vehicles, advanced transport and so on.



 



At the same time, China continues to attract non-financial Foreign Direct Investment (FDI) at much over USD 100 billion a year, with multinational corporations contributing to millions of jobs, a major part of China’s trade, significant tax revenues and added industrial value. Bigticket investments are continuing in the form of the South-North Water Diversion Project and the world’s longest undersea-tunnel under the Bohai sea to name two examples. The latter is expected to generate economic activity in the northeastern part of China by connecting it to the prosperous and buzzing eastern Chinese coast. There is also the ongoing grand investment in China’s high-speed railway network, which is already the largest in the world.



 



China’s growth story seems to be far from over!

Sumita Dawra is an IAS officer in Andhra Pradesh cadre, and till last year was Head of Economic Wing in the Indian Mission at Beijing. Her book, ‘China: Behind the Miracle,’ (Bloomsbury) is under publication.

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