Despite success China still poor

In: Uncategorized

18 Jan 2010

This is my comment from this week’s Fund Strategy.

Arguably China came of age last week. After more than three decades of rapid economic growth it achieved the titles of the world’s largest exporter and the world’s biggest car producer.

This was an enormous achievement. Back in 1978, when its rapid growth began, China was dirt poor. Not much earlier, famine had been a frequent scourge of Chinese life. ??

Today not only are the Chinese people much wealthier but China is the second most important economy after America. Decisions made in Beijing and Shanghai have an impact all over the world.??

Such a high profile can be a mixed blessing. China has come under sustained attack for allegedly “dumping” its exports and, in particular, for keeping the renminbi unreasonably low. ??

As a result, western experts frequently call on China to let its currency appreciate. Often this is presented as a demand which will help China counter the effects of overheating. For example, Barry Eichen­green, a professor of economics and politics at the University of California, Berkeley, argued last week that:??

“It’s crunch time for China. If the authorities don’t let the renminbi appreciate substantially now, they risk a substantial depreciation later. Appreciating now will help cool off China’s overheated asset markets. Otherwise China risks a crash and economic slowdown with a weaker currency, since exports will be the only game in town.”

What such comments often downplay is that Western producers have a vested interest in a Chinese revaluation. It would help give their goods more of an export edge against Chinese ones.??

Whatever the merits of the arguments on the renminbi, most commentators tend to overestimate China’s strength. They see figures such as China’s rapid growth rate or its export performance and erroneously conclude that it is a rich country.

But such conclusions omit a key factor: China’s massive population. Once its 1.3 billion people are taken into account it should be clear that China remains poor. Even at purchasing power parity—taking into account America’s higher price levels—America has about eight times the income per head of China. China is at about the same level as Angola and Egypt in relative income terms.

It is true that if China continues at its rapid growth rate it will probably overtake the developed countries at or before mid-century. But it is still far from having reached that stage and, if China’s growth rate slows substantially, it may be a long way off or even never achieved.

Over the past 30 years China has moved from being dirt poor to simply being poor. Although it has made huge strides forward it is still far from being a developed economy.