– China, Growing Superpower

China to keep growing in face of challenges
New Kerala

Davos: China will continue to grow at a rapid pace but needs to rebalance its economy to rely less on exports, economists said Wednesday at the World Economic Forum meeting here after the emerging economic superpower revealed its 2005 gross domestic product figures.

China Wednesday said its estimated gross domestic product (GDP) grew 9.9 percent to 8.23 trillion yuan ($2.26 trillion) in 2005, marginally below the 10.1 percent growth for 2004.

"Today China overtook France to become the fourth largest economy in the world," said Min Zhu, Executive Assistant President of the Bank of China.

"There is still room for growth, as there is a rural workforce of 300 million people coming into the cities looking for work," he said. "I think China will continue to have a GDP growth of up to 9.3 percent."

Jacob A Frenkel, Vice Chairman of American International Group, concurred. "The rural workforce will continue to come to the cities and the government will continue to provide jobs for them, driving the economy," he said.

However, economists agreed that the Chinese export model could not last indefinitely and the economy would have to be rebalanced to promote more internal consumption.

"Countries like China have not developed an internal consumption model, so when the American consumer spending drops, as it will continue to this year, their exports will be hit," said Stephen S. Roach, Chief Economist at Morgan Stanley.

"The bulk of China's growth has been driven by fixed investments and exports, which account for 70-80 percent of GDP; if China powers on there will be overcapacity and deflation," he said.

Zhu agreed that the situation needed to be examined.

"Our model is simple: high foreign direct investment, cheap labour and export. Unfortunately, this is not sustainable," he said.

According to Laura D. Tyson, Dean of London Business School, the Chinese government will address the issue.

"China's macro-economic policy record has been outstanding and it can be expected to act," she said. "These changes would be good news for China and the global economy."

Roach warned that in the short-term China's export rate would lead to friction with the EU and the US, and lead to more protectionist measures to slow the flood of cheap Chinese goods.

However, Frenkel said this may be a bad idea.

"People are missing the point with the protectionist argument," he said. "China exports around $300 billion per year to the EU and US but it imports the same from other Asian countries."

"Doing something to slow China's growth would also affect all of Asia," he said.

Zhu ended with words of warning for the traditional superpowers.

"The US and Japan are no longer the global growth engine," he said. "If things remains the way they are for next two years, it will profoundly change global economic structure."