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Future of Booming Chinese Economy Debated - 2003-02-15

The booming Chinese economy was the subject of two separate presentations in Washington this past week.

The Wilson Center asked the question of whether, like the fast rising U.S. stock market of the late 90s, the booming Chinese economy is a speculative bubble waiting to burst. The answer of four scholars, is a resounding no. One of them, Yale University sociologist Deborah Davis, expects the rapid seven to eight percent annual growth rates to continue.

While she acknowledges a corresponding and potentially explosive rapid rise of income inequality, Ms. Davis says other socio-economic indicators suggest that the widening income gap may not be so pronounced. "At the same time we're seeing a growth of basic education and health care for rural girls. That's always our target," she says. "So, if we're seeing fewer poor rural girls and they're getting more education and they're getting more health careand we know in the way that the AIDS thing is coming through we're able to target our preventative measures, then this (income inequality) becomes not the same story as what we've found in the capitalist developing world."

Economist David Hale, an investment manager in Chicago and frequent visitor to Asia, says China is currently the only growth locomotive in the global economy. Unlike Japan and South Korea in earlier decades, Mr. Hale says China has thrown itself open to imports and to foreign direct investment (FDI). "Foreign companies there now dominate the market for cellular telephones, shampoo, for automobiles, for a growing number of consumer products and also for some capital goods products. And indeed foreign companies now account for half of China's exports," he says. "Foreign companies are now using China now not just as a base for domestic consumption but also as a base for the world."

Mr. Hale says that foreign firms account for much of the recent change in the composition of Chinese exports. "Seven or eight years ago imports were overwhelmingly for domestic consumption," he says. "But now half of China's imports are for export reprocessing. China is getting a new link in the global supply chain, similar to what Singapore and Taiwan had 15 or 20 years ago. You import capital goods, you import components, you reassemble them and ship them out again. This is now China's new place in the global supply chain."

Mr. Hale says China is now behind only the United States and Britain in having the largest accumulated stock of foreign investment. Those flows into China totaled $50 billion last year. Mr. Hale says foreign investment has facilitated China's shift into high technology products. "A couple years ago, China's exports were only 20 per cent technology products. The dominant exports were plastics, toys and textiles. But by 2005 or 2006, with Taiwan moving a lot of its output from the island to the mainland, half of China's exports if not more will be technology related products," he says.

Mr. Hale believes China's boom is enduring and not fragile. He says China has immense cost of labor advantages over other developing country competitors. Aside from rising income inequality, a high 23 percent unemployment rate and bad loans in the banking system were identified as significant problems that must be addressed.