China in Transition

China as Number 1

Chi Hung KWAN
Consulting Fellow, RIETI

In September 2009, my book China as Number 1 was published by Toyo Keizai, Inc. The preface and table of contents of the book are reprinted below courtesy of the publisher.

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In 1979, I came to Japan as a student from Hong Kong and began studying at the University of Tokyo's Graduate School of Economics. It was the year in which Prof. Ezra F. Vogel of Harvard University published his book Japan as Number One (translated into Japanese by Wakako Hironaka and Akiko Kimoto, TBS-BRITANNICA). Back then, I was driven by an avid enthusiasm to learn from the experience of Japan, the only Asian country that had achieved remarkable economic development and joined the league of developed nations, and convey the lessons to China. Never in my wildest dreams did I think that 30 years later I would write China as Number 1 myself to convey the experience of China to Japan.

The year of 2009, in which this book is published, marks the 60 th anniversary of the founding of the People's Republic of China. The first 30 years of its history were no time for economic development, plagued by endless political conflicts symbolized by the Great Leap Forward and the Cultural Revolution, both launched by Mao Zedong, president of China and chairman of the Communist Party of China (CPC). The result was a continuous widening of the economic gap with Japan which, having gone through the postwar high economic growth period, emerged as the world's second largest economic power in 1968 with its gross domestic product (GDP) exceeding that of West Germany.

A turning point for the Chinese economy came at the third plenary session of the 11th CPC Central Committee held in December 1978 under the leadership of CPC Chairman Deng Xiaoping. It was at that session that the Maoist line of policy was denied and the Deng Xiaoping Theory, centered on the policy of reforming and opening up the Chinese economy, was established as a new course of policy. In the 30 years since then, China has been maintaining robust annual growth of nearly 10%. It is historically unprecedented that a huge country such as China has continued to achieve high economic growth over such a long period of time. Today, China's presence in the global economy is growing rapidly.

China seems to be emerging as the sole winner, which is becoming all the more obvious as the world economy continues to struggle in the worst financial and economic crisis in 100 years triggered by the collapse of Lehman Brothers in September 2008.

The global crisis dealt a serious blow to China's exports. However, by stimulating its domestic demand, China began showing strong signs of recovery, ahead of developed countries, and is likely to achieve the government's target of 8% growth in 2009. The U.S.-triggered financial crisis will be recorded in the history as an event symbolizing the rise of China as a global economic power.

In 1978, China's GDP was only about 20 percent of Japan's. However, in 2008, after 30 years of high growth, China's GDP had reached a level close to 90 percent of Japan's. GDP predictions are subject to a degree of uncertainty caused by fluctuations in foreign exchange rates and prices. However, considering the significant gap in the growth rate between the two countries, it is highly likely that China will surpass Japan by 2010 in terms of its scale of GDP. If realized, this will mean that Japan would cease to be the world's second largest economy, surrendering the status it has retained for about 40 years to China.

Yet even then, with its population 10 times that of Japan, China would be reaching a level about 10% of Japan's in terms of GDP per capita. That is, China would be in a stage of development equivalent to that of Japan about 40 years ago. While this means that the living standard of China would be remaining at that of a developing country, it also suggests that China would be left with ample room to exploit its latecomer advantage to maintain higher growth relative to developed countries. It is anticipated that the Chinese yuan will continue on a rising trend in value against the U.S. dollar in the coming years. There is a good chance for China to exceed the United States in the size of GDP to become the No. 1 economy in the world by 2030.

Actually, areas in which China has reached the world's top level are increasing rapidly.

First, in the real economy, China has become the No. 1 exporter in the world with its exports growing rapidly particularly in the area of industrial products, as reflected in the fact that the country is often referred to as the "factory of the world. " A closer look shows that there has been a shift in the composition of exports away from labor-intensive products to machinery products. Also, by taking advantage of an enormous domestic market of its own, China has become the world's No. 1 in the production of steel and automobiles.

Meanwhile, on the financial front, China embarked on a major reform of its stock market and regulation in 2003. Through this ordeal, the country's three major banks, which had been saddled with massive bad loans - the Industrial and Commercial Bank of China (ICBC), China Construction Bank, and the Bank of China - have emerged strong and become the world's top three banks in market value of shares. Furthermore, China is the world's biggest holder of foreign reserves with its currency stockpile topping $2 trillion. A great portion of the reserves is being invested in U.S. treasury securities. Today, China money has become a major determinant of the exchange and interest rates of the U.S. dollar and other key currencies, taking over the role once played by Japan money.

China has thus risen as an economic power. At the same time, however, China faces a number of challenges - including the deterioration of the environment, growing trade friction, and sluggish political reform - that must be overcome if the country is to sustain its high growth. Particularly, now that China has overtaken the United States as the world's biggest emitter of carbon dioxide (CO2), it is being urged to play a role commensurate with its capacity in providing international public goods in terms of contributing to the prevention of global warming.

In this book, I have sought to illustrate the current state of China, a country that is becoming the No. 1 in many areas, by making extensive use of statistical data. At the same time, I have attempted to provide an insight into the future of China by identifying challenges the country must address to become the true No. 1. I would be delighted if this book could serve as a reference for Japanese readers in understanding the Chinese economy.

Finally, I would like to acknowledge Ms. Kimiko Ishihara, Ms. Wei Yuhong, and Mr. Xu Yirui for their support in preparing data and materials for the book as well as in proofreading the manuscript. Also, I received valuable advice form Mr. Tomoyasu Sato of Toyo Keizai Inc. throughout the process of writing this book, from the selection of the theme to the thematic structure and content of the book. I would like to use this space to express my thanks to all of them and those others who helped me bring this book to fruition.

Table of Contents

  • Introduction: China Recovering Ahead of Developed Countries: Beyond the global financial crisis
  • Chapter 1:World's No. 1 in Economic Growth: Light and shadows of reform and open-up policy
  • Chapter 2:World's No. 1 Exporter: Improving foreign trade structure
  • Chapter 3:World's No. 1 in Steel and Automobile Production: Shifting from light manufacturing to heavy industry
  • Chapter 4:World's No. 1 Bank: Progress of financial reform
  • Chapter 5:World's No. 1 in Current Account Surplus: Unfinished yuan reform
  • Chapter 6:World's No. 1 in Foreign Reserves: Signs of a shift away from U.S. dollar
  • Chapter 7:World's No. 1 in Population: From labor surplus to labor shortage
  • Chapter 8:World's No. 1 Greenhouse Gas Emitter: Serious energy and environmental problems
  • Chapter 9:Toward World's No. 1 in GDP: Looking ahead to the end of the Communist Party dictatorship and the unification with Taiwan
  • Proposals for Reviving Japanese Economy: How to deal with China as world's No. 1
September 24, 2009.

September 24, 2009