How China Is on Its Way to the Top of the World

How China Is on Its Way to the Top of the World

After the US, China is already the world’s second biggest economy. China’s gross domestic product (GDP) climbed by 6.9% in 2017. Above-average growth is also forecast for the coming years thanks to more research, more innovation, and greater efficiency.

Everyone has an opinion on China. The world’s second biggest economy inspires politicians, academics, scientists, entrepreneurs, artists and the media worldwide to conduct analyses, produce specialist literature and, of course, air their views. These opinions cover the whole spectrum from blatant criticism to unabashed admiration. However, the common denominator here is respect for what the country has achieved over the last several decades. The single-minded way in which China targets – or has already achieved – leading positions across a whole raft of fields is impressive.

A look back

When the People’s Republic of China was founded in 1949, the Communist Party of China (CPC) faced a multitude of huge challenges. Agriculture was at a low ebb, the irrigation system was in very poor shape due to ram- shackle dams, and the transportation infrastructure was in a precarious state. The “Great Leap Forward” campaign proclaimed by Chairman Mao Zedong ended in a catastrophic famine that caused millions of deaths. The “Great Proletarian Cultural Revolution”, Mao’s other key project, also claimed millions of lives and only came to an end on Mao’s death in 1976. Up until then, the People’s Republic was largely isolated from the West. It was not until after the Cultural Revolution that the Communist Party embarked upon a controlled process of opening the country up to the outside world.

For reasons of space, we are unable to provide a detailed description of how China has developed over the 40 years since then in this article. We have restricted ourselves to three initiatives and programs with a direct link to the present: “The New Silk Road”, “Made in China”, and “China Manufacturing 2025 (CM2015)”.

The New Silk Road

The New Silk Road, also referred to as “One Belt, One Road” or the “Belt and Road Initiative”, has been a key priority of the Communist Party leadership under Chinese President Xi Jinping for a number of years now. The term harks back to the old Silk Road, which linked China to central Asia, the Middle East, and Europe.

Essentially, the initiative is a vast infrastructure project with which China aims to facilitate free trade across the globe. The New Silk Road runs through 60 countries, which are home to more than 60% of the world’s population. As well as building roads, railways and ports, the initiative envisages the establishment of special economic zones. Besides the Middle Kingdom itself, neighboring countries are also set to benefit from the New Silk Road.

For their part, many Europeans take a skeptical view of this project, accusing the Chinese of conducting this huge undertaking predominantly out of self-interest. There is a widespread sense that China wishes to exploit this enhanced infrastructure to gain efficient access to countries that it would like to take over the cheap mass production of goods in future. The Chinese aim to lose the “workshop of the world” tag by bidding farewell to mass production via an industrial upgrade.

A sovereign investment fund – the Silk Road Fund – was set up in late 2014 to finance the initiative. A hydroelectric power plant in northern Pakistan is one of the first projects it has funded. The China Development Bank, the Export-Import Bank of China, and the Asian Infrastructure Investment Bank (AIIB), whose members include Switzerland, are also providing funding for projects within the New Silk Road initiative. The AIIB was established at China’s instigation. Its founder members include India, Russia, Indonesia, the Philippines, Germany, France, the United Kingdom, Italy, and the Netherlands.

Made in China 2025

The initiative is partly inspired by Germany’s “Industry 4.0” program, which aims to combine the opportunities provided by information and communications technology with industrial production. However, the Chinese program goes a lot further. The aim is not only to digitalize China’s industry, but also to make the whole country ready to manufacture products that add the highest value possible. At the same time, the plan is to boost productivity, enhancing competitiveness to world-class levels. “China still lags a huge distance behind leading multinational corporations in many industries, but the catch-up process is gaining traction,” was the recent assessment of the Mercator Institute for China Studies, Berlin.

China Manufacturing 2025 (CM2015)

This initiative, which was launched in 2015, aims to promote ten specially selected economic sectors. These include various industries such as IT, robotics, aviation, the manufacturing of rail transport equipment, electric vehicles, agricultural machinery and ships as well as biotechnology and pharmaceutical products. The program gives priority treatment to building up local expertise quickly. The aim is to put Chinese companies in a position to compete with the best European and US corporations when it comes to quality, efficiency, sustainability, and innovation. Chinese companies that meet these criteria can benefit from tax privileges and subsidies. In contrast, it is by no means unusual for foreign suppliers to be at a disadvantage, as they either face obstacles to market entry or are denied access altogether.

The quest for stability

According to Credit Suisse’s Investment Outlook 2018, China’s policy focus this year will likely switch from economic stimulus to limiting growth in debt. Having achieved a surprisingly strong level in 2017, growth may therefore slow down somewhat, not least because of what will probably be ongoing consolidation in key industries.

On the back of their quest for stability, the Chinese authorities have tightened up capital controls, which has recently prompted a modest rise in money market rates. As a result, after a weak 2016 the RMB appreciated slightly on a trade-weighted basis last year as outflows eased amid a recovery in foreign exchange reserves. The authors of the Investment Outlook 2018 take the view that, while a more restrictive policy approach will likely be pursued again this year, capital controls could be eased a little. In light of what are relatively robust Chinese fundamentals, they do not expect this to trigger another phase of weakness in the RMB. Furthermore, the currency’s stability should limit the risks of protection- ist measures against China and of heightened pressure on other emerging market currencies.

Hats off to China!

Commentators may well take a critical view of the general conditions under which China’s economic success has been achieved. Yet there can be no doubt that the end has justified the means. The Chinese government’s track record is indisputable. China’s GDP of USD 11.9 trillion now accounts for 15% of global output, which runs to an estimated USD 79.3 trillion at present. The gap versus the US, whose GDP comes in at USD 19.4 trillion (24.5% of global GDP), is steadily shrinking. With its growth last year alone of 6.9%, China boosted its economic output by some USD 750 billion, which is higher than Switzerland’s entire GDP of around USD 660 billion.

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