This year, Britain chairs the G7 and China chairs the G20. In a speech in Beijing in February 2005, Gordon Brown mapped out the economic agenda that the two countries share, and hinted at the issues that still divide economic policy in China from policy in Europe. Understanding some of the facts and figures behind these issues is helpful in realising the scale of the opportunity that China could present.
The story of China’s economic growth is told in numbers which boggle the imagination. By 2008 China will be the world's third-largest exporter, and by the decade's end its economy will be larger than that of either France or the Britain.
GDP growth in China took off in the 1980s, driven largely by manufacturing, and reached 9% in 2003, a level of growth that most economists believe it can maintain. China has used its vast reservoirs of domestic savings to build an impressive infrastructure and has sucked in huge amounts of foreign money to build factories and to acquire the expertise it needs. In 2003 it received $53 billion in foreign direct investment, or 8.2% of the world's total—more than any other country.
Raw material supply
"China is quickly overtaking the United States as the world's biggest consumer of global resources,” stated a report from the Earth Policy Institute in February 2005 . China is the world's largest user of cement, steel, copper, iron ore and tin - consuming, for example, half the world's cement, over a quarter of the world's steel and a third of the world's iron ore. China has been responsible for one third of the recent growth in demand for oil, a situation which is ironic given China’s position as a developing country under the Kyoto Protocol, which seeks to reduce climate changing-inducing greenhouse gas emissions from fossil fuel use, amongst other sources. (More on this in the other briefing paper in this update.)
China’s Executive vice Prime Minister, Huang Ju attended the World Economic Forum at Davos in January 2005 and gave clear forecasts of China's potential for production. The Chinese government expects its country’s economic output to grow to $4 trillion by 2020, from $1.6 trillion today and its output per capita will triple to $3,000 per person.
Reflecting worldwide demand, the largest areas of manufacturing growth, and investment opportunity are in telecommunications, closely followed by electronics.
China’s own internal market is in itself a driver of growth. On 7th January 2005, Zhang Yichi was born, the 1.3 billionth member of the world’s most populous country. While the divide between the affluent cities and the half a billion people who make up the rural poor remains stark, China’s ever-growing population is a precursor to massive growth in demand for manufactured goods, notably cars. All the world’s large auto manufacturers are exploring joint ventures with Chinese companies, suggesting major opportunities for companies in their supply chains. The internal market and vehicle ownership in China is also driving a huge increase in energy demand, particularly around the urban centres, and technologies which deliver the benefits of resource use while actually transforming or conserving resources are in high demand.
To add to the list of mind-boggling statistics: China manufactures 75% of the world's toys, 58% of the clothes, and 29% of the mobile phones, 25% of the world's washing machines, 30% of the world's TVs, 40% of the world's microwaves, and 50% of the world's cameras.
The foreign direct investment of more than $1 billion which arrives each week shows no sign of slowing down. There are already 4000 joint ventures between UK and Chinese partners, with 400 new JVs being entered into each year. The UK invests more than any other European country in China - $20 billion per annum.
There is also an emerging venture capital (VC) market to support entrepreneurs, particularly technology entrepreneurs. Reflecting where the VC money is already most active, America provides most of this strand of finance. In 2004, US venture capitalists invested $1.27 billion in Chinese-based enterprises, almost 29% more than the previous year.1
There are, of course, still plenty of barriers to accessing these opportunities. Foreign companies are still usually required to enter China through a joint venture (JV) although there are increasing numbers of ‘Wholly Foreign Owned Enterprises’. The Chinese government manages the development of enterprise much more directly than Western businesses are used to. You can be a small entrepreneur in China, but if you want to be big you will have to get money from a government-affiliated source at some point. Government officials essentially have the power to decide which companies grow.
Managing the currency risk on any investment remains complicated while the Yuan is pegged to the US dollar. There are few signs of whether China will allow its currency to rise against the dollar, an element of the country’s macro-economic policy which is the main concern of developed nations.
A third big issue is whether the Chinese are going to crack down on the rampant theft of intellectual property. It may be unrealistic to expect them to achieve in a decade what Europe and America have established in a century but while patents are ignored, a Western company’s leverage to make a cost-effective entry into the Chinese market is severely constrained.
Back to Gordon Brown in Beijing in February: the British Chancellor of the Exchequer told his audience at the Academy of Sciences “It is already clear that if we are to maintain stability and growth, each continent has a role to play: America in addressing its deficits; and Europe and Asia in addressing the vexed questions of structural economic reform.” While there are factors which stand between Western companies and realising economic opportunities in China, it’s equally true that the West cannot stand still and expect China to convert to the same economic model as Europe – both sides are going to see massive changes.
- Zero2IPO, a Beijing-based VC research firm, February 2005
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© Article 13 2005