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Expert's View
Expert's View
UPDATED: February 5, 2007 NO.6 FEB.8, 2007
Not Quite There Yet
Despite China's remarkable economic achievements, staggering trade volume and trillions of dollars in foreign exchange reserves, it remains a developing country. Zhou Shijian, Standing Councilor of the China Association of International Trade, and Wang Lijun, Associate Professor at the Capital University of Economics and Business, have tried to set the record straight and present a true picture of China's current economic status in the global context. They believe that a developed China is still far from a reality. In explaining the gap caused by different economic measurement standards between China and the Western world, they note that China's economic capacity as seen by others is somewhat exaggerated.

The fourth largest economy?

In 2005, China's gross domestic product ranked fourth in the world, overtaking Britain that year. If income through overseas investments was added, however, Britain's gross national product surpassed China by $1,292.9 billion. China's gross national product for 2005, which accounted for 15.8 percent of the United States' total, 46 percent of Japan's and 64 percent of Britain's, was actually in sixth place worldwide. By the end of 2005, the overseas investments of the United States and Britain totaled $2,018.2 billion and $1,378.1 billion, which are generally equivalent to 90 percent and 62 percent of China's annual gross domestic product of the year, respectively.

The third largest trader?

The major component of China's impressive trade value is generated from processing trade. If the imported raw material is priced at $100 and the finished product is exported for $115, the process produces $215 in terms of import and export volume, of which only $15 is China's income. In 2005 alone, China's processing trade reached $690.5 billion, accounting for 48.6 percent of the country's total import and export volume. Imports stood at $274 billion and exports at $416.5 billion, with an added value of $142.5 billion (exports minus imports). As a result, $548 billion of the total processing trade volume was nominal and should be excluded from trade statistics. After its deduction, China's actual foreign trade was $874.1 billion instead of the previously announced $1,422.1 billion, far behind the massive $2,637 billion of the United States, $1,744.8 billion of Germany, $1,111.9 billion of Japan, $955 billion of France and $879.1 billion of Britain, ranking it sixth globally. More importantly, even though the processing trade can create more jobs and bring in a large turnover, it cannot radically drive the national economy ahead in the same way as general trade transactions.

More importantly, the huge volume is achieved in a trade structure that is typical of developing countries, through export of labor-intensive commodities, especially household necessities. Currently, about 70 percent of China's electrical and mechanical exports are products assembled with imported parts or components. Take the shipbuilding industry for example. In the second half of 2006, China built 5.28 million deadweight tons (DWT) of ships, accounting for 15.3 percent of the world total. This made it a major shipbuilder in the world, closely behind Japan and South Korea, with a 27.1 percent share of market orders. Yet Chinese enterprises' shipping output techniques lag far behind their foreign counterparts by 10 to 15 years. Furthermore, about 80 percent of the instruments used to build a ship in China depend on imports, while in South Korea and Japan the reliance on self-developed techniques has been fundamentally realized with 85 percent or above homemade instruments used. Though grand in scale, China's shipbuilding industry suffers from surprisingly low profits, meaning that the country is a big shipbuilder rather than a strong maker.

China is a large producer, but lacks world-renowned brands. Among the top 100 brands selected in 2006, the United States owns 51, Europe, 38 and Asia, 11 (Japan, 8 and South Korea, 3). None are Chinese. While competing for the most recognized 500 brands, China gained 12 places, mostly listed in the lower part of the list. In fact, roughly 2,000 Chinese enterprises own proprietary technologies, less than three per 10,000 of the total number. Even worse, more than 80 percent of Chinese exporters have no self-owned trademarks. China is probably a big trade nation, but not strong enough. A trading partner leaning heavily on foreign capital and technology is certainly a developing country.

World top foreign exchange reserves?

China's foreign exchange reserves reached $1,066.3 billion in 2006.

In comparison, by the end of September 2006, Japan reported foreign exchange reserves estimated at $843.6 billion without any debts. Japan is the world's largest creditor. By the end of 2005, its credits topped $300 billion. In addition to these overseas loans, Japan's foreign exchange reserves should far surpass those of China.

Moreover, due to China's mandatory foreign exchange settlement system, which allows businesses to retain only a small part of their foreign exchange earnings, the country's $160 billion worth of nongovernmental foreign currency assets are far less than Japan's $3 trillion and the United States' $9 trillion.

Most developed economies stress the significance of maintaining the value of foreign exchange reserves in conversion to strategic goods, such as oil and gold. The United States has a 150-day commercial oil reserve, while that of Japan is nearly 200 days. In China, the oil stockpiles plus oil produced by domestic refiners could be used up in 20 days. Also, most of these developed countries have a rich reserve of strategic metals like copper, aluminum and iron ore that could be equivalent to considerable amounts of forex reserves. As the most stable physical reserve, gold is favored around the world. The United States has 8,135 tons, Germany 3,440 tons, France 3,025 tons, and Italy 2,453 tons in reserve. China has a mere 600 tons.

Although Chinese people were proud when U.S. Treasury Secretary Henry Paulson recently flattered the country's economy by describing China as a "world leading economic power," we need to keep our feet on the ground and realize it takes time to reach the levels of the world's economic leaders.

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