China Embraces the World Market
Dr Frances Perkins Launch Presentation
26 November 2002
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- Just five years ago, when the Economic Analytical Unit launched its first China report, some analysts thought we were too optimistic in forecasting China would grow at 6 to 8 per cent for the next 10 years.
- In fact, despite the Asian crisis, over the last five years China has grown at the top end of that range, at about 8 per cent.
- In early 2002, WTO accession confirmed China's increasingly confident emergence as the most dynamic large economy in East Asia and probably the world.
- But what will China's WTO entry really mean for Australia?
- Five years after the Asian Financial Crisis with much of East Asia still underperforming, our new report seeks to answer three major questions for business and government:
- How fast is China likely to grow this decade and is its economic growth sustainable?
- What are the major risks for growth and businesses operating in China?
- And what new business opportunities are emerging in China?
- The major conclusion of the report is that, barring major unforeseen events, China should continue to grow at about 7 per cent per year in the coming decade.
- As well China's challenging business environment also should improve.
- Hence, the Australia-China trade and commercial relationship should continue to grow very strongly in the next decade.
- However, China could suffer some setbacks and this process is not without risks.
We're optimistic China will continue to grow strongly because so many powerful forces are driving its growth:
1. The private sector is growing rapidly
2. Economy increasingly open to trade and investment and FDI inflows are increasing
3. The Government is reforming and strengthening legal and economic institutions, although they still have a way to go
The major reforms the National People's Congress announced two weeks ago only confirm this optimistic outlook.
Looking quickly at some of the evidence
China's private sector is growing strongly and now contributes more to industrial value added than either state owned enterprises or collectives.
China's strong growth and liberalising foreign investment regime are drawing more FDI into China, boosting growth further. On current projections, China may pass the United States this year to become the world's biggest FDI destination. Meantime flows into ASEAN are declining.
China's markets also are becoming more open; average tariffs have declined from 40 per cent in the early 1990s to 12 per cent now. This is boosting China's productivity and growth and Australian export opportunities.
But what are the risks?
However, at least three major risks threaten this optimistic growth outlook.
1. The banking system is the main risk.
- Estimates of non performing loans range from 20 to 75 per cent of total outstanding loans, also about 20 to 75 per cent of GDP.
- Measures to reform bank lending are not stemming the flow of new bad loans.
- While WTO entry opens banking to foreign participants the Government won't privatise substantial shares of the major commercial banks soon.
- The Government can't permanently fix this problem until privatises the banks or the state owned enterprises, or both.
- Despite this very serious situation, the Chinese banking system is very
unlikely to collapse.
- It is almost totally state owned and most bad loans are to state owned enterprises.
- The Government has guaranteed bank deposits and will prevent banks failing, and the population knows this.
- Finally, Chinese banks and companies have not borrowed heavily abroad like Indonesian, Thai and Korean banks did prior to the Asian crisis.
- The main risk Australian and local businesses face is that they may have to pay more taxes in future to fund the write off the banks' non performing loans.
2. China's state owned enterprises themselves are a second major risk to growth. Their borrowing is threatening the banking system and soaking up most of China's savings.
- However, two weeks ago, the National People's Congress gave the green light for provinces to accelerate privatising small and medium sized state owned enterprises. This process is well advanced in the more progressive coastal provinces.
- Hence, within a few years only a few major enterprises in key sectors may remain majority state owned.
- However, unless they become publicly listed companies practicing sound corporate governance, these large state enterprises could stifle Australian businesses operating in their sectors, especially if they have special market privileges. They also could be a fiscal drain.
3. The third major risk to China's growthis its fiscal position. China's growing national debt is mainly due to its obligations to write off non performing loans and pay workers' pensions.
- The Government is responding to this challenge by raising its revenue take from 15 per cent of GDP in 2000 to 16.5 per cent in 2001. However, given the size of obligations building up, the Government knows its tax take must grow further to stop debt becoming unsustainable.
4. Again, at this stage, China's debt problem appears manageable and the main threat is that firms could well face increasing tax burdens. For example, businesses already are paying additional levies of up to 50 per cent of their wage bills to fund pension payments to current retirees.
How will WTO effect the risks of doing business in China?
- Firstly, China's ambitious WTO entry package commits the Government to adopting a range of trade, investment and institutional reforms that will improve the challenging business environment.
- As part of WTO entry, Chinese authorities are implementing a major legal
review of commercial statutes; this should boost transparency and predictability.
- For example, this year China has been implementing a raft of new laws strengthening intellectual property protection
- The Government also is using WTO entry requirements to drive bureaucratic
reforms to reduce the state's role in the economy. This should increase
certainty for foreign and local businesses.
- For example, the Government is running training programs for many thousands of officials across China on their new role in a market oriented economy.
The Minister already outlined some major commercial opportunities emerging; the report details many more. For traders and investors in agriculture, food processing, minerals and energy, manufacturing, infrastructure and services sectors the theme is similar. WTO entry should amplify the impact of ongoing market oriented reforms, boosting incomes and expanding export and investment opportunities.
- For example, the recent decision of the National People's Congress to permit farmers to buy and sell their land use rights should accelerate agricultural rationalisation, increasing the movement out of broad acre crops, boosting farm productivity, export opportunities for Australian broad acre farmers and demand for advanced farm inputs.
- As well, further WTO related opening of the insurance industry to foreign investment and on-going pension system reform should expand opportunities for the Australian insurance and funds management industries.
major implications for business and government
- While several major risks remain, the Chinese Government's track record on reform gives confidence it will overcome these challenges. Hence China is likely to achieve strong and sustainable growth in the coming decade.
- The raft of important reforms announced at the recent National People's Congress increase confidence in this outcome.
- If these reforms are implemented fully, China could even achieve our most optimistic growth scenario of 8% per annum in the next decade.
- While the China market will remain highly competitive, fast income growth, the boost to reforms from WTO accession and other recent reforms should expand significantly new business opportunities for Australian firms in the China market, enhancing the already dynamic Australia-China commercial relationship.
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