Global Impact of the Rise of China: The World’s Workshop

By Nadav Morag, Ph.D.

CTU’s Global Security Series offers background on current national and homeland security topics. Dr. Morag’s third post of this series, discussed the structure of government and leadership in China. Today’s post will focus on the global impact of China’s economy.

CTU Security Studies - Chinese FlagChina has been characterized as the “world’s workshop” because so much global manufacturing is carried out in China.  In fact, last year, China overtook the United States as the world’s largest manufacturer.  Overall, China has the world’s second largest economy and is slated to overtake the United States by 2020.  This is astounding given that only 25 years ago, the Chinese government contributed less than 2% to global Gross Domestic Product (GDP) – the sum of goods and services produced in an economy – and now it makes up roughly 9% of global GDP. The United States still provides 25% of global GDP and a significant chunk of this consists of the service sector, which is comparatively less than what is developed in China. 

As late as 25 years ago, China was an impoverished country with low income levels, poor infrastructure and a largely agrarian economy.  Under the leadership of Deng Xiaoping, China’s economy began to pull away from the constraints of communist state-planning.  The reforms began in the agricultural sector and were gradually extended to the industrial and service sectors. These reforms included legislation allowing the creation of private corporations and opening up the country to foreign investment.

Tremendous Economic Impact
Over the past two decades, the Chinese economy has grown nearly 10%, on average, each year.  In 1990, China was still a developing country. Today it is firmly within the ranks of middle income countries and on its way to joining the wealthy world.  The standards of living in China have not yet reached those of the wealthier countries in the Western world. However, the sheer number of Chinese and the shift from low to medium income levels has meant a significant increase in the buying power of a huge number of people. As a result, the Chinese impact on the global economy has been tremendous. 

Not surprisingly, incomes have not risen equally for all people. Consequently, China is experiencing increasing disparity of income. This, perhaps more than anything else, illustrates how far China has moved from its earlier Marxist ideals.  Nevertheless, average income levels in China are still far lower than those in wealthy countries such as the United States. 

Changing the Economic Landscape
China’s GDP per capita is under $6,000 whereas the United States is over $48,000. This means that Chinese wages are very low and as a result Chinese companies’ production costs are far lower than those of American companies.  Chinese manufacturers have been able to compete effectively against U.S. firms and have drawn many of them to outsource their industrial production to China.  This, in turn, has led to a big balance of payments deficit – the difference between the monetary value of exports versus those of imports – between the United States and China.  A large part of America’s balance of payments deficit of $137.3 billion is a result of massive importation of goods manufactured in China and far fewer goods and services being sold to China from the United States.

The Chinese are big savers with one of the highest household savings rates in the world – about 29% of annual income in 2009.  Americans, with high debt-income ratios – roughly 112% annually – and high consumer spending levels, typically put aside less than 5% of their annual income.  This means that China has a lot of extra cash for its banks to loan and that has resulted in Chinese banks purchasing U.S. Treasury bonds and otherwise investing in the American economy.  All told, China is estimated to have approximately $900 billion in Treasury holdings. Chinese investment in the U.S. grew at an annual rate of 53% between 2005 and 2010. Chinese overseas investment has also taken off. Chinese investors and businesspeople can be found throughout the world.

Challenges Ahead
Of course, not all is rosy for China.  Outside the major cities, the country still has a long way to go in terms of becoming a developed country. There are endemic problems of corruption, inefficiency, public health and serious environmental challenges.  Since China has invested so much in the United States and other countries, it is also vulnerable to the faltering of other economies. As a result, China is increasingly willing to use its influence to impact the global economy and economic decision-making in the United States and elsewhere.

The rise of China as an economic powerhouse is a fact of our times. The size and industriousness of the Chinese population and China’s industrial capacity will ensure a continually increasing role in the global economy.  Criticizing Chinese economic policies may be a popular tactic for U.S. politicians, but the reality is that the world is so economically interdependent that it is becoming increasingly unrealistic to view a country’s economy as entirely its own.

Next week, we will conclude this series by focusing on the rise of China as a geopolitical power and up and coming superpower.

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