What you need to know about the rise of China

According to the International Monetary Fund (IMF), China is now the world’s second biggest economy, behind only the United States, based on Gross Domestic Product (GDP). China has been on a stellar rise during the last 30 years and now holds a major influence over the fortunes of its trading partners.

So how did this powerhouse emerge and what does it mean for the future of world economies and markets? Let’s take a closer look.

The emerging economic power
China’s modern growth story can be traced back to the late 1940s when it emerged as an independent state after World War II. Under communist leader Mao Zedong, China initially held a hostile attitude to the capitalist West. This position gradually softened and China began to open up to the world, highlighted by the historic meeting between Mao and Richard Nixon in 1972.

The move to a market economy took significant strides in the 1980’s under leader Deng Xiaoping, who instituted reforms and opened up China’s interaction with the world resulting in a massive leap in its GDP.

The growth story
A key milestone in the remarkable rise of China as an economic superpower came in 1979, when it liberalised its trade policies. In the 35 years that followed, its economy grew at an average GDP rate of nearly 10% per year, making it one of the world’s fastest-growing economies. GDP in 1980 was just over US$200 billion, but by this year it has grown to a staggering US$11,770 billion. This growth has lifted around two-thirds of a billion Chinese people out of extreme poverty.

The reasons for this growth have been the relaxing of state control over the economy, the liberalisation of trade, the encouragement of citizens to start their own businesses and tax incentives to attract foreign investment. The increase in China’s trade with the world gives some indication of the effect of these policies. Chinese merchandise exports were just $14 billion in 1979 but by 2014 they had ballooned to $2.3 trillion. Over the same period imports also grew from $18 billion to nearly $2 trillion.

A major world player
While Chinese influence in the world is still relatively limited in cultural or political terms, the sheer size of the Chinese economy gives it enormous economic influence. Much has been said in recent years of Australia’s dependence on China, but China’s economic reach is felt across the Asia Pacific region, Africa, Latin America and Europe. Many countries in the developing world look to China as a model for their own economic development.

By 2030 it is expected that China’s economy will be double the size of America’s economy, so despite the recent hiccups in its growth, it is destined to be the predominant world economic power. China’s political and cultural authority, however, is expected to grow more slowly, due to the cultural gap between China and the West and China’s approach to exercising its political power.

How important is China to Australia’s fortunes?
China’s growth has been the primary driver of Australia’s fortunes, underscored by the fact that in 2013 over one third of our total exports were destined for China. This was by far the biggest proportion of exports of any G20 countries. In fact the proportion of our exports going to China more than doubled between 2007 and 2013, which largely reflects the resource bonanza that was spurred on by China’s massive manufacturing industry.

The tapering-off of that demand in recent years is unlikely to be reversed, as China focuses on developing its economy to be more reliant on domestic demand and service industries rather than exports and government investment. The challenge for Australia is to diversify our exports into value-added industries and away from resources, so that we are able to continue to keep China as a major customer.

The good news is that Australia’s domestic economy does seem to have started this transition away from dependence on resources and towards other sectors, such as services, agriculture and manufacturing, but there should be no illusion about how big a shift this is. As it stands, around 20% of our non-resource exports are going into China’s consumer markets. The opportunity for Australia is to continue this trend of selling education, tourism, dairy, wine and farm produce, so that we can tap into the expected 300 million new middle-class consumers that will emerge in China over the next 15 years.

What do you see as the positive and negative aspects of our relationship with China? Share your ideas below.

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