"Le Monde" Tuesday, March 9, 2004
Is the Chinese growth rate misleading? In 2003 (plus 9.1 percent) it rested mostly on a very fast development of investments (plus 30 percent), mostly coming from foreign groups wishing to pre-empt shares of the Chinese market. In an interview with the newspaper “Le Monde” Francoise Lemoine in charge of research at the Centre d'étude prospectives et d'information internationales warns foreign investors against overinvestment. According to her "there are at present production overcapacities in most industries for durable consumer goods, in the steel industry and in the concrete cement industry". Groups like Alcatel, Volkswagen or Philips make more than 10 percent of their sales turnover in China. Automotive manufacturers, including Nissan, will inject around 12 billion Euros over the next five years in the country.
Multinational corporations threatened by overinvestment in China.
In an interview with the newspaper “Le Monde” Francoise Lemoine in charge of research at the CEPII argues against the widespread view of the "Chinese miracle". Industrial overcapacities show up throughout the country, and the banking system is very fragile.
The Chinese government is beginning to worry about too fast a growth in China. Is there a risk of overheating?
The fast growth of the Chinese economy in 2003 (plus 9.1 percent) rested principally on the fast growth of investments (plus 30 percent). Overinvesting is a recurrent phenomenon in the Chinese economy. At present there are production overcapacities in most durable consumer goods industries, in the steel industry, and in the concrete cement industry.
There are also risks of overcapacity in the automotive sector. The production and demand for private cars grew very fast these past few years, starting from a low level. The number of cars produced trebled in four years, from 700 000 units in 2001 to 2.1 million units in 2003. Taking into account current and announced investment projects, it is likely that the domestic demand will not keep up with the expansion of production capacities. This will push prices downward and spur exports
Where lies the main risk?
The banking system is very fragile. It holds huge amounts of doubtful debts from state owned firms. In 1998, the State was forced to undertake the first cleaning operation in the four large national banks, at a cost of about 200 billion dollars. Five years later, we are back to square one, and the State authority must once again do something. At the end of 2003, it spent 45 billion dollars (36 billion EUR) to recapitalize two of the large banks and it will have to do the same, this year, for the other two banks. In order for this rescue operation to be the last one, a profound change of these banks, still very much under pressure from local authorities, is necessary. The Chinese government is faced with a dilemma: encourage fast growth, needed to create jobs, or cleanup the banking system, a measure required too to prepare for the opening up of the market to foreign banks between now and 2006.
What is the main engine of the Chinese economy growth?
Foreign investments are the cause of the Chinese boom. For the last ten years China betted upon the economic opening up, and on the import of new technologies. Foreign investments are at the heart of the rise of the Chinese economy and the modernization of its manufacturing industries. Currently, about 30 percent of the Chinese industrial production comes from firms that have a foreign participation in their capital.
There has been a constant and deliberate will to channel foreign investments toward manufacturing industries, according to a number of priorities: new technologies sectors (electronics and telecommunications), industries with high capitalistic intensity (automotive), export industries. The government encouraged these industries with fiscal and tariff baits. It was a success: in 2003 subsidiaries of foreign firms accounted for half of Chinese exports.
Besides this, are there local groups that spring up?
Even though the foreign presence is very high in certain sectors like automotive or electronics, there are entire areas of the economy that are dominated by local producers, like energy, metallurgy, petrochemicals. In Chinese enterprises productivity is globally low due to outdated managerial and production techniques.
Yet there are some large Chinese firms that are competitive, with strong domestic market positions and good export performances. A dozen such firms have the size to play in the world giants yard, and are internationalizing by raising capital abroad and by settling facilities abroad. One may mention Tsingtao (breweries), Haier (domestic electric appliances), Konka (television sets), or TCL, that just created, with the French firm Thomson, a joint venture (TCL-Thomson) and now is the world leader in television sets (18 million units in 2003). Will this internationalization strategy enable the "national champions", which the Chinese authorities want to push, to one day become "world leaders"?
Who are the foreign investors?
In 2003, like in 2002, China received more than 50 billion dollars of foreign investments. Out of this sum at least one-fifth is false foreign investments ; they are Chinese funds brought back home. Another two third of the investments come from Asian countries, mostly Hong Kong. In comparison, American investments are only 10 percent of the total and those of the European Union only seven percent. But Germany devoted 20 percent of its investment in China between 1995 and 2001, whereas France only spent three percent of its foreign investments there.
Investors do not all have the same goals. Whereas the Asian groups make much use of China as a production base for export, because of the low production costs, Western countries firms target the domestic market.
Listening to you, there is no Chinese miracle...
There is no miracle. The Chinese economy takeoff stems from the combination of its huge labour resources with foreign technologies and capital funds. The country is still faced with huge challenges. Employment remains the major problem, with the acceleration of rural departures to cities. Unemployment is already noticeable in cities. There is another unknown. Up until now foreign groups reinvested all their profits into China. What will happen when they decide to take their funds home?
Furthermore, China is an economy where sectors develop at different speeds, where very dynamic industries and regions, modern technologies, are found next to sectors in crisis and with obsolete technologies. To reduce these internal gaps and to spread the developing dynamic to the entire country is critical for its future.
Is China an economic superpower?
Over the last 20 years China has had a remarkable economic growth. Since 2002 its ranks as the fourth world exporting country, and as the sixth world importing country. In 2003 its exports grew by 35 percent, and its imports grew by 40 percent.
In spite of these spectacular achievements we cannot call it a superpower. So far China represents only 5 to 6 percent of world commerce, way behind the United States and the European Union, that each represent between 25 and 30 percent. China gross domestic product is only 4 percent of the world GDP. Catching up is in progress. But even if growth remains high, it will take a long time. China still lags far behind, in terms of economic size, from the United States or from Europe. We will have to wait until at least 2020 to talk about a superpower.