The Chinese Mirror

TOKYO – The closing decade of the twentieth century offered a crystal ball for anyone peering into the future of the Asia-Pacific region. Japan’s economy, once the region’s leader, was “lost” after its asset bubble burst, whereas China overcame the economic stagnation that followed the Tiananmen Square crisis of 1989 to achieve its current path of strong growth. The debate raging 10 years ago about China’s rapid growth – whether it represents a danger or an opportunity – has now settled into broad agreement that wider regional development would be impossible without it.

Further geo-political implications for the region and the world follow from three key changes in China. The first concerns the pattern of Chinese economic growth, which so far has been achieved mainly by rapid increases in factor inputs – labor, capital, and energy. But recent research suggests that about one-third of China’s economic growth comes from technological progress, or from the increase in total factor productivity. In other words, China’s growth pattern is becoming similar to that of industrialized economies, suggesting that growth will be increasingly balanced.

The second transformation is the substantial appreciation of the renminbi that seems inevitable in the coming years. Today, given the importance of exports to China’s economy, its government is reluctant to permit a major revaluation, despite strong pressure by foreign governments to allow the renminbi to appreciate in line with the country’s huge trade surplus. But Chinese officials know that renminbi appreciation is also in China’s interest, as they seek to dampen inflationary pressures. China’s government therefore appears ready to allow the renminbi to appreciate, the question being how fast.

From 2003-2005, long before the collapse of Lehman Brothers, the renminbi appreciated by 20%. In light of China’s rapid economic growth and the renminbi’s growing strength, Chinese GDP (based on the market dollar rate) will likely exceed that of the US much earlier than expected, possibly in 10-15 years. And, when measured in terms of purchasing power parity, China’s GDP will reach that of the US around 2015, thus changing the world’s balance of economic power.