China’s,Contributions,to,the,World:,Economic,Growth,,Resource,Consumption,and,Global,Imbalance:Chinatoitel

　　Abstract: This paper makes systematic observations of China’s contributions to global macroeconomic growth and bulk commodity consumption. Our observations suggest that while China’s economic size is relatively small on a per capita basis, its contributions are large in terms of overall volume; moreover, the economy has experienced tremendous growth. Quantifying these characteristics that are unique to China’s development creates a realistic background upon which China can re-examine its trade and economic policies and strategic thinking.
　　Key words: economic growth, economic globalization, contribution to global economic growth.
　　JEL Classifications: E00, O11, O57
　　1. “An Elephant Cannot Hide Behind a Tree”
　　In discussing China’s status and role in the world economy, observers oscillate between two views. One view is that China remains a relatively backward developing country and does not hold much sway in the global economy. The other view is that after decades of growth, China’s economy has been transformed, making China poised to become the world’s largest economy and possibly to replace the United States as the most powerful one. Indeed, while both views have merit, without systematically measuring China’s contributions to the global economy, misjudgment is inevitable.
　　This paper estimates the relative size and growth prospects of China’s economy by measuring China’s share of fundamental global economic indicators such as macroeconomic growth and bulk commodity consumption. According to our results, while China’s economy is small on a per capita basis, its overall contribution is both enormous and growing rapidly. Statistics indicate that despite meager per capita levels, China’s economy already accounts for a significant share of global total and contributes one of the largest shares (possibly even the largest) to global economic growth. As the Chinese expression tells us, “An elephant cannot hide behind a tree.” Quantifying these characteristics that are unique to China’s development creates a realistic background upon which China can re-examine its trade and economic policies and strategic thinking.
　　2. In Ten Years, China will Overtake the U.S. to Become the Largest Economy
　　Table 1 shows China’s overall and per capita economy measured in renminbi and US dollars, respectively. These figures show the rapid acceleration of China’s economic growth since 2000. Measured in RMB, China’s real GDP has grown roughly 20 times since 1978 at an annual average growth rate of around 10 percent. Given that the renminbi experienced a period of depreciation before its recent appreciation, China’s economic growth measured in US dollars was slower at the beginning before picking up speed later. 　　China’s economic aggregate from 1978 to 1990 as measured by exchange rate increased from USD 0.22 trillion to USD 0.36 trillion, up only USD 0.14 trillion over 12 years. By 2000, it reached USD1.2 trillion, an increase of USD 0.84 trillion. By 2010, it reached USD5.8 trillion, up USD 4.6 trillion from the previous ten years. Between 1978 and 1990, China’s per capita GDP increment measured in USD was less than $100, which then increased by more than $600 during the 1990s and reached over $3,000 in 2010.
　　This rapid growth attracted international attention early on. In its famous 2003 report that coined the term “BRIC”, Goldman Sachs predicted that Brazil, Russia, India, and China would become the largest economies after the U.S. and Japan and that China would overtake the U.S. by 2041 to become the world’s largest economy1.
　　These estimations can be revised in light of China’s actual economic performance since the release of the BRIC report. Table 2 shows the actual and nominal GDP growth rates of China and the U.S., as well as RMB-USD exchange rate fluctuations, from 2003 to 2010. Further analysis indicates that annual average growth of China’s GDP relative to the U.S. as measured in USD or annual catch-up speed is 15.4 percent.
　　In 2010, China’s aggregate GDP reached USD5.8 trillion, roughly 40 percent of the U.S. level of USD 14.6 trillion. If we consider China’s already rapid and imbalanced growth since 2003, we can speculate that China’s future annual average catch-up rate is likely to be lower than 15.4 percent, the rate of the previous eight years. Assuming a catch-up speed of 11 percent over the next decade, it will take roughly ten years for China to catch up with the United States in terms of aggregate GDP.
　　Assuming everything goes all right, therefore, it is possible that in just ten years, i.e, in the early 2020s, China will overtake the U.S. to be the largest single economy. This adjusted timeline is about 20 years earlier than is predicted by the 2003 Goldman Sachs report. Moreover, assuming that the U.S. economy grows at a rate of 2.5-3.0 percent on an annual average basis over the coming ten years, China’s economy will reach USD18 trillion to USD20 trillion in USD current prices by the time China’s aggregate GDP catches up with that of the U.S.
　　In 2010, China had a population of 1.36 billion and per capita dollar income less than one tenth of that of the United States. According to the United Nations, by 2021, China’s population may reach 1.43 billion and its per capita income may reach $12,000 to $14,000. In 2009, China’s per capita GDP was $3,714, which ranked roughly 100th in the world. In the same year, a country with per capita income of $13,000 ranked about 40th. When China’s economic aggregate surpasses that of the United States, China is likely to move from its current classification as a middle- and low-income country to a middle- and high-income country. Even according to this forecast, however, China’s per capita income will still be less than 30 percent of the United States’ by then. 　　If China’s investment rate drops from its current level of 40 percent to 35 percent, its investment volume will reach USD7 trillion after ten years, equivalent to half of the current global investment volume of USD14 trillion. If the share of export in China’s GDP drops from its current level 30 percent to 25 percent, China’s exports will increase from USD4.5 trillion to USD5.0 trillion. If the trade surplus is between 1 percent and 2 percent and the total value of China’s trade surplus is between USD200 billion to USD400 billion, China’s import will stand at USD4.3 trillion to USD4.6 trillion respectively. Even if the share of China’s foreign exchange reserve in GDP drops from its current level of 48 percent to between 35 percent and 40 percent, its total value will still reach USD7 trillion to USD8 trillion. Assuming the annual average yield of foreign exchange to be 3 percent, the yield alone will cause the share of current account surplus to exceed 1 percent of China’s GDP.
　　3. China Is Already One of the Most Important Economies in the World
　　This section selects basic economic indicators such as China’s investment, export, foreign exchange reserves, and bulk commodity consumption to measure the relative size of China’s economy. Despite different results from different indicators, it is fair to say that China is already one of the most important economies in the world.
　　First, we examine the share of China’s capital formation in the world total. The share rose from 5.9 percent in 2000 to 17.5 percent in 2009. The global share of China’s investment overtook that of Japan in 2006 but currently is still short of Japan’s record of 23.2 percent in 1992. Global share of China’s investment overtook the share of the investment of Germany, the UK, and France combined in 2008 and surpassed that of the U.S. in 2009 for the first time. It is foreseeable that China will maintain the highest share of capital formation in the world for a long time to come.
　　Next, let we examine the share of China’s exports globally. This indicator rose from 3.5 percent in 2000 to 8.5 percent in 2009. The share of China’s exports of the global overtook Japan’s after 2004 and fell short of the U.S. level by a mere 1.5 percentage points. It was far lower, however, than Germany, the UK, and France combined (16.8 percent). Contrary to popular belief, the global shares of China’s exports and GDP are roughly the same. Given its considerable trade surplus, China’s import dependency remains slightly below the global average. 　　This observation reminds us that the problem with China’s foreign trade is mainly imbalance rather than its large value per se. Specifically, China’s trade surplus has contributed a growing share to the global trade imbalance in recent years. Figure 3 shows the shares of global current account surplus in GDP and China’s trade surplus in the world total. Between the 1980s and 1990s, the share of global trade surplus in GDP fluctuated within a band of 0.7 percent and 1.5 percent. After 2000, this figure jumped from 1.25 percent (2001) to a peak of 3.12 percent (2007), meaning that the relative degree of imbalance grew by 1.5 times over the span of seven years.
　　Between the 1980s and 1990s, the share of China’s trade surplus fluctuated between negative and positive values in tandem with domestic macro-cyclical fluctuations. Specifically, this figure was negative for five years during this period, close to zero for three years, and positive for the remainder. Over the 20 years, the total contribution is 52 percentage points, with an annual average contribution of 2.6 percentage points. After the year 2000, China’s contribution to the global trade surplus shot from 4.1 percent in 2001 to 24.3 percent in 2008, up five times over a period of eight years.
　　The increasing absolute value of China’s foreign exchange reserve and the relative share of its foreign exchange reserves reveal external imbalances that confront China’s macroeconomic growth. China is in a stage of economic “catch-up,” and its domestic investment return is high. Despite QFII restriction on foreign securities investments, there is still a considerable surplus of foreign direct investment and of private capital accounts. In 2001, China’s capital account surplus, through FDI net inflow, totaled USD34.8 billion. In 2009, after a string of fluctuations, China’s capital account surplus reached USD144.8 billion, up USD60 billion on an annual average basis. Surpluses in the areas of current and capital account balances caused phenomenal growth in China’s foreign exchange reserves during this period. Finally, in 2000, China’s foreign exchange reserve totaled USD160 billion; this number subsequently exceeded USD1 trillion in 2006 and USD2.85 trillion at the end of 2010.
　　Table 3 reports global foreign exchange reserves of the ten economies with the largest foreign exchange reserves over the past 20 years. Global total foreign exchange reserves grew from USD1.09 trillion in 1993 to USD1.98 trillion in 2000, up slightly less than USD1 trillion over seven years. This figure jumped to USD9.65 trillion in 2010, however, a more than threefold rise. During this time, Chinese mainland was not one of the top ten economies with the largest foreign exchange reserves before 1993, yet it boasted the second largest foreign exchange reserves in the world by 2000. In 2006, Chinese mainland’s foreign exchange reserves exceeded USD1 trillion and surpassed Japan’s to be the largest in the world. In 2010, Chinese mainland’s foreign exchange reserves amounted to some USD2.85 trillion, accounting for roughly a third of the world’s total. 　　During the industrialization and urbanization booms of the past 30 years, China’s consumption of primary metals and energy skyrocketed, surpassing earlier forecasts. Figure 4 shows steel outputs of China and major steel-producing countries over the past 100 years. For most of the 20th century, U.S. steel output had been far above that of other countries, peaking at 137 million tons in 1973. After the World War II, steel production in Japan and the Soviet Union increased rapidly. Japan reached peak steel production (119 million tons) in 1973, roughly 85 percent of the U.S. peak. The Soviet Union reached its peak (163 million tons) in 1988, higher than U.S. peak production by 19 percent.
　　Beginning in the 1980s, China’s steel output began to experience real growth. In 1996, China overtook Japan to become the largest steel manufacturer in the world2, with steel output reaching 100 million tons for the first time. China has kept its status as the largest steel manufacturer ever since. After 2000, China’s steel output expanded at a surprising rate: it stood at 127 million tons in 2000, and, in 2010 it surged to 627 million tons, representing 40 percent of the world’s total or 1.8 times that of the U.S., Germany, Japan, Russia, and the UK combined. These figures are revealing when studying the scale, speed, and shock of China’s economic rise.
　　China’s consumption of bulk commodities such as copper, aluminum, iron ore, and oil also experienced rapid growth during this time. Figure 5 shows the consumption indices for four bulk resources. As can be seen below, from 2000 to 2010, China’s consumption of copper, aluminum, and iron ore increased anywhere from three to five times, respectively, while oil consumption grew by 80 percent.
　　China’s growing consumption represents an increasing share of the world’s total. Figure 6 lists the breakdown of the above four bulk resources globally over the past 40 years. Between 2001 and 2010, the share of China’s consumption of iron ore rose from 30 percent to 70 percent, while copper and aluminum rose from 15 percent to 40 percent, and oil climbed from 6.3 percent to 10.4 percent.
　　4. China Has Contributed Significantly to Global Economic Growth
　　The relative size of China’s economy can be observed both by comparing growth among nations in a particular period as well as by China’s “growth contribution ratio”. If a certain indicator such as investment growth in a given period is 100 units and China’s growth of this indicator is 30 units, China’s “growth contribution ratio” is said to be 30 percent. Using the metrics of growth comparison and growth contribution ratio, China has already become the most important economy in the world. Figure 7 shows the GDP growth trajectories of major countries measured in US dollars. Statistics show that the EU and the U.S. had long been the biggest contributors to economic growth. Partly due to the effects of exchange rate fluctuations, the EU’s GDP growth had swung wildly. 　　China’s growth trajectory, on the other hand, increased from USD144 billion in 2000 to USD690 billion in 2009, overtaking the U.S. in 2006 and EU-15 in 2008 to be the biggest contributor to world growth. In the 1980s, Japan’s GDP growth approached the level of the U.S. but weakened after the 1990s. Although Japan has picked up some momentum in recent years, its growth remains significantly below its 20th century peak levels. Aggregate GDP growth trajectories of the four largest emerging economies after China have also reached a level comparable with that of the U.S. or EU-15.
　　Figure 8 reports capital formation growth trajectories of major countries measured in US dollars. Japan overtook the U.S. on this indicator in the 1980s and reached parity with the EU-15 in the middle and late 1980s and early 1990s to become the country with the highest investment growth. But after the 1990s, Japan’s growth slackened. In 2002, China’s investment growth overtook that of the U.S. In 2006, China overtook all EU-15 to become the country with the highest investment growth. Aggregate investment growth of the four largest emerging economies except China also overtook that of the U.S. in 2004 to become an economic consortium with the third largest investment growth after China and the EU-15.
　　Figure 9 reports the contribution of exports from major countries and economies to world export growth over a three-year period. The EU-15 contribute a higher-than-average share to export growth and, except for a few years, are consistently the biggest contributors to world export growth. Under the effects of the recent global financial crisis in 2009, however, the EU’s contribution to world export growth dropped to a low of 7.5 percent. On this indicator, China overtook Japan in 1996 and the U.S. in 2001 and lingered around 10 percent thereafter as the second biggest contributor to export growth (after the EU). As the financial crisis took a toll on world exports, China’s contribution to export growth over a three-year period rose from 11 percent to 27 percent, overtaking the EU to become the largest contributor to export growth. Japan’s contribution to export growth peaked in 1985 before it plummeted, falling to the third position after the U.S. and the EU in the middle and late 1990s. The other four emerging economies maintained levels of export growth similar to that of the United States.
　　Table 4 reports China’s contribution in basic bulk commodities to world incremental output or consumption. Figures for crude steel are output contribution ratios, while the remaining indicators are consumption contribution ratios. We note, first of all, that China’s contribution to global oil consumption was even and did not exceed 10 percent in the 1960s and 1970s; over the past 30 years, however, it has increased to 17 percent, 24 percent, and 48 percent (at each ten year interval). Second, China’s output and consumption of crude steel and iron ore has grown steadily, exceeding 50 percent in the late 1980s before reaching 88 percent and 105 percent in the most recent decade. Third, China’s consumption of copper and aluminum as the two most important non-ferrous metals contributed 20 percent and 10 percent to world increment before the 1990s yet experienced a substantial increase over the past 20 years. In the first ten years of the new century, the share hit record highs of 145 percent and 78 percent. 　　In a word, despite substantial differences in the specific growth contributions for different categories of bulk commodities, absolute levels over the past decade have been very high. From 2000 to 2010, China’s surging oil demand accounted for no less than 40 percent of global growth in oil consumption, with figures reaching roughly 80 and even 100 percent. For these bulk resource commodities, China’s demand fluctuations have a significant and even decisive influence on world demand and supply equilibrium.
　　5. “Large-country Status” as a Double-edged Sword
　　The above observations can be summarized as follows: first, the expansion of China’s economy can be characterized by both economic “take-off” and “catch-up” of a large country. China has not been unique in its ability to take advantage of economic globalization and embrace the global market economy. It is preceded by both the successes of the Four Asian Tigers as well as the practice and attempts by Vietnam and India. China’s uniqueness lies in the fact that for the first time, a billion-population economy opened up to the rest of the world and embarked on a fast lane of growth in an era of globalization. If the Four Asian Tigers left indelible marks on global economic landscape, China’s economic growth is bound to reshape global industrial and economic balance of power. Economic upsurge of a country as large as China will surely contribute an enormous share to world growth and expand its relative size in world economy.
　　Second, even more potentials exist behind limited per capita levels. In the 1980s when Japan neared the U.S. level in terms of total demand, investment and export, Japan’s per capita GDP was roughly 70 percent that of the U.S. In the 1990s, Japan’s per capita GDP measured by exchange rate overtook that of the U.S.. At the onset of “convergence”, Japan stood at the forefront of world industrial and technological development, but its reaching GDP parity also meant that Japan’s “late-starter” advantage was exhausted and could no longer exert the same great impact on the global economic landscape.
　　Although China has approached or overtaken developed countries in terms of contribution to world economic growth and share in the global economy, China’s per capita income level still remains ten times smaller than that of the most developed countries. Therefore, there is still great potential for China to use its “late-starter advantage” to fuel its rapid economic growth. If China can improve market systems and maintain a favorable environment of globalization, China’s economy will continue to catch up by leveraging its comparative advantage in the coming thirty years. 　　Third, behind growing size of China’s economy is the double-edge effect of large-country status. In international economics, the extent that self-decisions can influence one’s external environment is regarded as a key difference between small countries and large countries. Policies and actions of a small country influence its own efficiency and welfare without changing international market prices and equilibrium. Policy and economic fluctuations of a large country, on the other hand, bears direct impact on international market prices and equilibrium that in turn affect its own decision-making as well. An endeavor that a small country carries out, wisely or unwisely, is in essence its own business, whereas what a large country is committed to has a spillover effect on a global dimension.
　　As a large economy and the biggest contributor to world growth, China’s status is a double-edged sword. The premise for China’s economic catch-up under open and competitive market is the provision of inexpensive and high-quality goods to the rest of the world. This includes domestic demand in China as a source of world total demand.
　　The large-country effect, however, has also brought about unprecedented challenges. For instance, a super-high surge in demand for iron ore deteriorated China’s trade conditions through lagging effect of supply, while causing imports of raw materials to soar. This gave rise to new contradictions and problems in dealing with international oligarphic suppliers and economic and trading partners involved. In the context of currency appreciation pressures that are inevitable part of the economic catch-up discussion, an over-emphasis on exchange rate stability will intensify world imbalance, which in turn stands in the way of China’s economic soundness. In a nutshell, China must accelerate reform and improve its macroeconomic framework, demonstrating its commitment to an open world economy, while ensuring its goals are appropriate for that of a large country and conducive to goals outlined in the most recent 12th Five Year Plan.

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