3 October 2002

CHINA'S FUTURE AS THE WORLD'S LARGEST DEVELOPED ECONOMY

China has to transcend itself from a processing agent for the world and roll out its own products, according to the latest issue of the Hang Seng Economic Monthly.

It can do this by relying on domestic demand to sustain its growth, and building up its brand name products with its indigenous technology and raw resources, it states. China is currently the world's largest processing export centre for consumer manufactures. The country's open-door policy and competitive labour costs have attracted enormous foreign direct investment to its manufacturing base. Export processing, however, cannot be the main driver for the Mainland's sustained growth over the long term due to its massive population, the report states. Processing exports would be a means only of speeding up technology diffusion and building up national wealth, it states. China's future lies in being the world's largest developed economy with the world's largest consumer market, the report states. The Mainland has ample natural resources, particularly in its inland provinces, and has developed a solid infrastructure for basic research in building up its defence and aerospace industries. Making better use of its natural resources and applying the technology of its defence and aerospace industries to civilian industries would help the country leapfrog along the value-added chain, the report states. In the past two decades, mainland China has witnessed the proliferation of processing and assembling factories along its coastal provinces. Processing exports made up 55% of national exports in 2001. Today, many of the world's leading and prestigious brands carry the 'Made in China' tag. Manufacturing processing has also significantly improved the income levels of the workforce and their standards of living. Processing trade is likely to remain the key area of growth in the Mainland's export sector in the interim period. Not only does it create new jobs for the more educated population, it also brings in foreign capital and technology, which have been critical in the growing geographical and product diversification in the Mainland's manufacturing processing output. Foreign direct investment in the Mainland's manufacturing industries exceeded USD100 billion between 1997 and 2000, accounting for 60% of total inbound investment. Exports by foreign-invested enterprises rose to 50% of the country's total exports in 2001, nearly double the 27.5% share in 1993. Technology diffusion from foreign investment has allowed the Mainland to handle increasingly sophisticated products. In 2001, exports of machinery and transport equipment accounted for 35% of total exports, a substantial increase from only 3.5% in 1986. Leveraging on such technology diffusion, the Mainland is already building up quality domestic brands, especially for household products. Some of these brand names have been making inroads to the world market as well. The Mainland's export performance has defied the recent US recession and global slowdown. After registering a respectable 6.8% growth in 2001 amid a difficult world economy, exports have gathered momentum in 2002, recording growth of 17.5% in the first eight months. Currently accounting for a share of over 5% of the world's manufacturing exports, China looks set to be able to surpass France as the world's fourth largest manufacturing exporter this year. The immediate benefits arising from the surging exports have been growing trade surpluses, which in turn have led to the rapid accumulation of the huge foreign exchange reserves over the last decade. China's foreign exchange reserves are now the world's second largest at USD253 billion.