‘Made in China’ Highly Dependent on International Markets
In the 1980s–1990s, in the eyes of the global capitalists, China meant two things, cheap source of labor and land, and a potentially huge consumer market with its 1.3 billion people. However in the past 5 years, global capitalists have gradually come to realize, China cannot be both.
Due to its huge population, employment opportunities are few, hence in China many are willing to work for low wages and low (or nearly zero) government welfare. However because wages are low, Chinese people’s buying power is also correspondingly weak. Amongst the 1.3 billion Chinese people, at least 800 million have nearly no buying power. Therefore China severely lacks domestic demand, and is therefore highly reliant on foreign markets. Those who truly understand China’s economy are extremely worried about this situation. Exports have become one of three engines of the growth of China’s economy.
The dependence of China’s economy on international markets might be as high as 70 percent. In the event that demand from international markets drops, such as during the current financial crisis, the drop in the United States and European Union would cause a break down of exports, one of its three engines. Beginning in the second half of last year, this became a reality.
In the past over 20 years, the co-existence of the global factory (China) and the huge U.S. consumer market has been an important fundamental reality in the global economy. The financial crisis has forced normally generous spending by Americans to be cut back and consequently, China's exports have inevitably suffered.
An interesting scenario took place at the “U.S.-China Strategic and Economic dialogue” held at the end of July this year. The United States had hoped that China could effectively increase its domestic demand; while China in turn hopes that the U.S. economy will recover soon. This will lead to increased American spending and hence increase the demand for China's exports.
Other Low-Cost Producers
On the other hand, the advantages of cheap labor and low environmental costs are not exclusive to China. Quite a few developing countries are able to compete with China in these areas. Whilst escalating land costs in China has lead to inflation, foreign investors have gone to other regions in search of new “lowlands for production costs.” These include Vietnam, India, Indonesia, and Sri Lanka, among others. Capitalists are profit conscious, wherever it is cheaper they will take their business there. If foreign investments withdraw en masse from China, employment and government taxes will become a problem.
China’s Economic Achilles’ Heel: High Dependence on Foreign Resources
China and the international market are co-dependent, yet constantly at odds. This multi-faceted relationship is manifested through competition for market share as well as for energy, minerals, and raw materials. Since the 1990s, China’s demand for oil has steadily increased. Energy demand has become the third largest factor affecting China’s foreign policy.
In the last several years, China’s GDP has been increasing at averagely 9.79 percent per year, while its crude oil consumption is going up by 5.77 percent per year. During the same period, China’s domestic oil supplies have only been increasing 1.67 percent per year. In 1993, China, for the first time became a net importer of oil. In 2004, China replaced Japan as the second largest oil consumer nation, second only to the United States. Western media believe that China has become the main engine driving world crude oil demand. It has a direct impact on oil prices, market stability, and supplies. The Chinese authorities detest this view of “China’s Energy Threat.”
The crude oil market reflects global competition. U.S.-based RAND Corporation analyzed geo-petro politics and China’s oil resources in its report “China’s Quest for Energy Security.” It concluded that China shouldn’t put all of its eggs in one basket. It suggested China limit its imports to one-third of its consumption. Oil imports from Russia, Central Asia, and the Middle-East should each be able to supply an additional one-third.
China’s demand for resources, particularly crude oil, sheds light on why energy diplomacy is the third largest factor affecting China’s foreign policy, following large-country diplomacy and border-sharing diplomacy. The Chinese economy consumes much more energy relative to its GDP growth. In 2006, China’s GDP consisted of 5.5 percent of the world’s GDP, while it consumed 388 million tons of steel, 30 percent of the world’s steel consumption, and 1.24 billion tons of cement, 54 percent of the world’s consumption.
According to China’s own conservative estimates in 2004, if the Chinese population reaches 1.6 billion in 2030, and average GDP per capita reaches US$5,000, and average steel reserve per capita reaches seven tons, China’s total steel reserve should exceed 10 billion tons by then. It will consume over 300 million tons of steel per year which will require 600 million tons of iron ore. This exceeds the world’s level of available iron ore trades in 2004. (note: this estimation is based on the fact that in developed countries, over 80 percent of steel smelting material comes from recycled steel instead of iron ore).
Energy Diplomacy: The Third Driving Factor of China’s Foreign Relations
The current situation dictates two approaches in China’s energy globalization: oil “reaching out,” and coal “coming in.” Oil “reaching out” refers to China’s petroleum firms purchasing foreign oil assets. China Petroleum & Chemical Corporation and China National Offshore Oil Corp joined forces to purchase an Angola oil field for US$14.5 billion and YPF Argentina for 150 billion yuan (approximately US$ 21.97 billion) respectively in July and August this year. Coal “coming in” means China’s coal consumption will take up a greater portion of the world’s consumption. By 2010, the percentage may be over 40 percent. Such a strong demand will undoubtedly affect pricing and the supply-demand of raw materials markets.
In January 2008, British-Australian based Rio Tinto, the third largest mining and exploration company in the world, projected that in 10 years, China will use up at least half of the world’s major resources. Rio Tinto supplies iron ore, aluminum, and copper to China. Of the three, China currently consumes 47 percent, 32 percent, and 25 percent of Rio’s total output of these resources respectively. China is the largest buyer of nickel, copper, aluminum, steel, coal, and iron ores in the world. The only area it lags the United States is crude oil. Based on market projections, Rio Tinto maintained a strong negotiating position.
China, which is the biggest buyer of Rio Tinto products, arrested four Rio Tinto China executives after it failed to reach desired negotiation outcomes. This has cast a dark shadow over international business relations. If China continues to adopt such strong-arm policies on foreign business issues, how can the world markets participate and play by its supply-demand rules?
The Chinese authorities have become more and more pragmatic. They know that China’s domestic market will take a lot of nurturing. They are sober about the dependence of Chinese products and China’s resource consumption on international markets. On the other hand, they don’t want to abandon “Chinese socialism” despite China’s economic dependence on the international community.
In February, Chinese Vice Chairman Xi Jinping said during a trip to Mexico that foreign countries only cared about China’s human rights because they were bored. This can be viewed as a political statement by the Chinese regime. Other countries initially wanted to incorporate China into the world economy as a new place to invest and a huge potential market. To their surprise, China became the biggest consumer of resources and a supplier of cheap products. China and the world’s other main economies will need to make adjustments in order to manage this unexpected twist in their relationship.
(First published by BBC Chinese.com “Focus on China,” September 2, 2009)
