China - Now the World's Fourth Largest Economy

Submitted by Share Trading on 15 December, 2005 - 17:00

This year, China will outstrip the UK to become the world's fourth largest economy. A new economic census, which has probed the murky depths of China's grey economy, with its cash-only back-alley businesses, decided that the Chinese economy is actually 20 per cent bigger than the official figures suggest.

And in a reminder to the world's markets the Chinese are determined to sustain its staggering growth, the Finance Ministry decided to abolish capital gains tax for foreigners in order to lure cash in. The large amount of foreign investment is also a sign of weakness. China's banks are not strong enough to provide the money themselves. The country's swift rise up the world's rankings does not stop there: Goldman Sachs estimates it will take only 35 years for China to become the world's largest economy.

China has taken on Britain's 19th-century mantle of "the workshop of the world". It has 160 million workers in its factories, almost three times the UK's total population and eight times Australia's population. It pays an average of 80 cents an hour.

Most of the goods that China exports are low cost. More than two thirds are clothes, shoes and toys. It also makes 60 per cent of the world's bicycles although its own citizens have given up two wheels in favour of cars.

China was essentially a closed economy until the late 1970s, when the rural collectives set up under communism were disbanded. The land was returned to individual farmers, under a "responsibility" system. Tens of millions of people were freed from working on unproductive farms to move into the cities.

The competition between foreign investors in China is incredibly fierce. Last year, foreign companies sank $US53 billion into building new factories or starting new businesses in China.

Many economists have accused China of encouraging an investment bubble, which has seen huge sums of money go into machinery and tools that are not needed. The new census will help to convince some doubters that the Chinese economy is not entirely built on fixed investment. However, a sure sign of the country's failings is the poor performance of its stock market.

China's index has slid more than 12 per cent this year because of weak profits. The OECD is full of praise for China's reforms. The number of public companies has halved in the past decade to 150,000. They now account for almost two thirds of the economy. However, the country needs more public sector reform, while corporate laws must change to allow firms to expand. Property laws and the financial markets also need help.

Meanwhile, poorer countries become more competitive. China's bicycle manufacturers, for example, have been facing cheap competition from countries such as Vietnam, as well as bans on bikes at home.

The Shenzhen China Bicycle Company filed for bankruptcy four months ago.