Features

Beijing or bust

China | Once-restrictive government now drives an economic powerhouse

Issue: "Tighter lips?," Feb. 18, 2006

By the summer of 2008, when television cameras and newspaper reporters flood Beijing for the Olympic Games, China's capital city will project an image of industrialized modernity. A $160 billion building project is underway, adding the equivalent of three Manhattans to the downtown skyline.

Such architectural decadence is no mere façade for the once radically isolationist nation. Three decades of market reforms have advanced the country to the early stages of a full-forced economic eruption. China recently leapfrogged Britain to become the world's fourth-largest economy, its gross domestic product (GDP) increasing 17 percent in 2005 to $2.25 trillion. In 30 years China's economy has quadrupled in size. When measured by purchasing power parity, China's global GDP rank climbs to No. 2.

While the government's shift from a state-planned, micro-managed economy allowed foreign companies to tap the nation's 1.3 billion potential consumers, domestic businesses continue to operate under the restrictive guidelines of the Communist Party. But the shot of competition is powerfully beneficial: Average disposable income among Chinese citizens surged 9.6 percent in 2005, topping out at about $1,300 per year. And the shopping sprees began.

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Ford Motor Co. reported a 46 percent increase in 2005 vehicle sales from the previous year, requiring the addition of 50 Chinese dealerships to keep pace with demand. Mei Wei Cheng, Ford's chairman and executive director of China operations, expects to sustain such growth through 2006. General Motors enjoyed a similar spike of 35 percent, pushing its total 2005 car sales in China to 665,390. The entire automotive industry, which had slowed from peak levels three years ago due to tightened credit restrictions, rebounded with a 14 percent swell.

The consumer revolution extends also to high-tech products, the rush to replace bicycles paling next to software purchases. Industry revenues in Shanghai, home to nine of the country's top 60 grossing software companies, exceeded $5.5 billion last year, a 50 percent increase from 2004. Analysts expect that steep upward trend to continue, some predicting the business software market alone will reach $1 billion by 2009-growth requiring annual 30 percent spikes. Chinese government figures suggest the nationwide software industry is steadily climbing at a rate of 40 percent each year.

But Chinese citizens are not only using their extra cash to consume. A new-found profit motive is driving technological innovation. The World Intellectual Property Organization reports that China made 2,452 international patent applications in 2005, up 44 percent from the previous year. That increase vaults the East Asian powerhouse past Canada, Italy, and Australia to among the top 10 countries in the world. Six years ago, China applied for fewer than 800 international patents.

Such profound growth speaks more to the past depth of China's economic dysfunction, however, than to the success of its current system. Allowances for private enterprise with higher salaries remain severely limited, forcing the majority of China's workforce into low-paying public jobs. State-run companies can rarely afford to offer raises as they struggle to compete.

The disparity between the public and private sectors is widening the rich-poor gap dramatically, the top 20 percent earning 20 times the income of the bottom 20 percent among city dwellers. But rather than expand free-market options to grant more citizens access to the nation's bulging economic pie, the Chinese government remains dedicated to socialistic solutions.

That commitment is particularly troubling as rapid industrialization and greater financial means spur significant military development. A recent U.S. defense review named China as the chief U.S. rival militarily and warned that "the outside world has little knowledge of Chinese motivations and decision-making or of key capabilities supporting its military modernization." That's a proposition to take seriously, given the mammoth public buildup of downtown Beijing.

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