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China: Country and Foreign Investment

Executive Summary

Although China is of course the most populous nation in the world, with a population estimated at 1.34 bn in mid-2012, it is surprisingly only the fourth largest country, being slightly smaller than the USA.

Unlike the USA, and the other two countries which are larger, Canada and Russia, China has a long history of advanced civilization; it was not until the Industrial Revolution in Western Europe in the eighteenth century that China was overtaken in terms of technology and culture. Indeed, partly because of intrusion by 'the West', and contamination by foreign ideas, China spent the years from 1750 to 1945 suffering from a series of civil wars, occupations and famines. The communists under Mao Zedong then took control, with appalling consequences for ordinary people, although in China, as in Russia, the period after the second world war saw the establishment of a technology-based 'modern' country with adequate infrastructure. The People's Republic of China was established in 1949, replacing the Republic of China, which is preserved only on the island of Taiwan (capital, Taipei), although China has never accepted the validity of that entity.

Deng Xiaoping, who took over from Mao in 1978, supervized a gradual thaw equivalent to perestroika in the USSR, although unlike Russia, China has yet to convert its highly restrictive political system to a Western, democratic model. Within the confines of a one-party state, individuals have a reasonable degree of economic freedom, and China's acceptance of market mechanisms has underpinned its startling economic and technological advances in the last twenty years. The current President of China is Hu Jintao.

Although China is three times more densely populated than the USA, except in certain regions it could not yet be said to be over-populated. Due to the 'one child only' system, however, the population is only growing by 0.5% a year, a comparatively low figure. India may overtake it in the foreseeable future, with Brazil and Indonesia also likely to grow to a significant fraction of China's size during the next twenty years, not to mention the USA itself. In economic terms, however, China is likely to become and remain for some years the world's largest economic power. In 2011 China's GDP was USD11.3 trillion at purchasing power parity, ranking fourth in the world, and about two-thirds of the US figure (if nominal GDP figures are used, China is much further behind). But China has been growing at 10% or just below a year for the past few years, while moribund Western nations are stuck in the 1-3% range, and China is expected to overtake the US, at least in PPP terms, within ten years and perhaps sooner. Of course, in GDP per capita terms, the picture is much less rosy for China, with a 2011 level of USD8,400, between five and ten times lower than in the US. On the other hand, the low wage rates (and other costs) implied by this figure are a positive advantage for China, which has an enormous competitive advantage over most developed countries.

China's competitive advantage over the West is accentuated by what US and other politicians and economists say is a secular undervaluation of China's currency, the yuan or renminbi. It is this that accounts for the difference between 'nominal' and 'PPP' GDP figures. China disagrees, but is very gradually allowing the renminbi to trade up. The currency remains non-convertible in most respects, although a number of capital market instruments, particularly in Hong Kong, are chipping away at the lock-down. It can be expected that the renminbi will become convertible within five years, and the difference between nominal and PPP valuations will probably unwind over the same period.



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