sign in sign up
<<
Home , Chinese Century, Economic power, Economy of Asia, Greater China

Washington University in St. Louis Washington University Open Scholarship

Weidenbaum Center on the , Murray Weidenbaum Publications Government, and Public Policy

Contemporary Issues Series 57

2-1-1993

Greater : The Next Economic ?

Murray L. Weidenbaum Washington University in St Louis

Follow this and additional works at: https://openscholarship.wustl.edu/mlw_papers

Part of the Economics Commons, and the Public Policy Commons

Recommended Citation Weidenbaum, Murray L., ": The Next Economic Superpower?", Contemporary Issues Series 57, 1993, doi:10.7936/K7DB7ZZ6. Murray Weidenbaum Publications, https://openscholarship.wustl.edu/mlw_papers/25.

Weidenbaum Center on the Economy, Government, and Public Policy — Washington University in St. Louis Campus Box 1027, St. Louis, MO 63130. Other titles available in this series:

46. The Seeds ofEntrepreneurship, Dwight Lee Greater China: The 47. Capital Mobility: Challenges for Next Economic Superpower? Business and Government, Richard B. McKenzie and Dwight Lee Murray Weidenbaum 48. Business Responsibility in a World of Global Competition, I James B. Burnham

49. Small Wars, Big Defense: Living in a World ofLower Tensions, Murray Weidenbaum

50. "Earth Summit": UN Spectacle with a Cast of Thousands, Murray Weidenbaum Contemporary 51. Fiscal Pollution and the Case Issues Series 57 for Congressional Term Limits, Dwight Lee February 1993 53. Global Warming Research: Learning from NAPAP 's Mistakes, Edward S. Rubin

54. The Case for Taxing Consumption, Murray Weidenbaum

55. 's Growing Influence in : Implications for U.S. Business, Steven B. Schlossstein

56. The Mirage of Sustainable Development, Thomas J. DiLorenzo

Additional copies are available from: i Center for the Study of American Business Washington University CS1- Campus Box 1208 One Brookings Drive Center for the Study of St. Louis, Missouri 63130-4899 ~\Vclshington American Business Phone: (314) 935-5630 ~1\tR.'ffi 1.... 'T t.a.l' Washington University • St. Louis Greater China: The Next Economic Superpowerl

Murray Weidenbaum

Preoccupied with political challenges in Europe and the and with economic competition from I apan, most Americans are ignoring a powerful longer-term trend in : the rise of the greater China economy. Paced by a rapid rate of investment and given the abundance of trained human cap­ ital, the Asian rim has become the fastest growing part of the world, averaging over five percent a year in ~eal eeonomic growth. That trend is generally expected to continue at least for the rest of this decade and perhaps well into the twenty-first century .1 Without underestimating the strategic role of the I apanese economy in the Asian rim, there is another way of looking at economic develop­ ments in this key region. Over the years, scholars in the have referred to the Chinas as a multiple - , three Chinas, and more. They have in mind the fact that several of the major of this re­ gion have a predominantly Chinese population and an unusual degree of interaction is evident: In addition to , the overall Chinese economy includes such other rapidly growing areas as , Kong, Macao, and . This category also includes other key locations where business executives, traders, and financiers of Chinese background ~ make important economic contributions. Ac­ I I cording to some estimates, Chinese companies

Murray Weidenbaum is Mallinckrodt Distinguished 0 University Professor and Director of the Center for Copyright 1993 by the Center for the Study of the Study of American Business at Washington American Business. University in St. Louis, Missouri. This paper draws on research supported by the William H. Donner All rights reserved. Foundation.

1 in , , and the Phil­ endowments of land, resources, and labor ippines make up about 70 percent of the private (mainland China). A talking doll, to take a sector in those countries. 2 modest example, may be designed in Hong The "Chinese-based economy" has resisted Kong, contain a chip made in Tai­ the global which in recent years has wan, and be assembled in China. plagued virtually every advanced industrial na­ tion. This informal economy is currently the world leader in terms of economic growth, in­ Transnational networks are the backbone dustrial expansion, and exports. It contains an of the East Asian economy. array of potential consumers that far exceeds the markets in Europe or the Western Hemi­ sphere. The informal Chinese economy differs from Within the Asian rim, this dynamic pattern the more official economies which usually are contrasts with the recent slowdown in the pace dominated by large multinational firms. Of the of Japanese economic and financial activity. world 1 s 500 leading industrial companies in the Japan Is foreign direct investment flows reached world in 1991, only one, Chinese , a peak of $67 billion in 1989 and have been de­ was part of the greater China economy (it is clining since. The 1991 total came to a modest Taiwanese, and is in 166th place). In compari­ $41 billion, lower than the 1988 rate. Japanese son, 13 Korean companies make the list; the direct investment in Asia declined simultane­ largest, , is the 18th largest industrial ously, from a peak of a little over $8 billion in firm listed in the Fortune tabulation. 1989 to less than $6 billion in 1991. The Chinese-based economy consists in Moreover, Japanese banks have tended to re­ large measure of midsize family-run firms, duce their participation in the international rather than the huge corporations characteristic banking market. The $53 billion reduction in of Japan, Western Europe, and the United their foreign banking assets in the second States. Transnational networks seem to be the quarter of 1992 was the largest recorded to natural accompaniment of the Chinese trading date.3 Of course, in absolute terms, Japan tradition. These channels for the movement of continues to be the dominant economy in Asia information, finance, goods, and capital help to and will continue to hold that position for many explain the relative flexibility and efficiency of years. the numerous ongoing informal agreements and transactions that bind together the various parts of the Chinese-based trading area. The Nature of the Chinese-Based From to Singapore, from Kuala Economy Lumpur to , this influential network - often based on extensions of the traditional Despite the current Japanese dominance of clans - has been described as the backbone of the region, the Chinese-based the East Asian economy. A substantial amount is rapidly emerging as a new epicenter for in­ of cross-investment and trade takes place, often dustry, commerce, and finance. This strategic on a family basis. Frequently, these business area contains substantial amounts of technology ties involve "overseas" Chinese who are deal­ ing with people in the province of China from and ~anufacturing capability (Taiwan), out­ which they or their ancestors migrated s~dtng entrepreneurial, marketing, and ser­ vices acumen (), a fine communica­ (tongbao or compatriots).4 tions network (Singapore), a tremendous pool To be sure, government is often heavily in­ of fmancial capital (all three), and very large volved in the ownership if not the operation of

2 3 many specific ~nterprises. In Taiwan, the The Close Connections KMT (the Nationalist Party or ) is the largest property owner, with widespread Several economic indicators, ranging from business interests. In mainland China, in addi­ modest to basic, illustrate the close connection tion to numerous private ventures (often in among the "Chinas." Eight years ago, the. spe­ collaboration with foreign investors), govern­ cial economic zone of Xiamen in mainland ment owns a great variety of enterprises. China booked 10 telephone calls a month to These range from the central government's gi­ Taiwan. Currently, such calls are averaging ant steel mills to local government factories. 60,000 a month and the number continues to The trading companies, which engage in a vari­ rise. In 1987, fewer than 7,000 Taiwanese ety of commercial, banking, and manufacturing visited the mainland. The current rate is ap­ activities, are owned by governmental units, proximately 1 million a year. Bilateral trade, ranging from the army to a local county. s which can legally be conducted only through third countries, was about $1.5 billion in 1987. The current figure is about $6 billion, a four­ 1hree-.fifths of all foreign investment fold increase. In addition, about 4,000 Taiwan enterprises have set up factories in China, in China has been made by Hong Kong's mainly in the south. In the aggregate, more Chinese entrepreneurs. than 5,000 Taiwanese companies have invested approximately $5 billion in the China main­ land.? The close connection between public and The current state of interdependence be­ private sectors and the greater China economy tween mainland China and Hong Kong is even is illustrated by the operations of the more striking. Each is the other's largest Container Company. This joint ven­ trading partner and largest source of external ture between Shanghai, Hong Kong, and investment. Three-fifths of all foreign invest­ Taiwan involves enterprises in all three areas to ment in China has been made by Hong Kong's produce steel containers in Shanghai. An even Chinese entrepreneurs. 8 greater extension of occurred in June A recent example of this development is the 1992, when the city of Wuhan allowed $60 million project on the part of Hong Kong­ Hongtex Development Company, a Hong Kong based Tian An China Group to construct a firm, to buy a 51 percent share of Wuhan No. large commercial and office building in the 2 Printing and Dyeing Company. This transac­ heart of Changzhou, an industrial city in tion marked the first time a "foreign" company Jiangsu province. Similar is the teaming up of was allowed to acquire a majority stake in a Hong · Kong's K wah International Holdings state-owned enterprise in China, albeit an ailing with a variety of partners in China to develop a one. . commercial office tower in Shanghai. The In contrast, the city of Qiaotori, in Zhejiang partners include the Hwang Pu District province, has no state-owned enterprises. This Resettlement unit, the People's Bank of China, metropolitan area has recently become the but­ the Shanghai Land Development Company, and ton-making capital of China. Seven Hong the Hwang Pu district government. 9 Kong and Taiwan companies have set up joint The People's Republic of China has report­ ventures to produce buttons for China's grow­ edly invested approximately $11 billion in ing industry. 6 Hong Kong trade, real estate, transport, and fi­ nancial enterprises. One result is that the Bank

4 5 of China is now the second biggest bank in the with considerable potential for influencing the colony, as measured by volume of deposits. In direction of future economic developments. the other direction, 80 percent of Hong Kong's Indeed, in 1991 Taiwan alone was the manufacturing companies have branches in largest single foreign investor in Malaysia and China, employing more than three million also in . Cumulative foreign direct in­ workers. Apparently there were far more peo­ vestment from the newly industrialized econo­ ple working in China for businesses owned by mies of Taiwan, Hong Kong, and Singapore is Hong Kong or on orders received from them beginning to surpass that of both Japan and the than the entire manufacturing work force of United States in Indonesia, Malaysia, and Hong Kong itself (in a reported ratio of 4 to Thailand. Not too surprising, the rapidly de­ 1).10 veloping Asian rim countries are turning to Approximately 50,000 managers and profes­ new suppliers within their own region for their sionals commute daily from Hong Kong to the imports. These newly developing countries nearby Guangdong province. About 60 percent now buy 33 percent of their imports from other of China's exports go through Hong Kong. nations within the region compared to less than These reexports, in turn, account for the 24 percent as recently as 1985.13 greater part of Hong Kong's exports. The data support the conclusion of William Purves, chairman of the Hong Kong Bank Group, that "Investment and expertise channeled from 1he economy ofmainland China may exceed Hong Kong have turned southern China into that ofJapan by the year 2000, one of the industrial powerhouses of Asia." 11 if not sooner. In fact, what some observers call the greater "Hong Kong enclave" is likely soon to enjoy a as large as that of The trend toward the internationalization of France. production within the greater Chinese area is Macao, a neighbor of Hong Kong, is also not generally viewed, however, as motivated undergoing a period of rapid growth. Al­ by the desire to integrate trade. Rather, the though under nominal Portuguese end objective often is to export final products until 1999, this island economy is developing to third countries in Western Europe and North its ties with the rest of the greater China America. Thus, trade data for Southeast Asia .economy. The new airport being built on the must be interpreted with this tendency in mind . island has the strong support of mainland China (which differs from the case of the contro­ versial new airport being planned for Hong A Look to the Future Kong). China's Chung Luen consortium holds an 8.67 percent interest in the company which Former president Robert is building and is also scheduled to operate the McNamara has provided an upbeat long-term facility .12 appraisal of the economic prospects of main­ At the more macroeconomic level, some land China. He states that, if China achieves private analysts, adding up the foreign ex­ its economic goals for the year 2000 and then change reserves of the various Chinas, come to moves forward at satisfactory but not spectac­ a present total of $200 billion. That amount is ular growth rates, that nation's per capita in­ far in excess of the foreign exchange holdings come in 2050 may be roughly equal to that of of any other worldwide. It the United Kingdom in 1965. The total size of surely is an impressive financial aggregation its economy would approximate that of the United States or Western Europe.14 One U.S.

6 7 economist estimates that the economy of main­ League. For many centuries during the late land China alone may exceed that of I apan by middle ages, the League tied together first the the year 2000, if not sooner.lS merchants and then many of the cities of north­ When we add to these forecasts the other em Germany and the Baltic area. Historians parts of the greater China economy, the eco­ stress the fact that the Hanse cities did not set nomic implications of the extension of current up a joint or unified government. Rather, the trends into the twenty-first century becomes business and government leaders cooperated on awe-inspiring. This study leaves the subject of matters of mutual economic and financial inter­ potential political unification to others. We est. A shifting array of participants can be must take note, of course, of the severe strains ) identified over the centuries. Some of the large in mainland China which are arising as an eco­ ) German cities in the qualifying area did not nomically backward, communist-led nation at­ participate at all, and many entered into the co­ tempts to move to a capitalist regime. Almost operative arrangements for only limited periods by definition, adoption of a private enterprise oftime.16 . system, however halting and incomplete, means the broadening of the society's power base and considerable decentralization of decisionmak­ Greater China is rapidly becoming one of ing. The existing power structure is not likely the world's most vibrant economies. to respond to these changes passively. Moreover, recent purchases of advanced military aircraft by Taiwan have raised levels Unlike the European Community or the of tension in the area. However, this study North American Agreement, the focuses on the economic aspects of the develop­ Hanseatic League was not a compact among ments of the Greater China economy. The im­ sovereign powers, nor did it constitute a super­ plicit assumption here is that the pervasive at­ government. Individual members continued to tractions of rapid economic development will, owe their traditional allegiance to the specific at least in the long run, overcome political political power that controlled the part of the animosities. The tragic events in , region in which they resided. Technically, the however, show the limitations of this assump­ League was an amorphous organization, lack­ tion. In that case, the great economic potential ing legal status and possessing neither finances of the country was virtually destroyed by un­ of its own nor an independent army or navy. reconcilable political antagonism. Nevertheless, the Hanse merchants cooper­ Surely the more complete industrialization ated in many important ways, providing mutual of Southeast Asia is a prospect that Western support in times of danger. They constituted analysts have not fully examined. Neverthe­ an identifiable economic grouping which com­ less, a few already are referring to a peted with businesses in Holland, Italy, and on 11 forthcoming 11 . 11 The Chinese different occasions, many of the nations facing Productivity Triangle II is another, and more the Baltic Sea. Despite the obvious limitations modest, description that is in use. With the of a nongovernmental organization spread over opening of China and capital flows to it, considerable distances - Bergen in Norway Greater China is rapidly becoming one of the was an important Hanse location as was world's most vibrant economies. It is no exag­ Novgorod in - for almost five cen­ geration to state that Greater China is a poten­ turies the Hanseatic League was an economic tial economic superpower. power to be reckoned with. A historical parallel comes to mind: the key No analyst can forecast with any degree of role in international commerce of the Hanseatic assurance the future nature of economic rela-

8 9 tionships in Eastern Asia. Will a modem ver­ ~ntinuing informal integration, perhaps ­ sion of the Hanseatic League be created? Will mg to a de facto Chinese Common Market. a counterpart to the European Community Nevertheless, forces of economic and busi­ arise? Will the more modest arrangements be­ ness development seem likely to dominate es­ ing developed in North America be the prece­ pecially~ the_long run. As in Eastern Eu;ope, dent that will be followed? Or will the present commumsm did not fall primarily because the informal relationships be relied· on in view of people rejected the ideology of Marx (if they their substantial success? ever understood it). Rather, they saw the Whatever the answer, trends rarely move in v~tly greater. benefi~ of democracy and a straight line for an extended period of time. pnvate enterpnse. Whichever specific course In the· recent past, setbacks have occurred in is followed in Southeast Asia, it is reasonable the economic and political development of to expect some type of response to the Southeast Asia and future detours are likely. economic unification that is now occurring in Some experts offer a more pessimistic assess­ the two other major competitive areas, Western ment than presented in this report. Ross Terrill Europe and North America. of the East Asian Research Center of Harvard University believes that China can never truly prosper while the Communist Party retains its In Eastern Europe, communism did not of power. Any gains resulting from fall because the people rejected piecemeal economic reforms, in this view, will the ideology ofMarx. merely benefit the· Communists by pacifying the citizenry. Other visitors to China report that their dominant impression of the new economic wnes, such as Guangdong, is one of official Conclusion favoritism, inside deals, and outright bribery. As economic journalist Dan Cordtz recently ~e ris~ of the greater China economy must wrote after an extensive visit, China remains a be viewed m the context of the increasing glob­ poor, developing nation by Western standards: alization of economic enterprise. Despite the "At best, it is a bicycle society moving up to many efforts of government. to restrain or at motor scooters." 17 least redirect trade and investment, individual Great uncertainty surely attaches to the fu­ businesses are succeeding in overcoming these ture of the Chinese economy. The People's obstacles to private decisionmaking. The mo­ Republic is making it clear that it wants to par­ bili~ of ente~rises- of their people, capital, ticipate actively in determining the future di­ and information - is reducing the power of rection of the . But government. Public sector decisionmakers in­ there is little clarity as to the nature of that creasingly are being forced to understand that participation and the desired direction of ther. no~ have to become internationally com­ change. Likewise, the relations between Pe­ petitive m the economic policies they devise. king and at best can be described as In th~s era of , telephones, and fax ambiguous. The political ties between China machmes, enterprises are extremely mobile.18 The most striking examples of that mobility are and th~ rest of the Chinese trading area, no­ tably Stngapore, range from loose to nonexis­ the recent experiences of Chinese entrepre­ tent. The notion of political integration does neurs. not now appear as a realistic short-term _Even in the face of official hostility, many prospect. However, what does seem likely is Taiwanese firms and a great number of Taiwanese individuals are succeeding in estab-

.tO 11 lishing their business presence in China. As we have seen in the case of Hong Kong and the Notes mainland, the mutual economic interpenetration is even more striking. The formal power of government is not to be discounted - and its 1. This paper draws from Murray Weidenbaum, destructive ability has been vividly demon­ "The Shifting Roles of Business and Gov­ ernment in the ," Challenge, strated in innumerable wars. Nevertheless, the January/February 1993, pp. 1-6. continuing desire of people to respond to the power of economic incentives and technological 2. "The Chinese Dia8pora: The Fifth 'Drag­ advance surely seems pervasive. on'," Conjonc:ture, November 1992, pp. 155- Looking ahead to the twenty-first century, 160. the Chinese economic and trading area might 3. Richard Waters, "Japanese Banks Step Up well reach across the Pacific (some early mani­ Pace of International Withdrawal," Financial festations are already evident in the Silicon 1imes, November 13, 1992, p. 23. Valley in California). Such a development 4. "The ," 1he Economist, would form a major part of the economic and July 18, 1992, pp. 21-24; Joel Kotkin, Pacific equivalent of NATO, the North Atlantic Global Tribes: Understanding the New Eco­ Treaty Organization. But,· unlike NATO and nomic Paradigm (Denver: Center for the like the Hanseatic League of old, that area New West, 1992); Joel Kotkin, "China would not be dominated by a single govern­ Dawn: A Rising Economic Power Is on the ment unit or depend on a military or political Horizon," Washington Post Weekly, October 12, 1992, p. 23. pact. On the contrary, it would be both con­ tributor to and beneficiary of the world's 5. I am indebted to Professor William C. Jones largest and most open commercial region. of the Washington University School of Law Barring a major political setback in the inter­ for this point. vening period, the Chinese economic area has 6. "Shanghai Joint Venture," China Morning the potential of providing a principal engine of Post, December 11, 1992, p. HS 1; Paul world growth in the early twenty-first century. Mooney, "At China's Crossroads," Far East­ em Economic Review, November 19, 1992, p. 66; Nicholas D. Kristof, "Poor Chinese Town Bets Its Shirt on Making Buttons," 1he New York 1imes, January 18, 1993, p. A6. 7. Angus Foster, "Bitter Enemies Become Grudging Partners," Financial 1imes, November 13, 1992, p. 17; Sheila Teffi, "Taiwan Vote Signals Growing Support for Independence," Christian Science Monitor, December 22, 1992, p. 6. 8. David H. T. Lan, "Hong Kong in the Year 2000," Nikkei Weekly, October 26, 1992, p. 14. 9. Eric Chan, "Tian An Signs Deal for Changzhou Project," Hong Kong Standard, December 10, 1992, p. 20; Sandy Li, "K Wah Links for $980 million Mainland De­ velopment," Hong Kong Standard, December 10, 1992, p. 19.

12 13 10. Lan, "Hong Kong," p. 6; Kevin Rafferty, "A Serious Case of Mainland Fever," Emerging Markets, September 23, 1992, p. 50. 11. Quoted in Louis Kraar, "A New China With­ out Borders," Fortune, October 5, 1992, pp. 124-125. 12. Harold Bruning, "Macao to Hold 51 pc Stake in Airport," Hong Kong Standard, December 10, 1992, p. 19. 13. Olin L. Wethington, Capital Flows, Invest­ ment, and Growth, A Presentation to the Pa­ cific Economic Cooperation Council, San Francisco, California, September 24, 1992; p. 2. 14. Robert S. McNamara, "A New International Order and Its Implications," A Paper pre- · sented to the Conference on Arms Re­ duction and Economic Development in the Post- Era, Univer­ sity, Tokyo, Japan, November 4, 1992, p. 4. 15. Charles Wolf, "Why Asia-Pacifi~ Holds the Cards," 1he New York 1imes, January 17, .1993, p. F-13. Wolf is director of ec_onomic research at the Rand National J;:>efense Re­ search Institute. 16. This section draws heavily from Philippe Dollinger, 1he German Hans a (Stanford: Stanford University Press, 1970). 17. Dan Cordtz and Richard Meyer, "Inside China Today," Financial World, December 8, 1992, pp. 36-51. 18. Richard McKenzie and Dwight Lee, Capital Mobility: Challenges for Business and Gov­ ernment (St. Louis: Washington University, Center for the Study of American Business, 1991).

14