The coming Chinese century: big, rich, and a force to be reckoned with.

Big, rich, and a force to be reckoned with.

China may become the world's largest economy sometime in the first quarter of the next century, surpassing the outputs of the United States, Germany, and all the other economic superstars of the twentieth century.

Since 1978, when Deng

Xiaoping began reforms aimed at liberalizing and integrating China's economy with the world's, China's official GNP growth rate has averaged about 9% annually, up from 4.5% in the two decades before reform. How soon the Chinese economy becomes number one depends on whether, or how long, it can keep up its extraordinary growth.

In China in the 21st Century, an international group of economists concludes that the answer will depend on whether the Chinese economy can deal with several internal structural issues and on the policies that the international community establishes to deal with China.

Issues affecting China's economic prospects include:

* Upgrading the infrastructure. China's infrastructure will have to be substantially built up. Transportation bottlenecks already cost about 1% of GDP, yet investment in the transportation infrastracture has actually declined in the 1990s. Demands on energy production will rise substantially. China has the world's third-largest coal reserves, but rapid economic growth could strain them. And the most rapid growth in energy demand is likely to be for oil, due to the widely anticipated expansion of road traffic. In addition, China's domestic capital markets, banking sector, and financial services are underdeveloped.

* Obtaining capital for investment. Even though the Chinese save at a high rate, foreign capital (as well as technological expertise) will be needed. The export boom has provided capital to date, but the global economy's ability to continually absorb China's exports is uncertain.

* Keeping economic reform on course. So far, most of the economy has effectively moved to a market basis. An outstanding question is the status of the state-owned enterprises, which are generally poor performers but which have ties to politically powerful people in the army and bureaucracy, who have been reluctant to give up their power and perks.

* Abiding by the "rules of the game." China is gaining a reputation in the international business community as a highly risky place to invest. Legal reforms, especially regarding intellectual property, will have to be made. Similarly, corruption has to be dealt with. Here is where the international community can perhaps exert its greatest leverage. Providing the capital and expertise that China will need to continue to grow can be linked to China's compliance with international rules and regulations.

* Protecting the environment. China already produces 11% of the world's greenhouse-gas emissions. Burning all that coal and oil without pollution protection or efficiency improvements, combined with the expected effects of growing road traffic, could have drastic effects on the environment.

* Feeding itself. China has 22% of the world's population, but only 7% of its arable land. Degradation of land and shortages of water have become increasingly critical. Pessimists include the Worldwatch Institute's Lester Brown, who projects grain imports exceeding 200 million metric tons by 2030. But China's own economists are optimistic, expecting technological innovation to maintain a high level of self-sufficiency.

* Holding the social fabric together. High economic growth has covered up the strain so far, but slower growth could create lots of unemployment and exacerbate the growing disparities between the flourishing coastal areas and the largely rural and less well-to-do interior. Also important will be the economy's ability to create high-level jobs for the growing number of college graduates. Failure to do so could ignite student activism.

China's Economy and International Policy

The response of the international community to China's economic development hinges largely on whether the world can or will absorb the flood of exports that a fast-growing Chinese economy is likely to produce. On the positive side, China has been open to imports, running a trade deficit since reforms began in 1978. An open, thriving Chinese economy offers new markets that should offset the threat that its exports present. In any case, China's economic growth will give the international community great opportunities for leverage.

Three possible scenarios for China's economic future are outlined by Dwight H. Perkins of the Harvard Institute for International Development:

Scenario 1: The High-Growth Alternative. Almost everything has to go right for growth to continue at 8% or 9% annually. The market orientation of the economy strengthens, and reform continues. State-owned enterprises are reformed, and corruption is curbed. Sufficient capital is available. China's high rate of personal savings continues. The needed upgrades in the transportation and energy infrastructures are helped along by direct foreign investment. The quality of education improves, and more efforts are made to lure back home Chinese nationals studying or working abroad. The global economy is willing to absorb a high level of exports from China's labor-intensive manufacturing, based in part on China's liberalization of its import policies.

Scenario 2: A Deteriorating External Environment. A less-favorable external environment combines with stalled domestic reform. The most likely trigger is if China's rapid export growth leads to a protectionist reaction. The global economy is unwilling to absorb China's export assault, especially since the world sees China as keeping its own markets relatively closed. Another possible trigger is a mishandling of the Hong Kong transition. The result is that China's domestic economy is unable to absorb its productive capacity and growth slows. As a result of economic trouble, reform stalls or even reverses. Social unrest follows, further retarding economic liberalization.

Scenario 3: The Triumph of the Bureaucracy. The external environment is favorable, but China has mixed success with reforms. Those inherently suspicious of the economy's market orientation yank the reforms backward and keep power in the hands of the government bureaucracy. Corruption proliferates. The boom continues in China's thriving coastal areas, but inadequate investment in infrastructure keeps the rural areas from sharing in the bounty. As social tensions emerge, the bureaucracy cracks down harder. Growth slows to about 4% to 5% annually.

Prospects for China

The consensus of the experts contributing to China in the 21st Century is that China will continue to grow rapidly if it deals successfully with its internal issues and if the external environment is favorable. China's growth will slow down if either is unfavorable, but this will only delay its emergence as the world's largest economy.

Source: China in the 21st Century: Long-term Global Implications, Organization for Economic Cooperation and Development, 2, rue Andre-Pascal, 75775 Paris, CEDEX 16, France. Telephone 33-1-45-24-82-70. 1996. 135 pages. Paperback.