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China: Awakening Giant

China News Digest International, Inc.


W. Michael Cox and Jahyeong Koo
Federal Reserve Bank of Dallas
September 2003

The views expressed are those of the authors and should not be attributed to the Federal
Reserve Bank of Dallas or the Federal Reserve System.


China: Awakening Giant
China has had four distinct periods in its 4,000-year
Figure 1: GDP per Capita:
history. As far back as there’s data, and until the 16th cenChina and Western Europe: 1-1998 A.D.
tury, China’s economy performed on par with countries
elsewhere in the world. Figure 1 plots GDP per capita
over the period from 1 to 1500 A.D. and shows that for
over 1,000 years China’s economy outperformed that of
Western Europe. Toward the end of the Ming Dynasty,
however, and throughout the Ching dynasty, China stagnated—its GDP per capita rising virtually nothing for over
300 years. Western Europe at this time enjoyed rapid economic development, riding the scientific revolution that
began in the 11th century. Around the 19th century, growth
in Western Europe skyrocketed, while China slipped into
SOURCES: Maddison, Angus (2001), The World Economy: A
decline as it shunned progress and closed its doors to the
Millennial Perspective, Organization for Economic Cooperation
and Development, p. 42; authors’ calculations.
outside world. China’s isolationism led eventually to invasion from Western and Japanese forces, driving the
nation’s GDP per capita back down to levels seen 2,000 years earlier. Just a quarter century ago, China began
to awaken from its 500-year sleep, and today it is rapidly catching up with the Western world.
The year 1978 marks a turning point in China’s modern history, as Deng Xiaoping began to remake the
economy around market principles. In 1978, China had the world’s ninth largest economy, with a GDP
just one-eighth that of the United States and a third that of Japan (Figure 2).
But by 2001, China had grown to the world’s second largest economy, with a national output over half that
of the United States and 60 percent larger than Japan’s (Figure 3).

Figure 2: The World’s Largest Economies: 1978

Figure 3: The World’s Largest Economies: 2001

SOURCE: World Development Indicators, World Bank.

SOURCE: World Development Indicators, World Bank.


China’s growth rate has slowed somewhat from its astonishing double-digit pace of the mid-1980s and early
1990s, but still its GDP is expanding at roughly 8 percent per year (Figure 4). At this rate, and assuming, say,
a 3 percent average annual growth rate for the United States, China will ascend to the world’s largest economy
in just 12 more years (by 2015).
Whether or not China continues to grow at such a rapid pace remains to be seen, but with its population and
labor force being so large, China’s preeminence is inevitable if its modern development continues (Figure 5).
At 1.3 billion, China’s population is 4.5 times that of the United States. The labor force comparisons are
astounding. The United States has roughly 130 million workers. China’s has 760 million—six times that of the
United States. It is truly a giant.
We look at the effects of China’s awakening on the world economy—effects in five major areas: world
production and trade, world capital flows, inflation, consumer demand and, finally, education and technology.

Figure 5: Population and Total Labor Forces

Figure 4: GDP Growth Rate

SOURCE: World Development Indicators, World Bank.

SOURCE: International Financial Statistics, International
Monetary Fund.

World Production and Trade
China is a nation in transition from an agricultural
economy to an industrial one. Figure 6 shows 50
percent of China’s labor force still works in agriculture,
as compared with just 2 percent in the United States.
Roughly the same fraction in each nation works in
industry—the combination of manufacturing, mining and
construction. The industry figure is 22 percent in China
and 19 percent in the United States. Just 28 percent of
Chinese work in the services sector, whereas 79 percent
do so in the United States. China surely will transition
one day to a largely services economy and outgrow (so to
speak) manufacturing, as did the United States in gaining
its wealth, education and human capital. But right now
China is following the footsteps of early 20th century
America and mid-20th century Japan, that is, developing
its industrial base.

Figure 6: Where China Works

SOURCES: China Statistical Yearbook, National Bureau of
Statistics; Bureau of Economic Analysis.

The picture below epitomizes the typical Chinese family in transition from farm to factory. The male works in
a city factory, living in a company dormitory, returning to the country twice a year to visit his family. He works
in the city because wages there are much higher than in the country. Urban workers in 2001 earned an average
of 6,860 yuan, whereas rural workers made just 2,366 (Figure 7).
Figure 7: Per Capital
Income of Urban and Rural Workers

SOURCE: China Statistical Yearbook, National Bureau
of Statistics.

“China 21”/Ruby Yang 2001

Chinese factory workers earn more than those in agriculture for two (not unrelated) reasons. First, factory
goods are readily traded in the world. China’s top exports in 2001 were all industrial goods—textiles, fabric,
footwear, furniture, electronics and so on (Figure 8). Second, factory workers are generally more productive
than those in agriculture because they have more capital with which to work. This may not look like a lot of
machinery and equipment for workers to use compared with what U.S. factory workers have. But it’s a lot
more than what’s found in Chinese agriculture, where workers toil mainly with their hands and with little of
the technology found on U.S. farms.

Figure 8: Top Ten China Exports: 2002

SOURCE: China Customs Statistics.

Student Photo, Carleton College program


Figure 9: Productivity: China vs. United State

SOURCES: China Statistical Yearbook, National Bureau of
Statistics; World Development Indicators, World Bank; Bureau
of Economic Analysis.
FAO photo by F. Botts

Productivity in China’s agricultural sector—measured as output per worker—averages just 3.2 percent of that
on U.S. farms (Figure 9). One U.S. farm worker produces more than 31 Chinese farm workers; one U.S. factory worker produces more than five Chinese factory workers. Employment in China is shifting to manufacturing because productivity and wages there are higher than in agriculture.
But manufacturing jobs are also shifting to China from other parts of the world because China’s labor is so
much cheaper than most places (Figure 10). You might say there are four tiers of manufacturing wages in the
world—high wages like those found in Japan, the United States and most of Europe; second-tier wages, such
as those of other Asian economies; wages in less developed countries, such as Mexico and Brazil, which are
substantially lower; and wages in China, which are lower still.
Economists estimate that over the next decade or so, China’s industrial sector will have to create jobs for over
150 million workers, as it did for nearly 100 million workers during the 1978–2001 period (Figure 11).
Figure 10: Four Tiers of Wages:
Hourly Pay in Manufacturing: 2001

Figure 11: China’s Growth in Industry Employment

SOURCES: Dahlman, Carl J. and Jean-Eric Aubert (2001), China
and the Knowledge Economy: Seizing the 21st Century, The
World Bank, p. 16; Reutersward, Anders (2002), “Labour Market
and Social Benefit Policies,” in China in the World Economy: The
Domestic Policy Challenges, Organization for Economic
Cooperation and Development, p. 537.

SOURCES: Bureau of Labor Statistics;
China Statistical Yearbook, National
Bureau of Statistics.


Figure 12: China’s Exports as a Share of GDP

SOURCE: International Financial Statistics, International
Monetary Fund.

Figure 13: China: Leading Asian Exporter to the U.S.

China continues to ramp up to a largely manufacturingfor-export nation, putting 25 percent of its GDP out to the
rest of the world in 2001, up from less than 5 percent in
1978 (Figure 12).
China has overtaken Japan as the leading Asian exporter
to the United States. Figure 13 shows U.S. monthly
imports from China (in red), Japan (in green), and other
Asian nations. You can see the huge seasonal pattern of
toys and other festive items imported from China each
Christmas, and you can clearly also see China
methodically gaining U.S. import market share from
Japan and all its other neighbors.
China’s awakening is, of course, already affecting industry
in other nations. Consider again, for example, Japan and
add Mexico. From 1978 to 1999, both China and Mexico
gained market share in clothing, textiles and related industries at the expense of other producers, such as Japan
(Figure 14). We don’t have more recent data than this at
the specific industry level, but the overall export numbers
indicate that even Mexico is having trouble now keeping
up with China’s export push. Over the period from 1980
to 1999, Mexico’s exports rose by $121 billion, while
China’s rose by $177 billion. But in just the past three
years, China’s exports have shot up by $188 billion—
more than the previous two decades—while Mexico’s
inched up by just $13 billion (Figure 15).

SOURCE: Direction of Trade Statistics, International
Monetary Fund.

Figure 14: Share of World
Exports in Clothing Textile & Like Goods

Figure 15: Export Gain for China & Mexico

SOURCE: NAPES database, Australian National University.

SOURCE: Direction of Trade Statistics, International
Monetary Fund.


Capital Flows
Figure 16: Net Capital Inflows into China

A brief look into capital flows reinforces China’s growing
status in world markets. China is clearly getting a lot of
investors’ attention worldwide. As late as 1980, virtually
no capital flowed into China from the rest of the world.
Today, the figure is approaching $50 billion annually
(Figure 16). Where is the money coming from, you might
ask. From all over the globe, including from foreigners
who might otherwise have invested in the United States
(Figure 17).
Capital seeks labor with which to work. And China’s massive shift from farm to factory will likely offer world
capitalists the labor with which to earn good rates of
return for decades.

SOURCE: World Investment Report, United Nations Conference
on Trade and Development.

Figure 17: Foreign Direct
Investment as a Percentage of World Total

Our growing imports from China appear to be putting
downward pressure on U.S. inflation. U.S. imports from
China have grown from nil in the late 1970s to nearly 12
percent today, putting China equal to Mexico in terms of
our imports from nonindustrialized nations (Figure 18).
Roughly 23 percent of U.S. imports from nonindustrialized nations are from China and Hong Kong (Figure 19).
This is China’s peer group, so to speak, in terms of the
products produced and the direct competition. But China’s
influence over its competitors’ pricing power likely
extends far beyond its 23 percent share as it competes
increasingly with Korea, Taiwan and the Association of
South East Asian Nations, as well as with Mexico.
Figure 18: U.S. Imports from
China as a Percent of Total Imports

SOURCE: World Investment Report, United Nations Conference
on Trade and Development.

Figure 19: U.S. Imports
from Non-Industrialized Countries

SOURCES: Direction of Trade Statistics, International Financial
Statistics, International Monetary Fund.

SOURCE: U.S. International Trade Commission Trade Dataweb.


This is important because roughly half of all U.S. imports
today are from nonindustrialized nations, and the price
index for manufactured goods from these nations has been
falling for the past eight years (Figure 20). In short,
China’s growing industrial output has been restraining
world and U.S. inflation.

Figure 20: U.S. Import Price
Index for Manufacturing Goods

Consumer Markets
As China produces more and makes economic gains, it is
consuming more as well. China still has a large poor population, living mainly in the countryside, and there’s the
very rich. Fact is, China’s income distribution is about the
same as America’s, just centered at a much lower middle.

SOURCE: Bureau of Labor Statistics.

The pictures below show some of the goods you might see in a rural household (immediately below on left),
and urban middle-income households. Notice the TV, a VCR, microwave and so on.

Longqi Lin

Rod Christian, Mesa College

Marshall University, Teach in China program


Figure 21: Consumer
Goods per 100 Households

Figure 22: Consumer
Goods per 100 Households

SOURCE: China Statistical Yearbook, National Bureau
of Statistics.

SOURCE: China Statistical Yearbook, National Bureau
of Statistics.

Chinese households—both in the countryside (shown in black) and city (in red)—increasingly own electric
fans, color TVs, washing machines and refrigerators (Figure 21). City dwellers tend to have more of most
things. But with less living space than country folks, they tend to own a foldout bed rather than the standard
couch. As China’s population gains wealth, it is buying more of most things but less of others, such as sewing
machines (bottom left) and bicycles (bottom right) (Figure 22).

JC Mancke

The bicycle has been the main means of transportation in China for
over half a century. It’s affordable and versatile, and nearly 100
people in China own bikes for every one who owns an automobile.
One day, a lot of these bikes are going to be replaced with cars.

Rod Christian, Mesa College


Indeed, China is a burgeoning market for many consumer goods, as this U.S. comparison suggests (Figure 23).
China has 583 bikes, 22 motorcycles and just six cars for every 1,000 people. The United States has not six but
475 cars per 1,000 people. Raising China’s auto ownership rate to, say, just a fifth of U.S. levels would require
producing 114 million more vehicles—nearly as many as are already operating in the United States. There’s
still a lot of room to go in selling such consumer staples as radios and TVs and the electricity to run them.
As China exports more of what it produces, it will import more of what it consumes, creating a huge market
for foreign producers (Figure 24).

Figure 23: A Burgeoning Consumer Market

Figure 24: China’s Imports as a Share of GDP

SOURCES: China: Bicycle, autos, living space, China Statistical
Yearbook, National Bureau of Statistics. U.S.: Bicycle,; living space, Housing Characteristics, 1993, U.S.
Department of Energy, Energy Information Administration. All
other data are from World Development Indicators, World Bank.

SOURCES: International Financial Statistics, Direction of Trade
Statistics, International Monetary Fund.

Figure 25 shows the bilateral trade balance of China’s
neighbors over the 1992–2002 period. The green line
shows Japan’s trade balance with China, which is more or
less going sideways—neither improving nor worsening
substantially. The orange line shows China’s other neighbors—Korea, Russia, Malaysia, Thailand, Taiwan,
Philippines, Singapore, Indonesia and Vietnam—which
have seen their balance improve from a combined surplus
of $500 million to $26.5 billion. With the exception of
Vietnam, every one of these nations now has a trade surplus with China.

Figure 25: A Growing Trade Surplus with China

SOURCES: Direction of Trade Statistics, International Monetary
Fund; Ministry of Finance, Republic of China (Taiwan).


Education and Technology
Figure 26: Export of High Tech Products

China now is a low-wage nation, abundant in unskilled
labor. If China is to improve its living standard substantially, it will have to produce and export more knowledgeintensive products. Indeed, China is already doing so, as
Figure 26 suggests. High-tech is 23 percent of China’s
exports today, compared with less than 1 percent in 1985.
In its early years of industrialization, Japan mass-produced
relatively unsophisticated electronics—such as transistor
radios—and progressively upgraded production to more
sophisticated, higher dollar exports, as typified by the
Lexus automobile. That’s a model most other modern
wealthy nations—including the United States—have followed, and it’s one that can work for China, too. But it
requires building education and technology far above
current levels.

SOURCES: World Investment Report (2002), United Nations
Conference on Trade and Development; Direction of Trade
Statistics, International Monetary Fund.

China today has six times the university population it did
in 1978—56 students per 10,000 population, compared
with just nine back then (Figure 27). But that’s still just
about a tenth of U.S. levels, not enough to sustain growth.
So more Chinese students are leaving to get their college
and advanced degrees in industrialized countries. 1999 is
the latest year for which we have data on the number of
Chinese students leaving the country to study abroad, but
even back then the data showed a huge jump.

Figure 27: University Students

SOURCES: China Statistical Yearbook, National Bureau of
Statistics; U.S. Bureau of the Census.


Figure 28: Number of Students
Studying Abroad and Returning

SOURCES: Zhang Guochu and Li Wenjun (2002), “International
Mobility of China’s Resources in Science and Technology and Its
Impact,” in International Mobility of the Highly Skilled, Organization
for Economic Cooperation and Development; 2001 and 2002
returning students numbers, Ministry of Education, China.

Interestingly also—and exactly as one would expect—
more Chinese students today are returning to China once
they complete their education (Figure 28). This is probably just the beginning of a trend, where more and more
students return home as China’s economy develops and
becomes more privatized.
Nearly 40 percent of China’s workers today are employed
in private or foreign-funded enterprises (shown in yellow
and blue). That’s up from zero in 1978, and it means they
can now run a business for profit (Figure 29). Economic
theory suggests that as market principles take greater and
greater hold in China, it will inevitably offer its population a better rate of return on education, more folks will
get educated, and more will stay home. As this happens,
China will be able to transition to the next phase—a hightech and services economy.

But China will also have to develop its information age infrastructure. The United States has 625 personal
computers per 1,000 people; China has just 19. The United States spends $2,924 per capita on information and
communications technology annually; China spends just $53. We have nine times the scientists and engineers
engaged in research and development per million people. China has 184 secure Internet servers; the United
States has 78,126. We have 20 times as many Internet users on a per capita basis (Figure 30).

Figure 29: Moving from
State-Owned to Private Enterprise

Figure 30: Education, Science and Technology

SOURCES: China: High school graduate, college graduate:
National Bureau of Statistics; university students: China Statistical
Yearbook, National Bureau of Statistics. U.S.: Literacy rate: The
World Factbook, U.S. Central Intelligence Agency; high school
graduate, college graduate, university students: U.S. Bureau of
the Census. All other data are from World Development
Indicators, World Bank.

SOURCE: China Statistical Yearbook, National Bureau
of Statistics.


The Outlook for China
Figure 31: Where America Worked: 1800-2001

Right now, China’s labor force is allocated between agriculture, industry and services roughly as America’s was in
1882 (Figure 31). This does not mean, though, that it will
take China 120 years to reach current U.S. living standards. Just as when going through a dense jungle, it’s
much easier to follow in the path others have already cut
than to cut it yourself. Followers can always grow faster
than leaders through technology transfer.
Currently, China’s per capita GDP is roughly $4,800—
about one-eighth that of current U.S. levels (Figure 32).
That’s an income roughly equal to 1901 America. But
regardless of whether China’s living standards ever fully
catch up with ours, the massive change that’s occurring in
China will have profound effects on the world economy
for decades. Certainly the development of Japan and Germany greatly affected other nations, even though Japan
and Germany never fully converged to our living standards
and even though the combined labor force of Japan and
Germany is only 110 million—just one-seventh the size of
China’s. One would expect the magnitude of China’s influence on the world to be much greater.
In closing, China today is at an intersection of yesterday
and tomorrow. Just a quarter century ago, China was a
largely agricultural nation—isolated, less educated and
stagnant. But today, China is rapidly transforming itself
into an industrial nation and thereby raising its population’s living standards.

SOURCES: Susan Carter et al., eds. (2001), Historical Statistics
of the United States: Colonial Times to 1970; Historical Statistics
of the United States: 1789–1945, U.S. Bureau of the Census;
Employment and Earning, U.S. Department of Labor.

Figure 32: Catch Us If You
Can: Per Capita GDP: 1950-2001

SOURCES: Maddison, Angus (2001), The World Economy:
A Millennial Perspective, Organization for Economic Cooperation
and Development, Table C; World Development Indicators,
World Bank.

Jonathan Kraft,


To progress much further beyond this stage and toward the heights of modern nations, China must develop its
knowledge and service base—which it is doing. China’s full transformation can happen; it probably will happen; indeed, it already is happening in China’s modern cities—Shanghai, Beijing, Qingdao, Guangzhou, Nanjing, Shenzhen and so on.


Ming Kou/


Shanghai Municipal Information Office

And so the lifestyle China’s youth will grow to enjoy should be far above what previous generations have
ever known.

Rod Christian, Mesa College