China's Next Great Leap Forward

11/30/2010 2:27 pm EST

Focus: MARKETS

Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor-in-chief of China Stock Digest, explains why the bureaucrats in Beijing are not resting easy.

We spend a lot of time here in the West marveling at the "Chinese economic miracle." Certainly there has never been a phenomenon like it in history. Yes, the British and American industrial revolutions shook the world. But no country has ever risen from poverty to economic power as quickly as China.

A little-noticed report from Beijing now reveals China's hidden weaknesses to the world. China is not the super-competitor that it appears to be after all. A surprisingly honest report from the well-regarded Chinese Academy of Social Sciences (CASS) says China still lags badly in both competitiveness and efficiency.

Of course, China comes out near the top in terms of economic momentum and scale. China comes in fourth place in terms of economic scale behind the United States, the European Union and Japan. The CASS report also gives China high marks for growth speed, ranking China among the five fastest developing countries.

Critical Problems
But that's where the good news ends. In terms of national competitiveness, Beijing's bureaucrats rank China at a dismally low 17th place globally. China's economic juggernaut fares even worse in terms of efficiency. The Chinese economy ranks only 56th worldwide. While many nations envy China for its economic growth, the moving parts of the miracle economy are apparently wasting a lot of energy and money.

There's no hint of propaganda in the very tough CASS self-exam. The structure of the economy is partly to blame, it says. In terms of structural competitiveness China appears near the bottom, in 89th place. Even worse, it is "lacking momentum" in making improvements.

Even in areas where many thought China had the lead, there is surprising weakness. China's top talent index and its education & health index are said to be only half that of the US.

And here's a shocker for those who worried about China's rising technical power. In terms of scientific and technological prowess, the Chinese rate themselves at only one-fifth the level of the United States.

Beijing Plots Change of Course
Unlike Washington, Beijing is not paralyzed when dealing with problems. The new five-year plan from the Central Committee is a call to action. Beijing is signaling an entirely new direction for the economy.

The plan's new pillar industries all focus on innovative technologies and efficiency improvements, rather than on the basic heavy industries like steel and autos that dominated previous plans. That means information technology, energy-saving and environmental protection. China is also pushing for new energy sources, innovative biotechnology, high-end equipment manufacturing, new materials, and new-energy cars.

China says it will "boost policy support and planning guidance to promote research and development in key technologies and develop these seven strategic sectors into pillar industries to improve industry competitiveness and economic efficiency."

That's a mouthful, but you get the idea. China is putting a priority on moving from the heavy industry era into the high-tech arena of the 21st century.

Don't believe it can happen? Keep in mind that the slow-moving China of old is ancient history. In a centrally managed economy, big things can and do happen if the government acts in a coordinated way.

Time to Hit the Roads
Have you seen China's famous 220 mph bullet trains? China's new plan calls for a national network of new bullet trains stretching 25,000 miles. This massive grid could join every Chinese city with more than half-a-million people in just five years.

The five-year plan also calls for an American-style freeway system covering more than 50,000 miles. This grid would tie together all cities with a population of more than 200,000. Those Americans who remember what Eisenhower's interstate system did for the US will understand the kind of results the Chinese are looking for. That's just one part of structural efficiency.

The Chinese have already started shuttering old fashioned factories, determined to meet self-imposed energy-efficiency targets.

So this much is true. China is still a lot less efficient and competitive in many arenas than the west. It even lags behind in India in some economic measures.

But give the Chinese credit for two things. They have recognized their weaknesses. And, they have started to take tough, concerted action.

[Paul Goodwin recently profiled a fast-growing airline based in China’s dynamic south. Jim Jubak recommends nine other stocks set to benefit from Beijing’s growing emphasis on domestic consumption. Igor Greenwald warns against envying China’s rapid growth rate. Prieur Du Plessis predicts the forthcoming Chinese business surveys will hint at a slowdown—Editor.] 

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