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Year of the Tiger: The Chinese century

On Sunday China celebrated its New Year but how much do we really know about the economic powerhouse in the east – and what lies in store for the rest of the world?

Rupert Cornwell, Clifford Coonan, Hamish McRae and Greg Walton hunt down the answers

The pace and extent of China's ascent among nations has been remarkable. Barely 20 years ago, it went virtually unnoticed. Today it is an economic superpower – if not (at least yet) a cultural and military one.

By every measure it is a rising power. It is now the world's second- biggest economy behind the United States, and some experts predict it will overtake the US within two decades. It has overtaken Germany to become the world's largest exporter. It holds the largest foreign-currency reserves on earth, more than $2 trillion (£1.3 trillion). Barring a collision between China's authoritarian politics and its economic liberalisation – the paradox of "Confucian capitalism" – this momentum will surely continue.

Despite its progress, China certainly has great potential weaknesses: a poor rural population and ethnic tensions, to name but two. It is also the world's greatest polluter. But its public infrastructure programme dwarfs anything in the West. In that sense especially, its centralised and authoritarian system is a source of strength, enabling decisions to be taken and vital projects to be launched without the delays that often hold up such investment elsewhere.

The West's economic travails have, if anything, made China yet more confident and assertive, and more dismissive of criticism from abroad – be it of its human rights record or its manipulation of the yuan's exchange rate. The fact is that money, not gunboats, gives huge muscle to a diplomacy whose goals are mercantilist rather than ideological. When the Soviet Union collapsed in 1991, it seemed a foregone conclusion that the 21st, like the 20th, would be an "American Century". Now, for the first time in almost a millennium, a Chinese century is on the cards.

Where does China rank compared with other leading economies?

Though China's $8.8 trillion gross domestic product figure is the world's third highest, its per capita GDP rank is far lower, at $127, only just above Ukraine's. The US by comparison has the highest GDP of any economy and the 10th highest per capita. But China is growing fast. Many Western countries, including Britain, have barely increasing GDP figures, whereas Chinese officials expect an 8 per cent increase, at least, for 2010.

How many Chinese are there? What are the population projections?

China's population is expected to peak at around 1.4 billion, but we could see the emergence of an enlarged population of urban, educated children – including long-out-of-favour girls – who will contribute to China's ongoing expansion. China's urban population right now is more than 540 million, which dwarfs the entire EU. This largely agricultural society is being rapidly transformed into a country teeming with megacities.

The country's urban population is currently dispersed across 661 big, medium and small cities; more than 100 of these have the stated aim of transforming themselves into internationalised metropolises or megacities. By 2025, at least 220 Chinese cities will have more than one million people, compared with 35 for the whole of Europe. Some 300 million rural dwellers will migrate to the cities in the next 20 years.

How much of the world's resources is China consuming?

China now consumes around 40 per cent of the world's aluminium compared with only 2 per cent in 1970. Its appetite for natural resources is highlighted by the recent passage of laws banning the export of metals used in the manufacture of fuel cells for hybrid vehicles. The government has also amassed the world's largest reserves of several precious metals – including indium, used in touchscreens – driving up prices and provoking fears of shortages.

What else are they doing with those resources?

While China's export industry still takes the lion's share of imported raw materials, domestic infrastructure projects and house building are also putting strain on a number of commodities. The country's fledgling middle class is steadily establishing the world's largest housing market, with forecasts indicating that China could have as many as 78 million new homeowners by 2013. The expansion of cities is driving up demand for cement in particular. Economists have forecast that China will consume 40 per cent of the entire global supply of cement during 2010, having maintained an average annual growth rate of 25 per cent over the past 10 years. The construction equipment industry grew by around 20 per cent in 2009, and 50 per cent of the world's tall cranes are now to be found in China.

How much does China export?

China took the title of the world's leading exporter from Germany only last week. In 2009, it earnt $1.23trn, relegating Germany to second place. The US buys close to 18 per cent of all Chinese exports, making it by far the largest market for China's goods. The downturn resulted in a dramatic drop in US consumption, leading Beijing to reconsider the country's reliance on the American consumer.

Much of China's success as an exporter depends on low costs. What happens when, inevitably, China's costs rise as living standards go up?

China has to go upmarket. Already the higher-cost regions of China, most notably Shanghai, are moving out of mass-manufacturing and into more complex manufacturing and high-added-value services. But for another couple of decades there will be a plentiful supply of labour as people move away from less-developed regions towards big cities, so it will be able to contain costs for some years yet. It is investing heavily in training.

What economic power does China have over other countries?

China's power shows up in three main ways: as a purchaser, mostly of raw materials; as a supplier to the rest of the world; and as an investor of its spare cash.

In relation to the first, it has had a huge impact on Africa. It funds more infrastructure in Africa than all the aid of Western nations put together, much in exchange for raw materials. As supplier to the world, it has helped hold down living costs elsewhere by producing so many cheap goods. For example, it produces two-thirds of the world's socks. As an investor, it has by and large bought financial assets – US Treasury securities in particular – rather than buying foreign firms. So it has not exerted its power in any direct way.

How much of the US commercial sector does China own?

Surprisingly little, given its vast exports to the US. Although China holds hundreds of billions of dollars of US government and corporate debt, as of 2007 its declared direct investment totalled barely $1bn, mostly in the wholesale trade sector. That figure almost certainly understates reality: a further $5bn may have been invested by offshore holding companies ultimately owned by China. But if protectionist sentiment grows in the US, and the gap in labour costs between the two countries narrows, then both politics and economics may well push China to boost its direct investment sharply over the coming decade.

Are relations with the US worsening?

Right now they are, and given that the world's most important bilateral relationship is the one between Washington and Beijing, that matters to everyone. The most visible friction has been over US plans to sell $6bn of arms to Taiwan, but other issues fester. China is the biggest obstacle to genuinely tough UN sanctions against Iran, and Washington is suspicious of China's moves to lock in long-term raw material deals with poor countries in Africa and elsewhere. The most serious US accusation is that China unfairly holds down the yuan's exchange rate. A trade war is not to be ruled out.

What is it doing with its spare cash?

In addition to extensive investment in overseas projects, mainly mining and other raw materials, the Chinese state has cautiously invested in foreign companies and is now the world's fifth-largest sovereign wealth fund. China's $227bn of state investment in foreign companies includes a 1 per cent stake in BP, 1.7 per cent in the French oil giant Total, as well as stakes in IBM's laptop division and MG Rover. A 30 per cent decline in the value of China's investment in the US-based wealth management firm Blackstone only months after the initial venture triggered widespread criticism and partly explains China's caution. China has also grown its stockpile of gold by 454 tonnes in 2003 to around 1,100 tonnes now.

Where is it investing?

China is expanding its presence in Africa and Latin America through joint ventures, as well as buying stock in US and European blue-chip companies, although, as explained above, Beijing's strategy is cautious. Official figures show that there are more than 1,000 China-backed projects in Africa and 750,000 Chinese workers in Africa, but these numbers are thought to be an underestimate. China has also rapidly expanded its presence in Latin America, signing 20 oil deals with Venezuela and a $10bn loan to Petroleo Brasileiro in return for a long-term daily supply of 160,000 barrels. According to government figures, China established 59 new projects, which created 607 new jobs, in the UK between 2008 and 2009. Britain receives more Chinese direct investment than any other EU country, according to the auditors Ernst & Young. The tech company Huawei is the largest Chinese corporate investor in Britain, and conducts research and development of fibre optic technology with BT in Ipswich. Its European HQ in Basingstoke employs 750 people.

What benefits do we in the West enjoy because of China's success?

There have been three main benefits. The first was clear-cut. Cheap goods from China not only boosted the standard of living in the West but also helped hold down inflation, putting downward pressure on prices everywhere and enabling the growth phase to continue without capacity shortages. The second and third were more nuanced. The positive result from this increased competition was that weaker producers in the West had to improve their productivity and quality to compete. But those that failed to lift their game went out of business or at least had to shed workers. The third result, increased competition for raw materials, brought benefits to many countries, including in sub-Saharan Africa. That region had its best economic performance for five decades. But elsewhere countries had to compete for more expensive commodities, and that created problems, too.

China's currency is seriously under-valued. Might this change, and what would it mean for the dollar?

The yuan will rise against all other currencies, not just the dollar. But this will happen in a controlled manner as the Chinese authorities do not want to make their exporters suddenly less competitive. They will, however, welcome cheaper foreign raw materials.

What sort of banking system does China have? Are any of the problems we have had with banks being experienced there?

China's banks are the world's biggest by a long way. Based on market capitalisation, the Industrial and Commercial Bank of China (ICBC) is the world's biggest bank. A casual glance makes these banks appear profligate, loaning about 100 billion yuan (£9.38bn) a day in the early part of this year, but China's banks have been very smart in their choices. To start with, they have had a state guarantee, and are not betting on an absurdly inflated property market. Not yet, anyway.

The first 11 months of 2009 saw a record 9.21 trillion yuan (£860bn) of new bank loans, an influx of credit that fuelled a construction boom and a surge in business investment.

Is China's economy becoming a true market one? Or it is still a command one with heavy subsidies?

China's economy is not a market economy, and is a heavily subsidised one, but does anyone know what that means any more, now that the biggest banks in the world are owned by the US and British governments? The speed with which Western governments intervened to bail out the greedy banks of their respective countries gave the dirigiste government in China a lot of hope. No one knows what a subsidy means any more. You don't have a big mortgage issue in China, for example, and to default on a loan is unthinkable for a Chinese family.

How does life expectancy in China compare with the West?

According to US government statistics, China's average life expectancy stands at 71 for men and 75 for women, which is higher than that of EU members Hungary and Bulgaria. Despite this, there remains a significant disparity between the quality of life enjoyed by those living in wealthier urban areas, who earn on average 3.5 times more than those living in poorer, rural settings. Here, both life expectancy and infant mortality rates are significantly worse than the national average. The infant mortality rate fell by 39.5 per cent between 1990 and 2005 and currently stands at 20.25 deaths per 1,000 live births, compared with 4.85 in the UK. China's official poverty rate fell from 53 per cent in 1981 to 2.5 per cent in 2005, though around 11 per cent of people survive on less than $1 a day.

Just how big is the Red Army these days?

China's 2.3 million strong People's Liberation Army is the world's largest military, and it is very much in the hands of the Communist Party. In addition, there are 800,000 reservists and a People's Armed Police of 1.5 million.

In other countries, sudden prosperity has brought liberal reforms. Is there a tipping point when this will happen in China?

China's tipping point is the world's biggest gamble. Everywhere else in the Communist-ruled world in 1989, the government made a decision not to open fire on its democracy activists. In most Warsaw Pact countries, they held back, and were pretty much all transformed into democracies with varying degrees of success. China opened fire on its freedom demonstrators. It jailed, or exiled, most of its troublemakers, and then wooed the Western business community back. There is little sign that President Hu Jintao is keen to implement liberal reforms, although people are looking to the next administration to see what that brings.

As China does more business with the world, is there any sign that human rights are improving?

China constantly says that human rights issues are domestic matters and that foreign governments have no business interfering. There are no signs that human rights are improving. China doesn't concern itself much with the issue: the rest of the world needs it too much, so the debates about human rights have largely gone out the window. Traditionally, foreign companies working in China have been slow to criticise the government on human rights and freedom of speech, and the prevailing ethos is that engaging with China is a way of creating a more favourable environment which will ultimately lead to greater freedoms.

And finally... Just how bad is China's pollution?

China, the world's biggest producer of greenhouse gases, has set an ambitious target to cut its carbon footprint, and pollution has improved in recent years. It is still bad – there are days when you would avoid going out if you could. But it leads the world in manufacturing sustainable energy products, so perhaps there is hope.

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