"May you live in a time of change..."

That is an ancient Chinese curse for an enemy. However, the Chinese do not seem to be handling this present epoch of change too badly. These transformations in China are not just to do with the culling of sparrows and casting iron in the yards of houses. The growing power of China is becoming one of the most important factors in current geopolitics, resulting in many interpretations and opinions. Some analysts seriously believe that the third millennium is that of the “Middle Kingdom”.

Sergei Smirnov

On the basis of the changes occurring in China, there is a well-known pragmatic maxim set by Chairman Deng Xiaoping: “The color of the cat does not matter – it should catch mice.” This “cat”, known as the “socialist market”, which has grown acclimated to Chinese soil, and through its success in “catching mice” has led to the quick development of the nation’s economy. China, which just 25 years ago was hanging between starvelings’ revolt and sociopolitical destabilization, has transformed into one of the most dynamically developing countries in the world.
Chinese communists, in comparison to their European comrades from the socialist camp, have refused shock therapy, and instead started slowly adopting a market economy. Using the principle of gradualism in implementation within one industry after another, and in one region after the other.
The “territorial” dissemination of market mechanisms began from the special export economic zones with the establishment of advanced manufacturing infrastructure and tax benefits within the coastal cities of China. The “industrial” spread was initiated in the agricultural sphere, small and medium-sized enterprises (SMEs), and the service sector, with the further inclusion of other industries within the nation’s economy. At the same time, the Chinese did not start to compare the market and the command economies, and then eliminate the latter (which is usually peculiar to our reformers). As a result, already by the mid-1990s in China the market economy had become dominant, while at present the share of the state-controlled sector does not exceed 40% of the gross domestic product (GDP). At the same time, China continues to grow very quickly. From the point at which they commenced reform, the economy of the country has grown by 11 times. 
Today’s China has more than 9% annual GDP growth, along with US$60.3 bln of foreign direct investment (FDI) into the economy. As per the major index, gross national product (GNP), China (US$6.9 trln) has achieved the second position in the world, after the U.S. (US$11.7 trln). For comparative purposes, after China ranks Japan (US$3.5 trln), while, nearby Russia (US$1.4 trln) and Ukraine (US$256.5 bln) are at eleventh and thirty-third, respectively, and Kazakhstan (US$105.3 bln) stands at fifty-seventh. As of February 2006, China’s forex and gold reserves were estimated at US$853.7 bln, and provided that the current forex growth rate continues, this number should reach US$1 trln.
When speaking about investments, one should note that of the so-called FDI into China, 40% comes from Hong Kong investors. Ethnic Chinese (huatsao) account for some 80% of total FDI. China, which took its decision to opt for economic growth in 1978, when the country’s GNP stood at a mere 11.7% of the USSR’s, is rapidly catching up with Hong Kong as regards the level of development, while CIS countries remain at their same pre-independence levels. In 2005, the average Chinese spent Yuan 680 on food, which is an increase of 119 times in comparison with 1978.
China (in contrast with CIS countries) is confidently developing high-tech industries. Therefore, the contribution of six industries, including electronics, automotive manufacturing, chemicals, metallurgy, light industry and machine building, comprise 55% of GNP growth. In 2005, exports from high-tech industries reached US$218.3 bln, and comprised 28.6% of the nation’s gross exports. Moreover, China is now included among the world leaders in electronics. 30% of electronics exports from the region come from China (in 1997, this number was a mere 14.3%). China has already outdone the U.S. as regards production of electronics.
No doubt, China’s entry into the WTO plays a significant role in the increase of high-tech production. Many Western companies have transferred part of their production capacities to China following the opening of the borders. This is why at present two-thirds of the country’s total export volume consists of production for foreign companies, for whom manufacturing goods in Asia is cheaper. The companies later sell these goods on their respective domestic markets.
As per data from the State Customs Department of China, the surplus from external trade more than trebled in 2005, reaching US$102 bln (exports increased by 28.4% to US$762 bln, while import moved up by 18% to US$660.12 bln). In 2005, the largest trading partner of China was the European Union, the total trade volume with which rose by 22.6% to US$217.3 bln. In second was the U.S. (trade volume of US$211.6 bln), followed by Japan (US$184.4 bln). Major importers of Chinese goods include the U.S. (21.1%), Hong Kong (17%) and Japan (12.4%), while the major exporters to China are Japan (16.8%), Taiwan (11.4%), South Korea (11.1%) and the U.S. (8%).
However, the external market is already saturated with Chinese consumer goods exports, and experts believe that export growth in 2006 may decrease by 20%, as demand for cheap Chinese products in the U.S. decreases and the Yuan becomes stronger. Consequently, the Chinese government should either stop the development of certain industries, or redirect them toward the domestic market. The latter is more logical, and President Hu Jintao, has already declared the necessity of reorienting domestic goods production toward the local market. Stimulation of internal demand in China is done through large investment into public works: road building and residential construction. Over the next five years, the Ministry of Communications of China is planning to invest Yuan 100 bln (around US$12 bln) into the construction of automobile roads in rural areas, and by 2010 to have connected all towns in the administrative regions to the road network.
Chinese cities have been acquiring quite a European look: instead of dirty yards, there have appeared skyscrapers and super markets – just like mushrooms after a rain. At the same time, municipal housing still is available free of charge, while a system of affordable credit exists in parallel. For example, anybody that has a guaranteed stable monthly salary of Yuan 800-1000 (Yuan 8.03 : US$1) can buy a 300 sq. m. split-level apartment in a new district of Beijing. While if 10-15 years ago the main mode of transportation of the nation “under the sky” was the bicycle, nowadays the streets of Beijing, Shanghai, Guangzhou and Shanyang, are full of new Chinese-assembled Audis, Toyotas, VWs, Citroens and Buicks.
This is the result of very strict tax sanctions directed toward decreasing cars imported into the country, as well as special terms for foreign automotive companies. The outcome has been that China has entered into the top five countries by automotive production volume, and holds second place as regards the size of the automobile market. Therefore, an attempt to create a market economy, while preserving the monopoly on political power of the communist party, has no doubt been a success.

Agriculture
Despite the fact that the economic transformation began in the agrarian sector, it still remains the least effective industry within the Chinese economy. Nevertheless, the authorities of China are not in a hurry to eliminate the collective farms, and therefore apply various agrarian reforms, based on the regional conditions. So, in one region the collective farms prevail, in another their private counterparts dominate, and in yet another FDI is allowed into the sector. However, most important is that farmers have the right to choose the type they prefer. The result of correctly implemented reforms in the agricultural sector (which until recently only supplied the necessary minimum) has helped in the elimination of supply problems in the domestic market, as well as in the start of produce exports.
Uniting of individual farmers (who replaced the collective farms) into farmers’ associations, which receive hefty state support, has contributed quite a bit to solving the above problem. In order to narrow the gap between city dwellers and villagers, and alleviate the tax burden, in 2006 Chinese farmers forever parted with the agricultural tax that existed for 2600 years.
However, the increased effectiveness of the rural economy has not only led to the creation of a domestic market for consumer goods, which practically did not exist earlier. Negative consequences also occurred – mass unemployment. If before, 80% of the more than one-billion-strong population of China lived in rural areas, then by 2004 the number of rural residents decreased to 60%. The mass relocation of the population from the village to the city has led to the formation of a huge quantity of unskilled labor in the cities.

Problems Still Exist
The structural priorities of reform in China have moved toward scientifically intensive production, as well as integration both into the regional and global economies. In the nearest future, the country should define the balance between national and regional economic interests, and find the answers to a number of questions. How to increase the effectiveness of the economy, while avoiding sharp increases in unemployment? How much foreign capital can be present in the economy of the country? How long can the monopoly of the communist party on political power be sustained under the conditions of a [combination] market and integrated economy? How to provide a balance between a market economy and a socialist political system?
Unemployment causes a high-level of concern. Providing that annual growth remains stable at 8-9%, the Chinese economy is able to create up to 8 mln new jobs each year, yet the labor market adds 13 mln new workers at the same time. Beijing, it seems, does not know how to solve the problem of finding employment for the growing ranks of the unemployed within the framework of a market economy combined with strict state regulation.
Another problem of China has become the attraction of FDI exclusively into industry. As a result, in a number of industries excess capacity has been created (which China itself is not able to consume). Several experts have predicted that the economy will overheat, expressing their doubts on the possibility on the furthering of the Chinese economic miracle. In their opinion, the accumulated investment is already threatening the economic stability of the country, and the present situation looks very much like that preceding the 1997 Asian financial crisis.
Bubbles are occurring in the real estate sector, non-ferrous metallurgy, and the automobile industry, while the power industry is operating at peak capacity. Due to this, the experts believe that a necessity exists to change not only the development model, but also that for spurring the economy, including a reorientation towards utilizing the potential of the private sector.
The sprouts of political change can already be seen with the naked eye. In 2005, the number of protests in rural areas exceeded 87 thousand, while journalists went on strike remonstrating against censorship. The growing Chinese middle-class, which is gaining strength along with the current economic growth, has become the motivating power behind changes.

Achilles’ Heel?
The development of the Chinese economy is causing quickly growing demand for energy resources. Over the past five years, oil consumption in the country increased by more than 40%. China, which in 1993 became a net importer of oil, currently consumes more than 7 mln barrels (bbs) per day, half of which is imported. Supposedly, by 2020 the nation will require 600 mln tons of oil per year, or three times more than their estimated domestic oil production. Experts have predicted that after 2020 any addition to the volume of energy consumption in China will be provided by alternative fuels and imports. Therefore, the economic future of the country is mostly dependent on whether the country will succeed in resolving its energy problems. Most likely, it will find a way out.
First of all, the Chinese economy is very frugal when it comes to using energy resources: each dollar of GDP in China requires 1.5 times less energy than in the USA, and 4 times less than in Russia. Secondly, quite a bit of data verifies the fact that actual oil production is several times higher than that reported. Electrical consumption (35 bln kWh) by the oil and gas industry of the country in 2003 corresponds to a minimum level of oil production of 500 mln tons of oil, while the officially reported volume was 170 mln tons of oil. China is continuing to export oil and oil products in significant quantities (17 mln tons in 2004).
However, the most important thing in supplying the economy with energy resources is not the volume produced by the Chinese oil industry, but the fact that this country is one of the few with a power industry based on coal. With regards to coal production, China has almost no limits (estimated coal reserves are 1.3 trln tons). Besides, in China the wind power industry is actively developing. Wind generating resources of the country usable for economic exploitation are estimated at 3.226 mln kWh (the Xinjiang autonomous region, which borders on Kazakhstan, is responsible for 37% of this total). By 2020, the expectation is that capacity of the wind-based power generating units in China will achieve 40 mln kWh.

Chinese Lessons for Kazakhstan
To Kazakhstan, China is not simply a neighboring state, but simultaneously a partner and competitor on the world market for goods and capital. This explains the impetus for a more detailed understanding of the Chinese experience in economic modernization.
In its economic transformation, China followed those trivial principles from which we are passionately refusing: gradualism and equilibrium in reforms, considered application of global experience to one’s own realities, and following one’s own national interests, among others. No doubt, a lot of what China has applied is impossible for us to harness – we have gone too far when changing as both a society and as an economy. Nonetheless, the experience of preserving the balance between the financial and the real sectors of the economy during reform, as well as the creation of conditions for the development of private business, is still interesting for us. Also necessary is study of the market as regards the connection between effective demand and supply at those points that provide economic growth under the existing production structure.
In the strategy of our own economic development we should definitely take into consideration the behavior of China within regional and global integration processes. Among all CIS countries, Kazakhstan is second after Russia as a trading partner with China. However, analysis of trade between our two nations shows that over recent years China mostly imports from Kazakhstan ferrous and non-ferrous metals and crude oil, which is to say, raw materials. In exchange for strategic raw materials, our country receives consumer goods, about the quality of which much has been written. The result of such relations is not only the opening of new positions in Chinese factories, but also the appearance of a mass of tourists – “suitcase traders” – from Kazakhstan, including those who had previously been engineers, teachers, scientists and qualified workers, being earlier tossed out onto the street. These people are not likely to return to the production sector again.
Last year, the position of China in the total volume of Kazakhstan’s external trade exceeded 8%. However, Kazakhstani and Chinese data differ by a lot. So, as per information from the Customs Department of Kazakhstan, in 2005 the external trade volume with the Peoples’ Republic of China US$3.7 bln. While as per the Chinese side, this statistic was US$6.8 bln. One of the reasons for such a discrepancy is no doubt the high level of corruption within the Kazakhstani customs agency.
At the same time, even as a large force of salespeople pushing Chinese goods has formed in Kazakhstan, China itself has become a leading global producer of a number of types of goods in such fields as equipment for the oil industry, electronics, home appliances, pharmaceuticals and light industry. In Kazakhstan, which has received more than US$40 bln in FDI since becoming independent, not a single large production facility has been constructed. Asking where these billions have been spent turns out to be a rhetorical question. The situation has become absurd: a country having its own underutilized refineries imports oil products from the Xinjiang province, which included oil from Kazakhstan as inputs.
Kazakhstani investment accounts for only 0.01% of total FDI in China. As of September 30, 2005, Kazakhstani citizens had invested US$155.3 mln into China, while the total volume of investment into Kazakhstan from China exceeded US$1 bln. A potential form of cooperative investment would be the creation of joint ventures (JVs) in China. There are many such JVs in China, but a significant number of these actually belong to Chinese entrepreneurs, though as per documentation they look like FDI. The average share of investment of a Kazakhstani party into the charter capital of a business is several times less than that of the Chinese counterpart. Besides, only a few of those JVs are involved in manufacturing, as most of them are established in the trading sphere (which provides a quick return on capital) operating only along the border region.
China began privatizing (though, to be honest, officials in Beijing, prefer to use the term “transformation in the nature of proprietorship”, instead of privatization) its state-owned companies at the beginning of the 1990s, and by 2000 more than 800 of these were changed into joint-stock operations. Privatization of these companies is done via the offering of blocks of state shares on stock exchanges in Hong Kong, the U.S., and other regions. Since 1992, when the shares of Chinese national companies began to be offered on the exchanges, privatization in the “Chinese way” has netted more than US$72 bln for the government of China. Currently, shares in more than 1,380 domestic companies are listed on the Shanghai and Shenzhen exchanges.
Since privatization has led to an increase in the army of the unemployed in China, a decision was made that funds received from the sale of state-owned companies would first of all be spent on supporting the poorest category of people, as well as the improvement of healthcare, the pension system, and social security.
In contrast to many of those countries with transitional economies on the European continent, the privatization process in China has actually improved competitiveness of the economy, changing the way such enterprises work and helping them to become more profitable. This progression had not initially resulted in an actual change in ownership, though eventually the state began to lessen its interests and influence in the economic process. The economic successes of China are proof that such a strategy has been the most effective one.
While carrying out transformation, the Chinese authorities intend to preserve their “commanding heights” over the economy in the future. First of all, this will include industries and enterprises strategically important for the country. The land, its natural resources and subsoil reserves, will remain under state control, as the “peoples’ property”. This will afford the state an opportunity to maintain control over access rights to those resources.
No doubt, the best variant for reacting to the economic growth of China is to cooperate with the country in such a way as to encourage China to produce goods developed in our country. However, in order to achieve this, our country needs to build up its intellectual potential, and not simply increase its oil production capacities, as has been happening thus far. The time has come for the government to take the necessary steps. Nonetheless, seemingly the government has become lulled by the high rates of economic growth – averaging about 10% – though our country has yet to return to the levels of the social and economic indices of 1990. Such “growth” causes many to doubt that our country could in the 21st century enter the list of the most highly developed countries.
Besides, the Kazakhstani officials, in a rush to enter the World Trade Organization, have seemingly forgotten that one of the conditions for admission is liberalization of the labor market, which means opening this market to China. Even today, nobody has exact figures as regards the number of those Chinese permanently residing in our country. Some speak about thousands of them, and our others even about tens of thousands. The most important fact is that Chinese immigration has not resulted in a net gain of intellect, inclusive of those highly qualified specialists who contribute to scientific and technological progress, but instead has been a means of territorial occupation based on primitive industrial, and even pre-industrial types of activities. One should note that the pool of human resources of China is seven times larger than Russia’s and five times that of the U.S. If we take into account that a Chinese person maintains his identity, even while in Africa, and to whom Mao and Deng are more important than Buddha, further commentary is unnecessary.

Sidebar
In 2004, the official unemployment rate among urban residents was 9.8%, while the total rate including rural residents was 20%. The total number of working age adults in the country is a little more than 760.8 mln people. 29% of the working population is in the service sector, 22% in industry, and 49% in agriculture. The average salary in 2004 was Yuan 15,000 (US$1,850) per year. Over the past few years, real salary has increased by an average of 15-20% annually. However, the maximum salary is higher than the minimum one by 245 times, and if one takes into account additional types of income, the difference becomes much more pronounced. At the same time, the average income level of rural residents is about 3.5 times less than that of urban dwellers. The nation experiences a shortage of highly qualified specialists, and the literacy rate in the country is 86%.