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Lehman evaluates China's prospects

Shoppers make their way in and out of a departmental store in Beijing yesterday. US investment bank Lehman Brothers said that if China can sustain an average annual economic growth rate of 6 percent for 30 years it can dislodge Japan as the world's second-largest economy. PHOTO: AFP

China may sustain an average annual economic growth rate of 6 percent and dislodge Japan as the world's second-largest economy in less than three decades, US investment bank Lehman Brothers said.

Despite challenges and near-term setbacks, especially as it opens up its economy following its entry to the WTO, China should "not be deflected from its chosen path," it said in a report.

"Overall, our assessment is that China's economy has the potential to sustain an average growth rate of around 6 percent over the next 20 years," the report said.

At this growth rate, "China's economy by 2030 will be bigger than each of the major European economies and could conceivably displace Japan to become the largest economy in Asia, and the world's second-largest economy after the US."

By 2020, China's service sector should have overtaken its agricultural and industrial sectors and the purchasing power of the country's domestic market "could be larger than the whole of Europe's."

"However, the key to China's economic success -- as most other Asian countries can now testify -- is not to grow as fast as possible. Rather it is to improve the quality of economic growth," said the 140-page study by senior economists Alastair Newton and Robert Subbaraman. It noted that despite the fast growth, the improvement of living standards needed to be put into context.

By 2020, GDP per capita in the nation of more than a billion people would have grown to only US$3,000 which "clearly highlights how crucial it is for China to sustain a strong economic expansion."

Under the WTO, China has committed to carry out a comprehensive package aimed at freeing up trade and investments in two to five years.

China will cut tariff and non-tariff barriers, limit farm subsidies, provide full trading and distribution rights to foreign firms and open up the services sector, among others.

In return, other countries will abolish quotas on China's exports of clothing and textiles five years after accession.

European Union Trade Commissioner Pascal Lamy said in Singapore on Friday that China's commitments were "ambitious," but he was also confident Beijing would meet them.

"We know that implementation of these commitments will take some time and we are sort of very positive on that," Lamy said.

"A number of China's commitments are phased in under a clear road map which they always said they will follow and I believe they will follow," he said.

The Lehman Brothers study said the challenge for the rest of Asia is to be "flexible and dynamic" to adapt to China's rising clout.

Governments should focus on developing niche markets and promoting industries with a comparative advantage, it said.

In the short term however, China has to bear the pain of its WTO membership as structural reforms and the entry of foreign competition lead to major disruptions in the domestic economy.

Stronger competition could push inefficient local industries into bankruptcy, resulting in job layoffs. The lack of social safety nets and increasing urbanization could worsen the situation, the study said.

"Hence, initially, the adjustment cost of WTO entry are likely to dominate the longer-run efficiency gains," it said.

Lehman Brothers projects China's GDP to grow at 6.9 percent this year and 7.1 in 2003.

GDP rose 7.3 percent last year.

Chief among crucial reforms to be carried out is the restructuring of the loss-making state-owned enterprises, noted for their inefficiency, bloated staff and high levels of debt. Between 1998 and 2000, an estimated 21 million workers were laid off in a campaign to turnaround these ailing state companies. Another 5 million are estimated to have been retrenched last year, the study said.

Other areas of reform are corporate governance, recapitalizing the financial sector, liberalizing the capital markets and establishing a national social welfare system.
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