BOOKS: The great leap forward - China's economic growth is awesome, but a new study warns of failing industrial policies and crisis ahead Charles Powell is more optimistic. ..BL.- LORD CHARLES POWELL, chairman, China-Britain Business Council

BOOKS: The great leap forward - China's economic growth is awesome, but a new study warns of failing industrial policies and crisis ahead Charles Powell is more optimistic. ..BL.- LORD CHARLES POWELL, chairman, China-Britain Business Council - China an

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Last Updated: 31 Aug 2010

China and the Global Economy by Peter Nolan; Palgrave; pounds 18.99

Most people would instinctively judge China's economic performance in recent years to be a remarkable success story. Growth has been awesome.

Measured in terms of purchasing power parity, China is already the world's second-largest economy and is destined to overtake the US in raw size in about 20 years. One has only to visit a US department store, bursting with 'Made in China' merchandise, to see tangible evidence of China's export success. Last year America's trade deficit with China overtook that of Japan's for the first time. The skyscrapers of Shanghai and the Special Economic Zone of Shenzhen are proof of China's leap forward in the last decade.

British business has also benefited along the way. Britain is by far the biggest European investor in China. Our exports have set new records in each of the past two years, crossing the pounds 2 billion threshold in 2000. Membership of the China-Britain Business Council has reached a new high, reflecting British optimism about the China market.

Yet the Chinese economy certainly has its problems: widespread unemployment, no social security safety net, state-owned enterprises that soak up a disproportionate share of capital and credit to no very good purpose, to name a few. But these problems are being addressed under Premier Zhu Rong-ji's energetic leadership. More modern and commercial attitudes are seeping into the top levels of government. Above all, great faith is placed in China joining the World Trade Organisation and opening up to the stimulus of international competition.

I recall a book written by a British journalist at the height of Japan's economic success, predicting problems for the Japanese economy at a time when everyone was piling merrily into the Tokyo stock market. It was counter-intuitive but proved right. Professor Nolan is in the same mould. His book is a painful exegesis of the failure of China's industrial policy, especially its attempt to create large, internationally competitive companies, copying the dynamic that drove the growth of Japan and the Asian tigers.

He cites various reasons for this failure: constraints on freedom for companies to merge, acquire and dispose; state ownership and intervention; and the fact that the global business environment has been changing so rapidly, with China constantly trying to catch up. His conclusion is that after 20 years of effort, China is unable to compete internationally in virtually every major business sector. As a result, its policy of the past 20 years must be judged a failure.

Nolan sees little prospect of relief. He thinks WTO membership, with only a five-year adjustment period, puts an unbearable strain on China's economy. He questions why it was necessary to join, when China's exports to the rest of the world were growing nicely anyway, and that the result of membership will be to favour foreign competitors.

He foresees a backlash in China as foreign firms take over failed national champions, displacing workers, destabilising the social-political environment and creating a sense of unfairness and humiliation to match that of the unequal treaties in the 19th century. While WTO membership could prompt a massive shift in industrial policy, Nolan thinks it could be achieved only by a de facto renegotiation of the terms of China's membership.

So is the glass half-full or half-empty? Nolan is no Luddite. He is certainly right that the streets of China are not paved with gold. But China has attracted more inward foreign investment than any other country except the US, and 10 times more than India. Have those investors misjudged?

I can only pit my intuition against Nolan's expertise and bank on China's ingenuity and determination. China is long-haul territory, but its growth is remorselessly - sometimes unattractively - forwards and upwards. I predict a more positive outcome for China than does Professor Nolan.

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