China in 2006: An economist's view

Since the start of the economic transformation in 1978, China has been growing at spectacular level. Given the size and growth of its economy, China is in a position to substantially influence world commodity prices and prices for various consumption goods. This report summarises insights from a trip to China, aimed at getting better understanding of how the Chinese economy 'works'. Based on talks with government officials, Chinese and foreign firms, we provide evidence that (i) through piecemeal introduction of market elements, China has successfully made the transition from a planned economy to a marker economy; (ii) political stability is an important determining the attractiveness of China for foreign investors, and (iii) regional disparities are huge, which might at some point pose a concern to further growth. Also we note that China is primarily growing through use of more inputs, not through high productivity. Looking forward, input-based growth is typically not sustainable. As productivity does not tend to grow by 10 percent annually, China's economy will probably slow down at some point. Lastly, we expect that in the medium term, real wages will rise. The resulting expansion of China's domestic market would create new export opportunities for Western firms.