Growing Without Borders: The Real Potential Of China

China has always been big in population and land mass. In the last 30 years, it has become a powerhouse of industry and trade. For two decades, it has been the fastest growing economy in the world. As a result of its export earnings, China now holds about 40% of the U.S. government's foreign debt.

Many experts have been predicting that the Chinese economy will surpass that of the U.S. by 2020. Many in agriculture expect that China will become a major market for their products. However, it is important not to get too carried away by euphoria about China's future.

Reasons To Be Cautious

There are many reasons to be cautious about China. The first one is political. The ruling Chinese communist party has so far preserved a delicate balance between encouraging economic freedom while curtailing personal freedoms. As long as their living standards were rising, ordinary Chinese were willing to tolerate lack of personal freedoms. However, that balance has been under increasing strain.

Inflation is beginning to hurt Chinese living standards, and ordinary citizens are becoming less tolerant of corrupt or capricious officials.

A second endemic problem is the unreliability of official Chinese statistics, on its macro economy, the operations of government agencies, and the solvency of its private institutions, such as banks. Sound analyses are complicated by the opaque relationship between federal, provincial, and local government agencies, the Communist party, and the private sector.

How Rich Is China?

Latest World Bank figures, based on Chinese government data, show that China's per capita gross national income (GNI) in 2009, in terms of U.S. dollars, was $3,650. That is less than 10% of per capita GNI in the U.S. ($46,360), Canada ($41,980), Japan ($38,080), or Germany ($42,450).

However, in many projections, economists use the World Bank estimate of Purchasing Power Parity (PPP) instead of U.S. dollar exchange rates. PPP adjusts for the fact that one U.S. dollar buys more goods and services in a developing country like China than it would in the U.S.. Using PPP methodology, the World Bank jumps average purchasing power of Chinese GNI in 2009 to $6,890, while that of the U.S. declines to $45,640, Canada's to $37,280, Japan's to $33,440 and Germany's to $36,850.

Not only does the PPP measure narrow the current income gap between China and the rich economies, it also dramatically reduces the time needed for China to attain rich country per capita income levels. Some forecasters have used this higher PPP base to develop some of the rosier projections of future Chinese GNI.

Real Purchasing Power

Average measures of income are a poor indicator of a country's actual purchasing power. Consumers gradually enter the market for more expensive goods (such as imported foodstuffs) as they move into ever higher income categories. To assess market potential for any product, one needs to be able to forecast how many Chinese consumers will have incomes of $10,000 or more, or $20,000 or more, by some future date. Those numbers are difficult to measure today, and even more difficult to forecast decades into the future.

Even if we could forecast the total size of the Chinese market in 2020, it would be difficult to predict how much China would seek to supply domestically, and how willing it would be to remove current political and economic restraints on imports. In general, China has been eager to promote production of intensive crops and livestock, and has only reluctantly increased strategic supplies of cereals and oilseeds. (See table 1). Even in the case of fruits and vegetables, the fastest growing imports have been of complementary products that China does not produce.

Tapping The Chinese Market

There are likely to be growth opportunities for many agricultural products in China in the coming decades. However, the U.S. government will need to be much more proactive in securing freer access for U.S. products. The relevant industries will have to be cognizant of potential competitors, both domestic and foreign. Their products will have to be tailored for specific niches. In other words, a rising Chinese market will not lift all boats equally. Capturing market share in China will require the same careful preparation and dedicated effort that is required in any other highly competitive market around the world.

While the Chinese market could present some opportunities for fruit growers in the future, it's important to remain cautious.