5 reasons behind the rise of China

There are five distinguishing features of this rise of China.

First, the pursuit of capitalism with a communist political system. Chinese authorities have defended this combination as "seeking truth from facts". According to the 2009 annual Hurun Report, there were 130 known dollar-billionaires in China compared to 24 in India.

Way back in 2000, according to the Economist, socialist China had the world's brashest capitalist economy. Starting from 1978, Deng Xiaoping liberalised the economy without changing the political system. While Soviet leader Mikhail Gorbachev simultaneously launched Perestroika and Glasnost in the late 1980s, China's handling of Tiananmen Square demonstrations in 1989 spoke loud and clear about how it intended to control the politics of the country.

Second, China, like the East Asian Tigers, pursued a policy of state-sponsored capitalism in the Japanese style, albeit in a much more accentuated form. There was a pronounced reliance on state-owned enterprises.

Third, China invested heavily in physical infrastructure. The pace of accelerated investment in physical infrastructure is illustrated by how, relative to India, China ramped up its rail network. With only 55,000 km of railways in 1985, China had a smaller rail network than India (62,000 km). By 2006, with 75,000 km of railways, China had overtaken India which had 64,000 km. In 2006, as a proportion of GDP, Chinese annual investment of 14.4 per cent in infrastructure such as power, transport, drinking water, irrigation and telecom was almost three times that of India.

Fourth, in sharp contrast to Japan, China became the factory of the world, relying mostly on FDI. After the US, China is the second-largest FDI recipient in the world. While FDI inflows into China from 1979 to 1999 amounted to $306 billion, annual average non-financial FDI in China was about $60 billion during 1999-2008. Much of Chinese exports are by foreign-owned firms. In 2007, only four of China's top 25 exporters were Chinese companies.

Fifth, for most of the post-reform period, China followed an exchange rate policy designed to promote competitiveness. The renminbi which had been rapidly devalued from RMB 1.50 per US dollar in 1980 to RMB 8.62 per US dollar by 1994, was maintained at RMB 8.27 per US dollar from 1997 to 2005.

It moved to a managed float in July 2005, the renminbi gradually appreciated to RMB 6.82 in May 2009, and remained more or less unchanged thereafter. China has had to intervene heavily to prevent the renminbi from appreciating, and in the process, has accumulated over $2.2 trillion.

In a way, China's rise could be described more as redemption of its historic role. After all, the country gave the world gunpowder, the magnetic compass and printing technology. Right up to 1820, China accounted for almost a third of the world output.