The reason China must be in almost any discussion related to international economics should be evident: China is an economic monster which has been growing very consistently and very fast, which is both unprecedented and warning. Unprecedented because the country has the largest population in the world. And warning because ... it has the largest population in the world. If seriously though, the role of China in the dynamics of international commerce can become too heavy, much like in the case of the United States. Not that China can become an economic threat to U.S. (there are multiple opinions on this. Personally, I believe that we need both countries for continuous global stability). But because the risks of systematic failures get higher if major players are recessing.It has become conventional to observe that if the U.S. sneezes, the whole world gets the flu. Will we become overly dependent on China as well (Chinese growth is slowing down)?
And how important is China's role in achieving recovery in the post-2008 reality? Only time will tell. Meanwhile, I am providing the most relevant talking points on the rise of the Red Dragon.
What China has accomplished in the past decades is quite extraordinary. They have built a powerful (although not very complex) mechanism of industry and export-driven growth. Chinese manufacturers tend to produce quite rudimentary products, although I do not in any case generalize the whole country. But the main algorithm is still simple: securing international oil contracts to fuel the work of domestic industrial plants, large-scale production using economies of scale, and exportation to the consumption-driven countries of USA, Europe, and to lesser extent Japan.
Now, the question from now going forward is: to what extent did the global financial crisis change the trans-continental trade dynamics? In particular, I wonder if the collapse of demand in the US and Europe will have a significant, prolonged impact on Chinese exports (since there is no reason to think of the contrary). Also, I am interested to see if China decides to intensify the technological component of its exports, i.e. to "move up" to high-tech exportation. That would begin to create not just quantity and cost-based competition with the West (which China already excels at), but also quality-based.
A number of people have told me that the decomposition of GDP in China is likely to change, but "how" is the question here. Obviously exportation has been the driving force. Also aggregate investment; but mostly through the government channel and the China Investment Company. The thing is that the Chinese consumer is getting richer, and this can rebalance the GDP composition towards consumption. Richer people means demanding people, right?
This brings me to the increasing general level of income and standard of living. Will the Chinese workers be willing to continue to accept low wages with the increasing overall national welfare? Upward movement on the ladder of social status can be good for equality and the "class warfare" kind of arguments, but not if the middle class becomes too large while the poor (which used to do most of the outsourcing jobs from the West) refuse to take on the old work.
Here is another issue. If the Chinese consumer gets richer, then she starts to consumer more. So, where will those goods and services come from? Will China be able with the help of economies of scale and massive demographic opportunities to specialize (1.5 billion people, no kidding right?) and develop niche industries to satisfy its own growing domestic demand for consumption? Or will the demand be fulfilled by imports from abroad? Then the obvious question becomes: which countries will start to export to China?
As a final side-note to a more trade-ish discussion so far, Beijing's monetary policy. The issue here is that the Chinese currency is artificially weak, or undervalued. This, in return, carries positive effects on Chinese exports, which drives the economy. The way the Chinese accomplish this is by buying up foreign currencies (US Dollars in particular) and building up a massive foreign exchange reserves base.
An appreciation of the Yuan can contract economic growth, something that Chinese policy-makers obvious don't want. On the other hand, you have an increasing pressure from the US and the others to let the Yuan float and thus gain more value. While we are having all these discussions on China, American exporters on the other side of the world need all the help they can get to help their economy recover. And the first vital step would be to eliminate the unfair disadvantage, that is the artificially undervalued Yuan. The threat of trading wars amid the post-crisis reality is more imminent than ever. How will the Red Dragon respond?
Rustam Jamilov
CEU Business School Alumnus
From Baku, Azerbaijan
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