Thursday, November 29, 2007

Should We worry about a Strong China?

The Chinese economy is growing by close to 10% a year. It far outstrips the growth in other developed economies. By various predictions, the Chinese economy is forecast to be the world's biggest economy within the next decade. Should this be an issue of concern? Or is a real boon for the rest of the World?

Benefits of the Chinese Economic Miracle

1. Low Inflation.

The Chinese economic miracle is founded upon the success of its manufacturing sector in keeping prices down. This is strongly related to the elastic supply of Chinese labour and consequently low wages. This has enabled falling prices for many manufactured goods; and this has helped keep global inflation low.

2. Cheap Imports.

Related to the first point, Chinese goods have provided many consumer goods at lower prices for UK and western consumers.

3. Growing export market.

With economic growth there is a growing Chinese middle class. This economic group is turning into an important consumer of Western goods and services. In the future, there will be an increasing export market in China. Also the Chinese middle classes may take increasing advantage of western education. Although we currently have a current account deficit with China, this may be reversed in the future as Chinese consumers begin spending their new found wealth.

4. World economy less dependent on US.

There was a saying that if the US coughed, the rest of the world caught a cold. This was related to the fact that a downturn in the US economy infected the global economy because of the American economic dominance. However, with the rise of China and India, a US recession is likely to have less impact on global growth.

5. Financial Surplus.

Currently the Chinese are financing the US current account deficit by purchasing US dollar securities. This means they use up their surplus foreign reserves. It also means that China has a vested interest in preventing a massive dollar devaluation - they would simply lose to much money.
However, some people would argue that this is not a good factor. The fact that China owns so much US debt is a cause for concern. - In effect the Chinese could hold the US economy to ransom. If they sold all their US securities it would cause a huge run on the dollar.

Concerns of Chinese Economic Growth

1. Rising Commodity Prices.

Because the Chinese economy is so large, economic growth has a powerful effect on the rest of the global economy. For example, Chinese growth is placing increasing demand on Raw materials. This has caused rising commodity prices; and is a concern for the future. There is a danger that in the future, Chinese growth could start exporting inflation

2. Environmental Costs.

It is argued that Chinese growth is occuring at the expense of environmental costs. For example, air quality in major cities is a significant problem. Chinese growth is liable to have a very damaging impact on issues such as global warming.

3. Increasing Inequality.

The Chinese economy is creating inequality within their own economy. As the gap between rich and poor, north and south, increase their is scope for increasing social unrest in China.

4. Is the Miracle Sustainable?

Chinese growth has averaged 10% for several years. However, there are fears that the economy may begin to overheat. If growth is too fast and inflation occurs, the period of growth may be followed by a downturn in the economy which could have an adverse effect on the rest of the economy.

One thing is for certain - whether we like it China will have increasing economic influence - and with that an increasing political influence.


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