Monday, May 23, 2005

Is China the World’s Next Economic Superpower?

Much has been written in recent years about China’s remarkable economic growth, and many are forecasting that it will be the next economic superpower. But, will it be? A few decades ago, many claimed that Japan would soon have the world’s most powerful economy, but Japan’s growth stalled, and the country went into a recession from which it has still not recovered. Will the same thing happen to China?

If China does not change its ways, the answer is yes. China’s economic policies have helped it to grow at a remarkable pace—9.5 percent last year—but that growth rate cannot be sustained. China’s growth depends mainly on exports, and as Japan and Germany can testify, export-driven economies are vulnerable. China’s expanding exports depend on tremendous consumption of natural resources, a total disregard for the environment, and an undervalued currency. Let’s take those points one at a time.

According to an interview with Pan Yue, Deputy Minister of China’s State Environmental Protection Administration published in the German newsweekly Der Spiegel, in order to produce $10,000 worth of goods, China requires seven times as many raw materials as Japan, six times as many as the United States, and three times as many as India. China’s enormous hunger for raw materials has pushed prices sky high, as anyone who drives into a gasoline station for a fill-up can testify. The supply of raw materials cannot grow quickly enough to meet China’s needs if it continues its present manufacturing practices and rate of growth. One or the other will have to change.

In the same interview, Pan Yue said that acid rain now falls on one third of China’s land mass, that half of the water in the country’s seven largest rivers is completely unusable, that one fourth of Chinese citizens have no access to clean drinking water, and that one third of city dwellers breath filthy air, with the result that 70 to 80 percent of cancer fatalities in Beijing are attributed to environmental factors. In other words, the current economic boom is based in part on a disregard for the health of the Chinese people and for the future of the country. If that is not changed, China is headed for environmental collapse.

China’s currency problems have been much in the news lately due to pressure that President Bush has put on China to reform. The Chinese yuan has been valued at 8.28 to the U.S. dollar since 1995. It should be worth much more. China keeps the value of its currency artificially low by buying huge quantities of U.S. currency and government debt. Its under-priced currency helps China manufacture goods more cheaply than other countries can, and as a result, it exports far more than it imports. China had a balance of payments surplus of 4.2 percent of its gross domestic product in 2004, and the number for 2005 is sure to be much higher. China’s reaction to President Bush’s demands that it let the value of its currency rise has not been promising. Prime Minister Wen Jiabao called the currency question an issue of “China’s own sovereignty.” Such failure to address this problem does not bode well for China’s future.

China is in effect subsidizing the standard of living of people in other countries, especially in the United States. It cannot continue to accumulate every larger amounts currency and foreign debt. At some point, China will revalue its currency or market forces will do it. When that happens, China’s its dollar holdings lose value, but the longer China delays in taking this necessary step, the worse that loss will be.

Whether China makes a successful transition to sustainable but slower economic growth is largely up to China’s government. A gradual change in policy in the near future could give China the opportunity to switch its production to industries that are less dependent on the consumption of natural resources, begin to clean up its environmental mess, bring its imports more nearly into balance with its exports, and to raise the value of its currency in a controlled way without triggering panic. Failure to adopt such measures could cause China’s economy to collapse.

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