Accessibility links

How China Is Reorganizing World Economy


Everyone knows that China is growing fast. It has sustained an average annual growth rate of 9.5 percent for more than two decades. According to some estimates, the size of its economy is second only to the United States. China now has the world's biggest foreign reserves, in excess of $1.3 trillion. It is the world's third largest trader and it remains first in attracting foreign investments.

Many analysts measure China's emergence as an industrial powerhouse by its increase in employment of some 25 million workers a year. It is the equivalent of adding another middle-sized industrial country to the world economy annually.

Economist Michael Schiffer of the Stanley Foundation, which promotes multilateral economic and political cooperation, says China's rise has sparked a new global division of labor with mixed results.

"The tremendous labor market that is available in China has had a profound effect in changing the patterns of trade,” he notes. “We've seen in the United States, Europe and Japan more concentration on high-tech, highly specialized products, which have tremendous economic benefits and a shift to China of a lot of heavy manufacturing, lower down on the economic development chain.”

“It's a messy economic reordering we are going through right now,” adds analyst Schiffer, "and that in turn creates anxiety, because it is very difficult to figure out exactly what direction things are going."

Hungry Dragon

In order to sustain its phenomenal growth, China buys vast amounts of commodities. The country represents about 5 percent of the global economy, but it consumes about 20 percent of global aluminum and copper, about 30 percent of steel, iron ore and coal and 45 percent of cement produced each year.

Stanford University's economist Ronald McKinnon says China's hunger for resources is benefiting a number of countries.

"It already has made a huge difference to countries in East Asia. But its purchases of basic primary commodities in the world markets have been a boon to Latin America. Countries like Chile, Argentina and Brazil export raw materials to China in a big way. We haven't had a Latin American [economic] crisis recently," contends McKinnon.

He adds China's wealth is impacting global lending practices. McKinnon argues that unlike the World Bank, for example, Beijing has been providing substantial credit lines to developing nations with no political strings attached.

"They are more politically neutral in their lending. They are in there to build roads and power plants and new ports because they want to get raw materials. They don't inquire in to the politics of the local government," says McKinnon. "This is why Africans don't mind Chinese investing and are more comfortable with that than a lot of Western government investing."

Destabilizing Yuan

But the United States and Europe are critical of China's policies.

Early this year, the U.S. government filed a complaint to the World Trade Organization against Chinese export subsidies and pirating practices and announced tariffs of 10 to 20 percent on certain Chinese goods.

Washington has also increased pressure on Beijing to re-evaluate its currency, the yuan. They say the low value of China's currency, on top of low-cost labor, gives it an unfair advantage in international trade. By keeping the yuan's value artificially low relative to the dollar, Chinese exports are unfairly cheap for U.S. consumers to buy and U.S. exports to China are more expensive, fueling a worsening trade deficit and destabilizing the U.S. economy.

Some experts say the Chinese currency should increase in value by at least 40 percent against the dollar.

Clyde Prestowitz, president of the Economic Strategy Institute in Washington, says China's troubling trade surplus with America increased to $233 billion last year, and accounts for almost 30 percent of America's total deficit. He notes Beijing's policy mirrors that of most East Asian countries, including Japan.

"Japan, China, South Korea, Taiwan, Singapore are all pursuing export-led strategies. They are all managing their currencies in order to keep them undervalued. They are all maintaining very high savings rates, 50 percent savings rates, investing heavily in export industries and depending for growth to a very large extent on exporting to the U.S," points out Prestowitz.

According to Stanley Foundation's Michael Schiffer, China's mounting trade surplus with the United States could benefit America in the end. "If a company that was manufacturing a low cost item for exports to the United States in, say Thailand, shifts its base of manufacturing to China because manufacturing costs are cheaper in China, that doesn't have a down side impact on U.S. markets because the jobs already weren't in the United States. That has beneficial effects for U. S. consumers because goods coming into the United States are now cheaper,” says Schiffer.

Winners or Losers?

Furthermore, it's hard to tell who is winning or losing in doing business with China.

"When you are talking about U.S. corporations, for example, or multinational corporations that are manufacturing in China: is that a Chinese domination or domination of a particular corporate interest?" asks Schiffer. "If the United State receives advantages -- whether it's China's ability to continue to underwrite our deficits or cheaper goods for U.S. consumers -- is that a U.S. advantage or Chinese advantage? It's more complicated than just who's on top and who's on the bottom."

A serious downside of China's supercharged economy is the environmental degradation and pollution it is causing at home and worldwide.

Water pollution and a lack of clean drinking water are some of the most serious problems facing China, with many of its canals, rivers and lakes severely tainted by agricultural, industrial and household pollution. An estimated 20 percent of the population lives in severely polluted areas.

The Chinese government has calculated that the effects of pollution wiped out $67 billion, or 3 percent, of the nation's GDP in 2004. The World Bank calculates that pollution costs China about 5.8 percent of GDP every year.

Nevertheless, say many experts, Chinese economic growth is expected to continue at a fast clip for decades, reflecting the pent-up demand of its huge population.

This story was first broadcast on the English news program,VOA News Now. For other Focus reports click here.

XS
SM
MD
LG