China: The New King in the Wings?

Yes, China’s ear-deafening economic engine is now pulling heads–but does it have the capacity to stay at such pace?

Whether China will be able to sustain its rapid economic growth and surpass United States as the world's largest economy remains anyone's guess. Just like China, in the past export-oriented powerhouses such as Japan and Germany were once tipped to accomplish the mission, but none of them is successful until present.

Amidst the storm from the recent financial crisis, which has seen most economies in the world to decelerate, little seems to be taking effect on China as its economy accelerates as fast as ever. Its economy grows to 11.9% in the first quarter this year, a staggering number which is far way ahead from its compatriots in the developing world could produce.

It is hard to deny the fact that China’s road to sustain its economic growth and become a future economic superpower is beset with thorny challenges ahead. Of all the upbeat forecasts of China, the sustainability of its economic growth in the long run is still in question, concerning the forthcoming predicaments.

First and foremost, China is dealing with serious problem on its ageing population. Because of the one-child policy, in the future Chinese working population will decline in number –and as the consequence, tomorrow labor in China would not be as cheap as they are today. As labor price rises and China’s industry becoming less competitive, investors will likely relocate their factories in other labor-intensive countries like Indonesia or Vietnam. With low-cost industry as the backbone that is responsible for the largest share of its economic growth, analysts predicted that China’s export-led growth model will be seriously disrupted by this demographic challenge.

Then, what else can be worse for a country than being blamed as the world’s enemy number one? That is what’s happening on China right now in terms of environmental issues, and this inconvenient situation can stand in the way of China’s ambition to keep its high economic growth long-lasting. Amidst global effort to reduce carbon emission, China now becomes the main perpetrator of the world by piling up pollution: in 2007, the country overtook United States as the world’s largest emitter and has seen a significant increase in carbon emission number since.

Environmentalists all over the world slam China as they deem the country is buying current economic growth at the expense of world’s future. And as time unfolds and its pollution grows, China will surely see more and more condemnations, which will put more pressure for Beijing to implement the green technology and apply strict measures to its dirty factories. These are costly and can reduce industry’s efficiency, and may possibly be the brake that hampers China’s economy from revving full throttle in the long run.

Also, China’s 10 percent-plus recent economic growth is mainly fueled by economic stimulus projects –a short term economic policy which the government implemented to prevent the economy from decelerating during the last financial crisis. And while the economic stimulus project is responsible for the significant swell of bank lending number and growth in credit these days –which instigates fears of the emergence of inflation and China’s property prices bubble–, the growth that it generates is indeed unsustainable in the long run.

Cool it the China way

Concerns regarding the matter have not fallen on deaf ears; with recent developments showing that Chinese officials and policymakers actually understand the threats that country faces no worse than the external observers.

If the main issue is short-term threat of economic overheating, some of the economic policies China’s policymakers implemented show their intention to put their economy in a safer, more sustainable level. In 2010, the Chinese central bankers are not so lenient in giving banks too much freedom. The amount of bank lending may have reached its peak last year, but this year reserve requirements have been repeatedly raised to prevent the market to be inundated with too much liquidity.

In the first quarter this year, China saw its housing prices to surge 10.7% –its highest since the last two years–, which instigated anxiety if the economy of China is experiencing an identical housing bubble problem as United States’. But China’s government has also started to implement restrictive policies on the housing market to cool its most overheated sector.

China’s recent decision to slightly loosen the currency’s peg to the dollar may be seen as the successful outcome of continuous pressure from various world leaders, but the truth is the implementation came cleverly just at the time when China desperately needs to cool its economy to prevent it from overheating.

Indeed, stronger renminbi may lead to less competitive Chinese goods in the global market (which is why this decision is strongly deplored by Chinese exporters). But during post-crisis period like this, loosening renminbi’s peg seems inevitable: at the time when other countries struggle to bounce back from global recession, you definitely do not want to be labeled as “global villain” whose undervalued currency and oversized export numbers continue to deteriorate other countries’ trade balances.

Another effort to encumber its too-fast economic growth can also be heard in the statement of Wen Jiabao, China’s Minister of Industry and Technology, who recently vowed to shut at least 2,000 highly-polluting factories that have not met environmental standards.

The statement is a fresh tonic for environmentalists; but what’s actually behind this? Because for some who remember how China’s representatives wrecked the Copenhagen deal by vetoing the deal of 50% global emission cut by 2050 to be taken out from the accord, how they suddenly change their mind may seem puzzling.

Applying strict environmental measures to Chinese manufacturers may decrease Chinese industries’ output, while loosening renminbi’s peg may possibly weaken China’s exports. But today China’s economy is very prone to overheating, and China’s ignorance towards environmental issues and its egoistic policy to maintain their currency undervalued start taking the headlines. At times like this, implementing policies which can cool down your economy and please the world’s citizens at the same time is indeed a very smart gambit.

Even though it’s still too early to call all these policies a success, reports show that economic growth in China has fallen to 10.3% in the second quarter, with both housing prices and bank lending amount also plummet. The sustainability of China’s economic growth is still in question, but the latest data on China’s economy should calm the world that Chinese policymakers are not unaware of their too strong economic growth and the downside risks that follow.

Crouching Eagle, Hidden Dragon

China’s recent achievement in overtaking Japan as the world’s second-largest economy is putting China in the spotlight as well as drawing attentions from many countries around the world –especially United States, the current frontrunner at the race that is checking his rearview mirror fretfully now because of the boisterous economic engine which Hu Jintao possess behind his car’s hood.

With Hu Jintao in the driver’s seat, previously China has successfully surpassed the economy of Britain and France in 2005, Germany in 2007, and Japan in 2010. Prophecies from oracles like PriceWaterhouseCoopers and Goldman Sachs, meanwhile, have predicted that between 2020 until 2030 the red car will overtake the star-spangled frontrunner as the world’s largest economy.

Yet sometimes to become number one “how” is a more crucial word to be addressed rather than “when”. It does not really matter when China will overtake United States as the world’s largest economy (in 10 years time in 2020 or 20 years from now in 2030). Actually what’s more crucial is how China can sustain its current growth and shunning their economy away from the looming threat of economic overheating, so they can ultimately sit at the top of the world.

One thing for certain is that China now is very different compared to 30 years ago, where its economy was still isolated from the world, as it currently stands right in the heart of the global economy. Now China plays an indispensable role in international trade: the number of goods they export around the world is staggering, and the gigantic demand from its 1.3 billion population became energizer to some recession-plagued countries which have been struggling to find buyer for their tradable items during the last financial crisis.

That’s precisely why China’s economic sustainability matters for the rest of the world: because if the car in red gathers steams and runs off the track, it will take the whole world with it. The commentators and racing pundits can utter everything they want to warn China against such upcoming threats, but so far it seems that the dragon and its rider understand and know exactly what they are doing.

Or are we seeing nothing yet and there’s actually more to come from China? Some of China’s immense potential, however, remain hidden and underestimated. The fact is; there’s a possibility that China’s engine will rev even louder in the future -political reform and information freedom are yet to be fully implemented, with China’s renminbi also waiting in the wings to be used as global currency.

With such menacing power possessed by the red dragon by now, the bald eagle has all the reasons to be worried.