China's Fall, Not Rise, Is the Real Global Threat: View

utubekhiladi

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China's Fall, Not Rise, Is the Real Global Threat: View - Bloomberg

China's Fall, Not Rise, Is the Real Global Threat: View

China's rise to global prominence has long preoccupied the leaders of the developed world. They should be more concerned about what happens if the country's growth falters.

With its combination of cheap labor, easy money, undervalued currency, heavy investment in manufacturing and focus on exports, the nation of 1.3 billion has built an impressive economic engine. From 2008 through 2010, China contributed more than 40 percent of the world's growth.

But the Chinese model has its limits, and that has far- reaching consequences for the U.S. and Europe, both of which are increasingly dependent on China. The country's share of global exports already exceeds 10 percent, larger than that of Japan at its peak in 1986. Barring some miracle, Chinese exporters can't expand their market share much further without lowering prices and wiping out their own profits, research by economists at the International Monetary Fund suggests. China's dependence on exports also makes it highly vulnerable to slowing growth in the developed world, and to rising trade tensions: The U.S. Senate today began debating a bill that could ultimately lead to punitive tariffs on Chinese imports in retaliation for undervaluing its currency.

Meanwhile, economic stress is mounting at home. Labor costs are surging as the supply of young, capable factory workers wanes and living conditions rise along with expectations of better wages. Cheap and abundant credit has driven over- investment and pushed up real-estate prices to levels many families can't afford, adding to social tensions and possibly setting the country up for a bust. China's approach to managing its exchange rate is fueling inflation, which government figures put at 6.2 percent in August.

Well Aware
Chinese officials are well aware of the problems their country faces. As Premier Wen Jiabao famously put it back in 2007, the country's growth is "unstable, unbalanced, uncoordinated and unsustainable."
The government's aim, as laid out in its latest five-year plan, is to move away from reliance on exports and spur Chinese consumers to spend more -- an outcome that would benefit the entire global economy by boosting China's demand for other countries' goods and easing the trade imbalances that have contributed to the developed world's debt troubles.

The implementation will be tricky. Getting people to spend requires the Chinese government to eliminate many of the subsidies -- including cheap labor, low interest rates and an undervalued currency -- that have fueled growth so far. Consumers need more income, so companies will have to pay their workers more. Consumers also need a stronger currency to boost their buying power, so exporters will lose some of their competitive edge. Savers need to earn a high enough return to guarantee their retirements, so banks' and companies' borrowing costs will rise.
Unprofitable Industry

As a result, vast swaths of Chinese industry could be rendered unprofitable. Bad loans could force the government to step in and recapitalize banks. Fixed investment, which makes up 46 percent of the Chinese economy compared with only 12 percent in the U.S., could fall sharply, undermining the employment growth needed to boost spending.

In short, China's export-driven model could fall apart before consumers are able to pick up the slack.
In such a crisis, China's economic weight would become a liability. The IMF estimates that the impact of Chinese demand on the world's largest economies has more than doubled over the past decade. A deteriorating outlook for Chinese imports could send commodity prices plummeting, precipitating heavy losses for investors and risking financial contagion.

China's Fate
There is very little the leaders of the developed world can do to influence China's fate. Trade wars, such as the one the U.S. Senate may be on the verge of launching, will only make the situation worse. Instead, Europe and the U.S. need to focus on limiting their own vulnerability: The longer they keep growing at rates not far above zero, the more likely it is that an unexpected shock -- such as a Chinese crisis -- will tip them back into a recession.

In Europe, leaders must move quickly to solve a deepening debt crisis and deal with insolvent banks. In the U.S., they need to take radical measures, including pumping more federal stimulus money into a stalled economy and providing debt relief to underwater homeowners, to clear the way for renewed growth. Over the long term, leaders on both continents need credible plans to stop debt from growing faster than the underlying economies.

Prudence requires being prepared for contingencies such as a bad outcome for China. If we don't solve our own problems soon, we won't be ready.
 

SHASH2K2

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China fall is bad for world in short term as every developed country has to look for newer destinations to manufactured good. It wil also increase the prices for certain commodities. But its really good for long term as it will help west to diversify their sources to trade with and some of those jobs will go back to developed country. biggest advantage will be that World will not have to face a monster named china anymore which is getting stronger with each passing day.
 

Armand2REP

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The fall of China is good for the entire world as it lowers global pollution, drops fuel/foods prices and lowers input costs for producers.
 

kickok1975

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China's fall and rise will determine the fate of CCP government. If China falls, so does CCP government. They have no choice but to continue reform, contain corruption and boost economy. It's a tough job which will ultimately require not only economic reform, but political reform. Chinese government is under big pressure to perform and Chinese people's attitude to them is generally negative for now.

In term of worldwide, a country will rise and fall all the time. But it's definitely a good thing for countries like China, India, each with over a billion people, to remain stable and prosperous. It will be a huge contribution toward human progress when these two countries doing well. Nothing to do with how well their respective government behaves.
 
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Tianshan

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China's fall and rise will determine the fate of CCP government. If China falls, so does CCP government. They have no choice but to continue reform, contain corruption and boost economy. It's a tough job which will ultimately require not only economic reform, but political reform.
i agree. ccp needs to implement reforms.

if china's economy collapses, then the ccp will fall.

Chinese government is under big pressure to perform and Chinese people's attitude to them is generally negative for now.
disagree on this point, they are doing ok for now, inflation is going down.

but the situation can change quickly.
 

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