China: The Threat & the Opportunity

The argument about when or whether China will overtake the United States to become the world's biggest economy is moribund. China is already the most “central” trader in the global economy, and its ability to influence events in dozens of nations far exceeds that of any other country, according to the International Monetary Fund.

This means the world could catch a nasty cold if China's growth falters, or if it fails to efficiently manage its economic expansion and a myriad of fiscal and other structural problems it faces in the near future. The IMF made the observation in its Spillover Report on China issued today. The name says it all: The Spillover Report examines the potential effects of disruptions in any of the five major trading regions (US, the Euro area, China, Japan, and the United Kingdom) on global economic activities.

Obviously, China is now positioned at a junction where its actions could significantly hurt trading partners. And yet, the overall effect of China's integration into the world economy has so far been positive. The world still stands to benefit from China's continued role. However, the Chinese government must carefully chart a path forward for the country; otherwise, its economic evolution and many of the changes being considered now will jeopardize the fiscal health of its trading partners. The IMF outlined these challenges as well as opportunities in the Spillover Report. Here are some highlights culled from the report:

  1. China ascendant:
  2. China is now the first or second largest trading partner of 78 countries with 55 percent of global GDP (versus just 13 countries with 15 percent of global GDP in 2000). From a network perspective, China is now the world’s most “central” trader, with the most sizable connections to other major traders. This means that China can transmit real shocks widely, whether these originate domestically or elsewhere.

  3. More than the world's manufacturing Mecca:
  4. The caricature of China as merely a cog in the global supply chain — wherein imported inputs and exported processed goods respond passively to final demand in the G7– is changing. This means China's capacity to originate shocks has risen. China’s export-oriented growth model has resulted in a large expansion of China’s trade and a rapid move up the value-added chain. This has had significant implications for the global supply chain: China’s reliance on processing trade, while large, is on a declining trend.

  5. Can China keep up this fast growth pace?
  6. The sustainability of China’s export-oriented growth model has been questioned — most importantly, in China itself. Indeed, the Chinese authorities recognize the need for economic rebalancing, with greater reliance on consumption, and this is official policy under the 12th Five Year Plan. The key issue for the rest of the world would be its timing, pace and spillover effects.

  7. Currency risks:
  8. While many acknowledged that China’s growth had brought benefits, including lower costs and an imperative for firms to raise productivity, some saw an undervalued currency as having displaced employment.

  9. Commodity hog and price inflator:
  10. Many counterparts cited China’s role in pulling up commodity prices — a plus for commodity exporters but not for the rest. China has become a dominant importer across a range of commodities. In metals, per capita intensity now rivals that in advanced economies, rising from less than 15 percent of the level of advanced economies in 2000 to almost 90 percent in 2009. Thus, the spillover to world commodity prices is now significant.

  11. Asset buying binge ahead?
  12. The channels of China’s influence on global asset prices are complex. On one hand, that influence is greatly constrained by China’s relatively closed capital account. On the other, the sheer size of China’s savings (the highest in the world in dollar terms), its rising foreign currency reserves (also the largest), and the composition of those reserves, should all affect asset prices.

It's easy to review this Spillover Report and regard it simply as another one of those interesting but barely useful economic analyses. That would be a mistake. Even China's government welcomed the review and is reportedly taking its recommendations seriously. Forward-looking high-tech executives should take a closer look and consider this: The potential outcomes of the scenarios discussed are not improbable, and the future in which they could occur is discomfortingly close.

13 comments on “China: The Threat & the Opportunity

  1. mfbertozzi
    July 21, 2011

    Interesting article Bolaji, I have kept an eye also on report from Spiral and in my opinion it provides a full picture about spillover of China economy and possible impact, worldwide. I believe another perspective for analyzing events is correlated to the strategy from major economy to move towards China for making business. In case primary reason is basically saving on manufacturing costs and try to take over an incredible market in terms of size, I am convinced all players (foreign countries and China) will lose the game. Foreign company realize a short term profit due to savings, China will increase cash and get back outside to buy all over. It is happening, it is a poor strategy. Otherwise, help China in sharing long terms strategy could mean help local economy in your country of residence.

  2. garyk
    July 21, 2011

    Does a MONOPOLY of manufacturing come to mine????

    Look at the history of FOXCONN.

    FOXCONN is the prototype of takeing over all manufacturing in the free world.

  3. hwong
    July 21, 2011

    Remember the states back in the Industrial Revolution days? It was all about manufacturing. Nowadayds U.S. has almost cut down on manufacturing and moved to China. Eventually, Chinese will follow suit. You will see that as they become more developed in the next 50 years or so, it will also be rid of manufacturing. In fact, perhaps the world is becoming more digital it doesn' t even need as much manufacturing.

  4. garyk
    July 21, 2011

    Your right, but immigrants helped develop the Industrial Revolution in the States.

    The US helped spread manufacturing to other countries. A great example is JAPAN. JAPAN has taken its fair share of manufacturing ( cars and electronics). CHINA is taking every countries share, all manufacturing job's. All CHINA wants to do is export not inport. Manual labor job's sweet shop condtions.

    India has taken control of computor and cell phone trouble shooting calls. The credit card sales calls come from India when your at home have dinner!

    In most case these are US company's trying to make more profit with cheep labor. Where does it stop? More TAXES no job's.

    I need to go home and see what credit card company wants me to change cards.

     Your job is next.

  5. itguyphil
    July 21, 2011

    Lower level tasks will continue to be outsourced to cheaper workforces. The more developed nations realize this, therefore they put more resources into higher level work that cannot and will not be easily moved outside of its borders. So it is almost inevitable that this trend will continue as time progresses.

  6. Houngbo_Hospice
    July 21, 2011

    China is not to be blamed for job loss in the United States or other industrial countries. Most of the jobs that are now outsourced are the ones that are being overlooked in the US and expensive US labour costs have led manufacterers to go to other countries where the price of labour is much lower. That is just how open economy works.

  7. JADEN
    July 22, 2011

    My concern is how China can sustain their growth with their export currently sustained by low wages with effect of poor life style on their workers.

  8. mfbertozzi
    July 22, 2011

    Exactly Jaden, that's the point and hence  the sense of my previous post. Speaking about business, Western hasn't to be fascinating only by low costs of salary in China. Strong help for both Western and China should be to share a cross knowledge transfer program, doable to cover manufacturing, processes' quality, work's quality, including life style at work. Otherwise if the focus is only on savings, as consequence, exports from China will meet with difficulties, sooner or later.

  9. Eldredge
    July 22, 2011

    It certainly seems like that has been their trend for a long time now, and the prospects of losing the manufacturing base and associated know-how is a great concern.

  10. jbond
    July 22, 2011

    It will be interesting to see how the Chinese government stays off inflation. China is the new world superpower in terms of importing and exporting. This report sheds some light on some potentially serious faults. If China was to have a major breakdown, the world will feel the ramifications. The Chinese government needs to take a serious look at this report and others that outline potential problem areas and set up plans ahead of time, before it's too late.

  11. Mr. Roques
    July 22, 2011

    Very interesting article! I really enjoyed it.

    I was amazed when I read that the Chinese government was trying to slow down their growth because they were afraid of inflation and other things. 

    Can the World afford to rely on China?

  12. Anna Young
    July 23, 2011

    I agree with the report that maintenance of Chinese economic growth has been a great benefit for partners through the global crises.

    However, the major concerns that if China mismanages the economy in the next few years may result in a potential global crises. I think this report should not be casually regarded by partner nations

    Particularly,the “forward – looking high – tech executives need to take a closer look and consider the probable future implications of China's economy hard landing should this occur.

    Bolaji, agree with your conclusion. It is well stated.





  13. Ms. Daisy
    July 31, 2011

    In addition to your conclusion that executives must take a look at China's economic management, and its implications. I also believe that the manufacturers that have moved to China will need to  stay there until America and Europe really get their act together. You and Bolaji are right on the fact that any hitch in China's economy will be a potential global economic collapse.

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