Many people still perceive China as a country that maintains a choking communist regime and stringent social policies, when in reality they have adopted many capitalist strategies and have grown into one of the most prominent economic powers in the world. Thanks to fiscally conservative policies, including a high level of savings, China has been able to rebound quickly from the recent global economic turmoil. Instead of acting defensively, like most governments throughout the world, China has been able to be aggressive and expand during the economic downturn.

When the economic crisis hit in the fall of 2008, China was one of the few major industrial players in the world who was operating with a budget surplus. Unlike in the US and European countries, there wasn’t negligent lending and excessive spending being promoted in the Chinese banking system. This allowed China to lower their interest rates and ease credit when the crisis hit, something that the US couldn’t due since their interest rates were already at historic lows.

The Chinese government has been able to use the struggling world economy as an opportunity to make meaningful stimulus investments to generate future growth, as opposed to other country’s efforts to simply “stop the bleeding.” One of the reasons why China’s economy has been able to thrive is the amount of money that they have in foreign exchange reserves. Currently the country holds $2.3 trillion in foreign funds; much of this comes in the form of US debt, issued in Treasury Securities.

In the US, we have become so reliant on China’s purchasing of these securities to subsidize our ever-increasing debt that if they were to stop purchasing them or try to cash them in, it would implode our entire economic system. As of January 2009, China held over $800 billion in US debt. While America seems completely at the mercy of China, there is mutual dependency in this relationship. China’s economy is fueled by their exports, most of which come to feed the insatiable appetite of American consumers. Although many people are leery of the codependence of these international juggernauts, there is not an easy way to make a clean break.

Today there are private businesses and corporations throughout China, and the government continues to remove regulations to promote free trade. Foreign countries have tried to capitalize on the rapid expansion of the Chinese economy, investing billions of dollars into the country during the last few decades. Many of the existing businesses and corporations that are thriving in China have been instituted by US investors and utilize their systems and structure.

In the third quarter of this year, the Chinese economy expanded by an astonishing 8.9 percent and this still fell short of the expectations of many economists. Analysts predict a strong showing from China in the immediate future as well, with predictions of 8.2 and 8.9 percent GDP growth in 2009 and 2010, respectively. China’s current trend of growth has already translated into new job creation.

While many people are enthused and inspired by China’s rampant growth, there is still some reason for concern. Nearly 90 percent of China’s GDP is accounted for by state spending, which has significantly increased the government’s debt to GDP ratio. Although China’s debt is still low relative to Western nations, this is a disturbing trend. Skeptics also are concerned that China’s currency, the yuan, is being undervalued and contributing to their power to export and inflated GDP.

The argument against the expansion is that China is focusing too much on achieving short term financial prosperity without properly planning for the future. Much of China’s current spending is being put towards improving infrastructure and developing new technologies, but many people are skeptical that these investments will lead to future revenue. Investing in infrastructure usually seems like a sound investment, but as I have stated, China’s economy is fueled by exports, and internal infrastructure will not necessarily lead to future prosperity.

One of the key infrastructure improvements is a series of railway creation projects, including a high-speed rail from Beijing to Shanghai, which will cost roughly $200 billion. Many areas of China, especially in the western regions, are still unindustrialized but there is anxiety that this large amount of government spending may not translate into future returns.

“China’s economy is showing no signs that it’s about to collapse or even contract,” The New Republic’s Zachary Karabell reported. “While many question the recipe that China has followed, the results speak for themselves.”

This sentiment seems to be the norm among most economic experts and analysts. One thing is for certain, however, China’s increasing power in the world—especially through there holdings of US debt—is an ever-growing concern for the world’s other superpowers. Although there are many questions yet to be answered about the long-term viability of China’s economy and expansion practices, the current results can’t be argued.

“Now with China surging ahead through this crisis, all [Western analysts] can discuss is, when will China stall?” Karabell said. “It’s as if they see the facts, but they can’t quite make sense of them.”

Popularity: 1% [?]

View James Gelfer's Profile      Subscribe via RSS