Is it time to worry about China?

27th March 2012

For example, community commenter rg.williams says: "Should we be all that concerned about the slowing economic growth in China? There are some experts who are now arguing that the US has decoupled (for the time being) from China and the Eurozone." JFerraro819 counters: "When China was strong we had no problem using it to add to the bullish flame but now that it's about to crash … can we easily say we've decoupled and it doesn't matter anymore?"

With this in mind, in this week's Sunday Times (paywall), Irwin Stelzer business adviser and director of economic policy studies at the Hudson Institute, said that there is an increasing economic separation between China and other global powers. If China is about to crash, then decoupling is perhaps desirable, but there are many that would argue that any further separation is a risk to both sides.

Stelzer expresses concern at the increasing two-way protectionism between China and the rest of the world. He argues that many of the manipulations of free trade that were tolerated in a time of economic expansion are no longer being tolerated as the economic cake gets smaller.  Stelzer suggests President Obama is letting it be known that he plans to get tough on China for its ‘currency manipulation, export restrictions on rare minerals, buy-China policy, and theft of intellectual property'.

China has been up to these tricks for some time and intervention has so far proved ineffective, but Stelzer argues that irritation is now becoming more global and therefore the response is likely to have more potency: "If the tiffs between China and America were the entire story, it could be written off as a phenomenon that will pass once America's elections are over and the new Chinese regime settles in….China's practices are now provoking reactions in countries other than the US. … The Chinese government has ordered its bureaucrats to stop buying foreign – mostly German – cars and spend their $13 billion annually on made-in-China vehicles.

"This has made German car makers, especially Volkswagen, unhappy, since Audis are the bureaucrats' car of choice, and they buy 6.5m vehicles each year." Brazil is also unhappy with its treatment at the hands of China, blaming the woes of its manufacturing sector on cheap Chinese imports

There is also a chance that policy changes from within China may see some reversal of the economic self-interest that has brought global super-powers together. Edmund Harriss, fund manager at Guinness Asia funds, says that China has always been a reluctant global player: "The priority for Chinese policy is the sustainable development of the domestic economy to deliver a steady improvement in the Chinese standard of living. China's response to international relations, trade relations, international finance and natural resources are all viewed through this prism. The outside world comes second."

However, he argues, a global role is being forced upon China by its engagement with the world economy and will be crucial for its next development phase. He believes that the move from an export-led economy to a domestic consumption-led economy will require a shift in the way China operates globally, particularly through its currency: "The path towards increasing its role in the international finance system lies through greater use of its currency to settle trade. Once again, though, it is domestic considerations that are paramount. China conducted over $3 trillion of trade in goods last year but it is embarking very slowly on allowing the currency to be used outside China. There are now domestic imperatives to introduce currency flexibility, which in time, accompanied by financial reform and interest rate de-regulation, will likely lead to currency convertibility and an opening of the capital account."

Stephen Roach, a member of the faculty at Yale University, and former chairman of Morgan Stanley Asia – says in an interview with Business Week's Charlie Rose that the US should set aside its irritations with Chinese policy and "recognize that a post-crisis U.S. economy needs a new source of growth. Exports are the top potential source of growth in the U.S. China's our third-largest and most rapidly growing export market by a long shot. We need better access to their markets, especially as they transform into more of a consumer society, and we should push hard in that regard." 

There is a possibility that China is in the process of decoupling from the US and other global powers. It could also spell bad news for the next phase of Chinese development and it could remove an important source of growth at a time when developed market economies are vulnerable. The relationship may be a tricky one, but it may not help either side to abandon it just yet.  


More from Mindful Money:

How to avoid media spin

World Bank warns of economic crisis in China

China's love of luxury

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