Friday, January 13, 2012

Severe Economic Turbulence coming to China? (The Diplomat)

By Charles Dumas & Diana Choyleva

China’s economic growth has been meteoric. But a tough global environment in 2012 could herald several years of severe economic turbulence in China.
Reports of the death of American economic primacy are exaggerated, as are expectations of future Chinese dominance. The past 15 to 20 years have seen a huge Chinese catch-up with the advanced economies that many are projecting far into the future. But the distortions entailed by China’s chosen mode of development now threaten it with a turbulent period of adjustment to an entirely different and probably uncongenial alternative route forward.  Meanwhile, the unwinding of those same distortions will remove artificial barriers to the United States’ competitiveness and thus fuel future economic growth.
China’s fast growth and sheer size have produced a meteoric rise to over 13 percent of world GDP in 2010 measured at comparable dollar prices. But during the last 18 years of China’s supersonic expansion, Beijing has chosen to attach its economy to the United States. It fixed the yuan rate to the dollar in 1994 to stabilize an economy that had just seen inflation accelerate to 30 percent. At the time, that rate reflected China’s competitiveness. Over the period 1995 to 2004, China saw ten years of falling export prices, as idle rural labor was brought into the cities and profitably employed at low wages.  The United States’ modestly positive inflation moved bilateral competitiveness sharply in China’s favor.

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