China's Boom: Global Impacts

China’s economy has been in the spotlight recently in terms of scrutiny and blame. The fact that China is by far the fastest growing economy in the world is causing the world to take a second look at China and its economic as well as political potential. Investing MNCs are also worried that China’s economy may soon slow down or even collapse due to several internal problems. The US is also taking this chance to officially make China its scapegoat for blaming the bad state of the US economy upon. Finally, China’s rapid rate of industrialization has created a huge environmental crisis in China, and this may affect the way international companies operate in China, as ethical and environmental concerns come into play. Much information was found for both supporting as well as criticizing the Chinese economic success, and a few of these are discussed below, organized into positive and negative facts.

Positive Facts About the Chinese Economy

In the past 2 decades, China has shown tremendous growth, and has now become a world leader in terms of consumption of raw commodities. As a direct result, China’s huge population has served not only as a powerful workforce, but also a lucrative market, and this has helped nearby countries so much that their economies are virtually dependent on that of China. As a direct result, (although relatively unlikely to happen) if China’s economy does stall or even collapse, it would definitely affect many countries worldwide, especially the smaller Asian countries that neighbor China, as well as large industrialized countries such as the US.

China’s international trade pattern is very peculiar: while china imports most of its stuff from neighboring countries such as Australia, Japan, Taiwan, and Korea, most of its exports go to the US. This results in China having a significant trade surplus with the US, and this is both beneficial and harmful to both countries: The US can get cheap products made in China, but Chinese people cannot afford to buy products from the US; on the other hand, importing so much items from China is bad for the US economy because it disrupts its balance of trade.

In 2003, China was responsible for more than 60 percent of the growth in world trade. It holds $610 billion (US) worth of foreign currency reserves in 2004 (risen from $420 billion in 2003) and accounts for 10 percent of world trade. Its share of global output has doubled to 4 percent over the past decade.

“China consumes 7 percent of the world’s oil supply, a quarter of its aluminum, 30 percent of its iron ore, 31 percent of all coal, and 27 percent of all steel products. It consumed 40 percent of the world’s concrete last year.”

China’s booming economy was by far the main reason for the growth of the Asian economy in 2003, due to an inflow of FDI (foreign direct investment) of more than $57 billion US into China that year.

In 2003, 32% of the Japanese export growth was due to exports to China. 36% of the South Korean export growth in the same year is also attributed to China, with their exports to China raised around 68% compared to 2002 stats. “It has been estimated that Korean export income would fall by 3 percent for every 1 percent decline in the Chinese gross domestic product.”

While China’s current period of growth seems very similar to that underwent by other Asian countries such as Japan, South Korea, Hong Kong, and Taiwan (sometimes known as the Asian Tigers), one major difference between China and the other countries is its huge labour force. With such a huge workforce, China has the potential to sustain its growth well beyond the duration experienced by Japan in the 80’s.

If adjusted for purchasing power, China’s economy is already the world’s second largest. At this rate, China will overtake the US as the world’s largest economy in under two decades.

In many industries, especially those that are labour-intensive, China is now the dominant global player. Factories based in China make around “70% of the world’s toys, 60% of its bicycles, half its shoes, and 1/3 of its luggage.”

China is not content in staying as a low-tech and labour-intensive manufacturer, however, and is already making rapid strides in incorporating technology into its manufacturing industries: the country builds half of the world’s microwave ovens, one-third of its television sets and air conditioners, a quarter of its laundry washers, and one-fifths of its refrigerators.

China’s huge population also appeals to foreign firms as an extremely promising market waiting to be tapped into. Although heavily restricted by Chinese protectionist policies, the corporate utopia that was pictured of the Chinese domestic market is quickly becoming reality. China is already the biggest market for Boeing’s commercial aircraft and American machine tool makers, and its automotive market is the most promising in the world. (China is already Volkswagen’s largest foreign market, ahead of the US).

The attractiveness of its domestic market gives china a powerful bargaining chip, one that was unavailable to Japan and South Korea before it.

Negative Facts About the Chinese Economy (That We Feel Potential Investors Should Know About)

However, there are definitely chinks in the armor that is the Chinese economy: As the study of economic reveals, a robust infrastructure is needed for any government to function properly, and signs of a failing infrastructure have been presented in China recently.

Bank lending has been a huge concern for China since mid 2003, when the growth rate of bank lending exploded to 3 trillion (RMB) in 2003, up from 1.9 trillion (RMB) in 2002. With claims that as much as 45% of Chinese lending is defaulted, this will pose