China : Rising Dragon or Paper Tiger

China has now officially become the world’s largest economy after the US, replacing Japan, which for over three decades held that official title. Today it has become difficult to not notice the rise of China. It has replaced Germany as the world’s largest exporter and now even consumes more Saudi oil then the USA. In the last decade many analysts have viewed the rise of China as America’s biggest challenge and some thinkers foresee China as the world’s superpower in the not so distant future.

The rapid rise of China on the global map in the last 30 years has shocked many, bewildered others and for some marks the shift of global power. Some have even touted a new model for economic development called the ‘the China Model.’

China as a nation has existed for over 4000 years. Most of Chinese history consists of internal struggles between various dynasties fighting to rule over the nation. Modern China emerged after WW2 when the Japanese who occupied large parts of China were defeated. The resultant vacuum led to civil war with the Chinese communists led by Mao Zedong, supported by the Soviet Union rising to power.

After various attempts to develop China, in 1979 reforms were initiated which would achieve self sufficiency and attract foreign expertise. China after a careful review of its strengths and weaknesses developed an economic policy that enabled it to benefit from its economic strengths and at the same time address its economic weaknesses.

China today produces most of the world’s consumer goods and for many represents an alternative to the exploitative West. Chinese economic development is leading to a geopolitical shift from the west to the east as Western economies teeter on the brink of a second recession in as many years. Many are looking to China to replace the US as the world’s leading economy in the not so distant future.

With this in mind we make the following observations:

* China does not represent a new system of governance or economic model. China today is the world’s industrial workshop; an export oriented economy totally dependent on foreign countries to buy its goods. This is a very fragile model of development.
* Whilst many have called China’s economic model a new form of economic development. The reality is China has adopted Capitalism with the government involved in a large segment of the economy.
* China’s development is intertwined with the US. The US the word’s largest consumer imports the vast majority of the goods that come of China’s production lines. As a result of this America has a trade deficit of $268 billion with China.
* Such trade means US dollars end up in China – totaling over $2 trillion today. Such huge reserves have resulted in China purchasing US treasury bonds, which funds America’s massive trade deficit.
* Like the Western Capitalist world which focuses on production rather than distribution, China’s double digit growth has not touched the lives of hundreds of millions of its population. Because of this China handled 87,000 cases of social unrest; public disturbances, demonstrations and civil strife in 2005.

Whilst China has made significant advances, we need to ask is its rapid growth sustainable.

Capitalists examples of malaise and failure are abound. The US itself pursued the same trajectory of export driven growth through the 1970’s and 1980’s, which all came to a crashing halt as its asset bubble burst. While the US is today still the world’s largest economy it is also the world largest debtor nation, deeply poverty stricken, energy dependent with a currency a fraction of its value only a few decades ago. Japan, another so-called miracle capitalist economy, has been at a state of economic loss for nearly two decades.

p/s: simple n yet meaningful analysis. just to share. been awhile for quite a time.