United States President Barack Obama’s chief economic advisor Lawrence H. Summers, had earlier mentioned that the growth model of India was people-centric known as ‘Mumbai Consensus’ and that of China was export oriented known as ‘Beijing consensus’. (On the lines of how specific economic policies promoted by IMF and World Bank were described as Washington Consensus). The average GDP growth of China has been over 9 % and 300 million people were lifted out of poverty over the last two decades. As mentioned above, China’s growth has largely been export oriented. Domestic consumption has been relatively low. Its current account surplus has been a real strength of its economy. Such an astounding and fast paced growth has given its powers (financial and due to that military) anyone would envy.
China has been at the receiving end of quite some accusations, and most of them being true, with respect to its currency and its devaluation. China has kept its currency rate artificially undervalued giving it an unfair advantage whereby it boosts exports and limits imports. And they have reaped the advantages of this by having a current account surplus (Exports exceeding imports) but at the same time due to tight controlling of its economy it has avoided its side-effects such as inflation. Due to a current account surplus, a large inflow of dollars takes place in the economy. In any other emerging market such as India, it has a two-fold effect. One, the domestic currency should appreciate making exports relatively less profitable. Secondly, because the domestic currency appreciates, the central bank intervenes and purchases these dollars releasing more of domestic currency in the market resulting in inflation. But China due to a controlled exchange rate ends up avoiding these economic problems and gains an advantage. Thus, when it trades with other emerging markets whose currency valuation is market-based and not controlled to a great extent, terms of trade lie heavily in favour of china.
Many, in future, see China as the power replacing the U.S. and its dominance. But does one want it? A communist power dominating the world affairs is not the best situation one can have. It lacks the maturity a nation needs to have to be the big brother of the world. One might blame the U.S. for misusing its powers at various instances (read Iraq) but one just cannot deny that it has given a lot of international aid and support.
Chinese products and services, though of low cost, are also low in terms of quality. A survey carried out by Harvard Business Review revealed that Chinese consumers in China’s urban centers themselves have a low opinion about “Made in China” goods. These goods have been extensively exported (or say dumped) to other emerging markets where they are in demand because of their low cost, affecting existing market players revenues, but at the same time they are low in quality which has its own set of implications.
China has a huge population with a growing per capita income and thus a dream for most brands to enter the country. This is the reason, that despite of its various restrictive policy and regulations, companies are willing to enter the nation.
Now, that china is producing a whole range of products, many see it as a market not only for selling finished products but also raw materials. Its cheap labor is one another reason that companies see as an opportunity to set up manufacturing units in china to save cost.
Also a bipolar or multi-polar world, wherein more than one power dominates, unlike in the past wherein U.S. was the one calling the shots, could be envisaged-provided China has a change of attitude. The IMF and WTO needs to reassess its role in dealing with china. They need to be more assertive and need to pressure china to tackle the currency devaluation and other situations.
To conclude, I would like to quote Uncle Ben, a character from the movie Spiderman, “With great powers comes great responsibility”. It is how China handles these responsibilities that will determine whether it can be an opportunity for others or threat to other emerging and developed nations.
[The article has been written by Parth Shah. He is pursuing his MBA from Somaiya Institute and is planning to take up finance as his specialization in the second year of MBA. His interests include reading novels and passionately following Football.]