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Over the last two decades China has gradually moved in the direction of market economy. This shift has vilified its previous economic model that relied on the powers of the central planner. What is even more interesting is that China’s new economic orientation has gained the approval of the international business and investment communities. As a result, China has been able to add more than 400 million new jobs, attract about $55 billion in foreign direct investment (FDI) per year, reduce its poverty rate from 65% to 17%, and accumulate more than $760 billion in international reserves.
Moreover, China has shown signs of strong interest in enhancing the knowledge base component of its economy in an attempt to be competitive in the sphere of knowledge innovation as well. This is evident in the new Universities and Business Schools that crop up annually, the new exchange programs with some of the most reputable academic institutions of the western world and the large number of Chinese graduates in the fields of engineering, mathematics, and physics. While China still lacks political and democratic freedoms, an antithesis to a free market economy, and a large segment of its population lives under conditions of severe poverty, the economic progress that has been made so far is remarkable. This is the reward of a flexible market economy. China continues to grow at 10% per year while the rest of the world, with few exceptions, has experienced meagre rates of growth.
China has been viewed in certain circles as Europe’s most formidable economic foe. China does not pose a threat for Europe and, therefore, its trading relations should not be viewed with fear and scepticism that may lead governments to impose trade restrictions in an attempt to ‘protect’ internal inefficiencies. On the contrary, it has the potential to instil catalytic economic changes in the European continent if Europe succeeds to draw the correct conclusions from the economic miracle of China. China will continue to sharpen its competitive edge and, therefore, Europe has no other choice but to enhance its ability to compete against China and other Asian countries. This, of course, cannot happen with high tax and spend policies, rising regulation low R&D spending (less than 3% GDP), red tape and bureaucracy. The problem of the European economies is rooted in the rise of the state and its growing intervention in the economic affairs of its citizens. More than 50% of the European GDP is spent by the state! While the European Union has set an R&D spending target of 3% of GDP (Gross Domestic Product) with the UK currently spending only 1.9% and expected to raise it to 2.5%, China spends 11.8% of its GDP on R&D and is expected to raise it to 13.6% by the end of this year, which will exceed that of Japan.
On the other side of the Atlantic, those that demand the revaluation of the Yuan to mitigate the US trade balance deficit are mistaken. If currency depreciations had the magic power of solving trade balance imbalances, countries such as Argentina, Mexico, to mention two, that did resort to currency devaluations in the past, would be economic paradises today! If the US officials do not abandon their criticism on China’s currency policy, they will exacerbate currency speculation against the US dollar with destabilising effects for the world economy. Currency speculation accounts for 38% of the capital inflows to China in anticipation of an appreciation of the Yuan, due to the US pressures. The irony is that US involvement in the currency affairs of China is partly responsible for the build up of Chinese foreign reserves.
John A. Doukas
Managing Editor
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