Sat, Nov 24, 2012 - Page 8 News List

A fresh agenda for China’s leaders

By Michael Boskin

Political leadership transitions typically signal either a change in direction or continuity. However, the mere prospect of such a transition usually postpones many important political decisions and freezes some economic activity, pending the resolution of the accompanying uncertainty.

China’s decennial leadership transition, culminating in the Chinese Communist Party’s 18th Party Congress, is a case in point. While some will remember when a Chinese leadership transition was a political and cultural curiosity that had few direct economic implications for the world’s major powers, those days are long gone.

China is now the world’s second-largest economy and despite a recent slowdown to a 7 percent annual growth in GDP, it is still outperforming all other major players. It remains the vital assembly center of the global supply chain for many manufactured goods, such as computers and mobile phones, enabling lower prices to be offered to the world’s consumers.

That has made China a key trade partner for the US, most European countries and many other economies, in addition to placing it at the center of intra-Asian trade and supply-chain dynamics.

Moreover, China sits on roughly US$3.3 trillion in foreign exchange reserves — much of it in US dollars, but also in other major currencies — owing to its large trade surplus in recent decades. It helps to finance other countries’ trade deficits and domestic investment. Many of its beneficiaries have large budget deficits that decrease national savings to below domestic investment.

Former Chinese leader Deng Xiaoping’s (鄧小平) reforms ignited the most rapid economic growth in human history, and with it the emergence of a large and growing Chinese middle class. That makes China an important market for a broad range of foreign firms, including car producers, technology suppliers, financial institutions, energy companies and agricultural exporters.

Chinese firms — often state-owned — are also seeking greater investment opportunities abroad in major industries, particularly energy.

A by-product of China’s spectacular growth has been rising economic tensions with other countries. China’s exchange-rate policy and its bilateral trade surplus with the US were major issues in the US presidential election, and concerns over Chinese foreign investment are ubiquitous.

The WTO upheld US duties on Chinese tires and Canada has extended its review of China National Offshore Oil Corp’s bid to acquire Nexen, a Canadian oil and gas producer. Despite China’s WTO membership, many foreign companies face restrictions on expanding in China or must cooperate with a local company.

For their part, the Chinese complain about foreign trade practices and are taking some cases (for example, a long-running dispute with the EU over solar panels) to the WTO, where cases brought against China by other countries are proliferating.

However, all sides must bear in mind that China is too important to the global economy and trading system to allow these disputes to spiral out of control.

Meanwhile, China’s economic slowdown — resulting from the weakness in the global economy and efforts to cool the country’s inflation and overheated asset markets — threatens to slow the pace of job creation for the millions moving annually from rural poverty to greater prosperity in China’s expanding urban areas.

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