China and Global Economy

China's role in the development of Global Economy
Contributor: Ayrat Maksyutov, 2013-09-09 15:09:05

Following the economic crisis of 2008 the state of the global economy remains unstable. Many economists rush into making predictions about the future collapse of the world economy, arguing that the recent financial crisis was only an indication of structural problems across the globe. While the most-commonly stated reason for the 2008 crisis is the collapse of the US financial system, rarely do we hear the underlining causes behind it, digging deeper than sub-prime loans and financial regulation problems.

In 2009 Ben Bernanke, the prominent head of the US Federal Reserve Bank, had suggested that one of the triggers of the crisis was a massive global imbalance created by large trade surpluses and deficits. Undervalued currencies, cheap costs of factors of production and consequent export-led growth have allowed China and major oil-exporting economies to run huge current account surpluses and to enjoy large inflows of capital. The countries began to accumulate high foreign currency reserves and subsequently exported the extra money to the west. The flood of cheap credit over the last decades increased the amount of risky loans in the Western world, and the US in particular. Financial industry started to become more and more sophisticated; cheap liquidity has contributed to the creation of complex financial instruments. Thereby, the global imbalance has created problems far greater than anyone could imagine.

Global imbalance is the new word that will stay and haunt the world economies for the next generations to come. One of the only plausible ways to fix the global imbalances requires cooperation from China, the second major economy in the world running the largest trade surpluses every year. The size of the Chinese economy demands it to be responsible for the global economy, as its domestic policies will have drastic effects on the world. Thus, China has put itself into a position to affect the global economy before it has reached a stage of political maturity.

While the world became accustomed to China’s model of growth – “socialism with Chinese characteristics” defined by the export-led growth backed-up with political and financial repression, the government began to take gradual steps towards reforming the basics of Chinese economy. In the beginning of last week China’s President Xi Jinping emphasized the importance of restructuring of the economy to solve the underlying problems of slowing growth. Many economists speculate that the changes to take place within the next few years will be as radical as the start of communism in 1949 or the market reforms of 1979.