By: Lon Chang
Commodity futures are well off their mark from the highs set this summer. Crude oil reached a record high on July 11, 2008 with a price of $147.27 per barrel. Crude now trades below $70 per barrel, more than 50% off from just a few months ago. Similar figures are seen right across the commodities board, copper, wheat and steel are all down. Believe it or not, while this global recession may most certainly have originated in the United States, these affects are going to be felt most profoundly on the other side of the Pacific.
As the financial crisis is testing United States fiscal policy, this major economic downturn will put a major damper on China’s growth. It is already finding demand for its exports soften as many nations reconcile liquidity issues and its citizens adjust their spending habits. Growth forecasts around the world have already been downgraded. The United States is predicted to grow at a mere 0.6% in 2009. Taking in a full 21% of China’s total exports, the US is China’s largest export partner. And since China’s GDP depends an incredible 40% on net exports, China is going to begin to feel the heat very soon. All this leads us to believe that for at least for the near the future, China will in fact begin to slowdown. However, while many feel that this will definitely hurt China in the short run, this global recession has the potential to leave some nasty scares on this sprinting tiger.
To the naked eye, this may not seem like a big deal. All nations go through business cycles, so a slowing down in China’s economy shouldn’t be that big of deal, right? But this time I fear it is different. The very fundamentals of the global economy are changing. A great many of the forces that were in play that allowed China to brilliantly grow over the past two decades no longer exist. Raising labor and production costs for Chinese factories have put the brakes on the huge amounts of capital flowing that once flowed in the nation. Simply put, moving assembly and production to China is no longer saving as much money as it once did for businesses in the 90’s.
Exports are directly affected by the importer nation’s demand for these goods and services. This makes China much more depended on global trade patterns than most other nations. With such a stunning fall in demand, China’s net exports will almost certainly slow down. China is too heavily reliant on its exports for growth and must begin to look inward for future growth.
China needs to begin to focus more on consumer spending to keep its GDP growing, especially in these turbulent times. There over 1 billion people who are starving for more durable goods. Sales of cares, clothes, and electronics all have the potential to increase 10, 15, or even 20 fold if the People Republic truly starts to foster more domestic spending. This can be accomplished by instead of giving all the tax breaks, free-economic zones, and other perks to mostly foreign companies, it should open them up and give more of a share of the pie to domestic firms. Also, the government can also begin to stress the importance of spending to keep the economy going. China has a long history of saving, but if each citizen began spending just 1% more of his or her income, China could easily find its way back to recovery.
This is by no a means a call to return to the days of closed boarders, high tariffs, and rigid quota systems, but rather a call to common sense. China can still take advantage for all that globalization has to offer once it begins to realize the spending power of its own native born citizens. In fact by keeping its borders open, Chinese consumers will have an even greater selection of goods and services to spend their paychecks on. Not to mention that the increased completion will ensure that these products are of highest quality and are super efficient to produce.
The very notion of China becoming just one big manufacturing hub is a flawed idea. It would be better for itself and for the rest of the world if this emerging nation put more faith in its own people and allowed them to take hold of all that the world has to offer. By making a real effort to shift its own consumer spending, this emerging nation really does have the potential to one day return to its former glory as the Middle Kingdom.