US national default was narrowly averted in the short-term after weeks of permanent headaches for the global economy, but, with the higher US debt ceiling supposed to sustain financial stability through 2012, serious problems continue to loom on the horizon. The US, still a single superpower and the world's biggest economy, is sure to stay on the downward trajectory, and the last-minute deal which lifted the country's borrowing limit did not prevent an unprecedented downgrade of the US credit rating from the formerly axiomatic AAA to AA+. China as the top holder of US bonds harshly reacted to the shift by calls for replacing the US dollar as the global reserve currency…
At the moment China's yuan is a clear forerunner among candidates for the mission of a new world currency. Beijing's reiterating that the yuan should be admitted to the privileged club of reserve currencies in part reflects fears that the global financial system is entering a protracted period of volatility and turbulence. In the meantime, China's increasingly important status is propped up not only by its unsurpassed currency holdings and sway over the world's spheres of financial transactions from commodity exchanges to bonds trading, but also by the stabilizing character of the influence it contributes to the global economy. The stabilizing role played by China during and in the wake of the crisis grows naturally out of the Chinese economic system which differs fundamentally from the Western economy with its bloated and largely virtual financial sector.
China's title of the global factory shows to what extent the country has succeeded in creating powerful and as of today fairly integrated industrial capacities. The policy of building industrial might – along with engaging with the global market – was adopted in Beijing back in the mid-1980ies, and today's Chinese industry is both extremely competitive and sufficiently diversified. The supply and demand posed by China largely define the readings of the global market barometers and, moreover, factor considerably into the state of global politics, making China the key driver of the new globalization and worldwide changes.
Having outpaced the US in terms of export and import growth by factors of around 1.5 and 2 in 2010, already this year China may emerge as the world trade champion. China's postings for the first half of 2011 are also impressive. Notably, at the moment the Chinese volume of export only slightly trails that of the EU: in 2010, the share foreign trade of the EU as a whole in the world's total was 15% vs. China's 13.3%. In fact, China's share may be even higher considering that a fraction of its cross-border exports are delivered to the markets in neighboring countries by individual vendors without customs declarations.
China's export activity appears generally sustainable and is relatively immune to the oscillatory character of the world trade. In 2009, at the peak of the crisis, the Chinese export dropped by 16% compared to the 23% global average. Importantly, China's overall export volume is not overly sensitive to fluctuations of demand for individual types of products. In 2006-2010 the convincing 15.7% average export growth was achieved regardless of the unfavorable pricing climate as over the period of time the prices of electronic appliances stagnated and those of labor-intensive products decreased.
Under all circumstances, China remains one of the top-stable consumer markets. Its import grows steadily ahead of export and, moreover, even in 2009, a disastrous year for the world trade, the physical volume of China's import rose by 2.9% compared to the 12.8% contraction of the global average.
Pricing competition across the global market gathers momentum as China inches towards the leadership in the world trade. Formerly limited to products of labor-intensive traditional sectors like the textile and clothing industries, the race over offering better prices now spill to the markets of industrial equipment, electronic appliances and devices, durable consumer products, etc.
The truth highlighted by the crisis is that China's competitive edge is not attributable preeminently to discount prices or the undervalued yuan as US critics permanently charge. In the difficult 2009, China's export did not plummet as deeply as that of its Asian peers while the yuan/dollar rate remained fixed and their currencies shed weight. The underlying cause unrelated to the currency value is that China with its increasingly integrated industrial capacities is making vast progress in replacing formerly imported product components with those manufactured domestically.
On top of being healthily insulated from the world's financial instabilities, the Chinese economy demonstrates an ability to carry on with strong growth regardless of the shrinking export. In 1997 China's ratio of foreign trade volume to GDP (both expressed in US dollars) equaled 42%. Following a slight decrease in the next couple of years, the index eventually climbed to 57% in 2008. In 2009 the striking nearly 14% export dip could be expected to undercut China's economic growth which in fact slowed down minimally and promptly picked up in 2010 (the toll on China's export taken by the 1998-1999 Asian crisis – a 0.4% foreign trade decrease – seems insignificant in comparison but bore a much stronger impact on the Chinese economy).
In China's case, there is loose correlation between export dynamics and GDP, and the export growth adds little to the overall state of the economy. At first glance, the conclusion seems to contradict the widely accepted notion that the share of added value and local production in China's exports are rising.
Assembly based on imported components along with processing trade are known to account for much of China's export sector. Beijing is staunchly implementing the strategy aimed at boosting the share of the value added within China in the country's export, the result being an increase of the ratio of costs of export and import in foreign trade from 1.2 in 1994 to slightly under 1.8 in 2010. As a parallel process, the share of processing trade in China's export was reduced from 48.6% to 38.9% during the 11th five-year period in line with the strategy.
The impression is that currently the Chinese economy depends on export much less than it used to back at the time of the Asian crisis. The potential explanation is that, in part thanks to the quality anti-crisis package, China's development is being mainly energized by domestic demand for investments and consumer products. In the situation, export volume figures became misleading and the projections that the fall of the global demand would plunge the Chinese economy into crisis have proved naive. Liquidity injections and spiking accumulation rates (which, conversely, used to go down in the 1990ies) tend to offset the impact of global demand contraction on the Chinese economy. As for the export sector, the recent crisis effectively filtered out its weakest players, the end result being the sanation of the Chinese economy.
To be continued