OBSERVER NEWS

China: From Investment to Consumption

M3367S-4504By IAN WEISSGERBER

Recently, The SAIS Observer sat down with Professor Paul Armstrong-Taylor, an Economics Professor at the Hopkins Nanjing Center to discuss China’s current economic situation.

Recently there have been reports that China’s economy has surpassed that of the United States. What do you say to that?

According to the World Bank, Chinese GDP measured using purchasing power parity exchange rates may have passed that of the United States. This result has been widely misinterpreted. The U.S. economy is still much larger in terms of its international influence.

If we use the purchasing power parity measure of an economy’s size, we are looking at the amount that could buy in that country. The market exchange rate-based measure, on the other hand, reflects the international economic power of an economy. If China wants to buy something in the United States (or anywhere else), it must exchange yuan for dollars at the exchange rate, not the purchasing power exchange rate. If we are looking at international power, we should use market exchange rates.

In the past 30 years, China has become an economic juggernaut. However, more recently it has experienced stagnation. With new reforms, and the world’s largest population, how do you see the economy in the future?

Xi Jinping and Li Keqiang are willing to sacrifice some short-term growth in order to ensure that long-term growth is sustainable. These reforms will involve the government relaxing its control of the market and allowing market forces to play a greater role.

For example, they have proposed to liberalize interest rates. This will shift income from borrowers (firms and government) to savers (households). This will reduce investment and increase consumption. Those who have benefited from China’s investment in the past will face reduced demand. Those who can satisfy China consumer demand in the future will benefit. Commodity exporters will suffer; producers of consumer products and services should benefit.

China’s rise has created many of global economic trends. As its economy changes, its influence will remain, but the trends will change.

In regards to relations with other nations, how does China’s economy influence its political status?

A lot of countries in the world today are caught between the United States and China. Many developing nations are increasingly reliant upon China for their economy, thus engaging in any dispute could be costly. On the other hand, however, these countries may not completely trust China, especially due to its political weight being thrown in territorial disputes. Unlike the Cold War, China and the United States (and most other countries) are closely linked by trade and investment. The hope is that these economic links will make conflict prohibitively costly. On the other hand, many analysts thought the same before the First World War.

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