China Challenge 2010! Overcoming Obstacles to Greater Growth

With over $9 trillion lost in Western stock and housing markets since 2008, the global marketplace is in dire need of fresh customers.  While U.S. retail sales remain shaky, domestic consumption rates in China are driving the Asian superpower into a new economic paradigm, from the world’s exporter to the world’s consumer.  With a solid financial foundation in high savings and moderate consumption, Chinese consumers are gaining a new sense of economic independence and purchasing power.  This growing market is attractive to foreign investors and firms looking to get back on their feet and enter emerging markets. However, currency control, protectionist policies, and lack of intellectual property enforcement threaten trade relations and investor confidence in a sustainable recovery.
 
Although China’s economy has bounced back with more resilience than any other global power, thanks to a substantial financial stimulus package that set growth rates back on track at 8% in 2009, the sustainability of its rebound is still tepid. Low interest rates and loose lending from state owned banks have increased property prices and fuel concerns about asset bubbles. Currencies like the Brazilian real and the South Korean won have skyrocketed against the yuan (42% and 36% respectively), seriously eroding those countries’ competitiveness, while the Chinese have fixed the yuan to the dragging dollar, allowing it to rise a mere 21% since July 2008.  Foreign central banks fear that lax monetary policy is not sufficient to drive China’s rapidly growing economy. They claim that a stronger yuan would wean China from its dependence on exports while stimulating healthier growth.
President Obama’s most recent visit to Beijing reaffirmed the need for multi-polar cooperation to rebalance the volatile global economy. According to an article in the Wall Street Journal, more than three-quarters of the $400 billion in trade between China  and the U.S. travels East to West. Obama  pushed for more fair treatment of foreign firms entering China in addition to a  fairer currency  valuation. Since joining the WTO in 2001, China has been accused of unfair tariffs and protectionist measures to subsidize domestic goods and jobs. Blatant favoritism of Chinese firms, most recently in the music sharing industry, has created distrust with major trading partners.
China’s booming grey-market is another  sector getting under the skin of firms such as Apple and Research in Motion.  Grey-market manufacturers are churning out “Hi-Phones” and Blackberry knockoffs at an ever increasing rate, which are particularly successful in Africa and the Middle East. According to the Economist, illicit phones comprise a staggering 40% of Chinese firms’ production. Over 145 million will be sold in 2009. To compete with branded phones, grey-market firms have innovated, adding sophisticated devices to phones and developing complex underground distribution channels in developing markets.
Many analysts predict that China’s economy will pass America’s in size within 20 years.  In the long run, a strong yuan coupled with balanced trade and stronger regulatory infrastructure will benefit both China and the world.  Tighter monetary policy and structural reform should shift growth from investment and exports to consumption, further empowering consumers. Just how China will overcome these growing pains remains to be seen.