China and Europe

 Discussion at this roundtable touched upon a series of strategic hot spots for China’s future and for its role in a global world. Many of the issues considered are the focus of the upcoming issue of Aspenia (n. 41, in Italian, due out June 10). Here follows an excerpt from an article by Professor Fu Jun: Given the high degree of uncertainty, vigilance and flexibility is required, as echoed by Chinese Premier Wen Jiabao: “China is a developing country with a population of 1.3 billion, which demands us to keep the economy at an appropriate growth rate to confront the employment pressures…We shall keep a close eye on economic changes and trends, enact timely and flexible measures, and have a good command of the pace, direction and intensity of macro-control measures to ensure a steady and fast economic development, employment of about 10 million people.” The current pattern of China’s growth presents challenges for its economy. The country’s export-driven and fixed investment development model means more factories to produce more goods and much of them for the world markets. Economically, this has left China quite vulnerable to growth slowdowns elsewhere in the world, and particularly in the US. Politically, environmental concerns and trade protectionism have already arisen, posing additional challenges to Chinese policy-makers. As growth in China is heavily linked to exports, the slowdown in the global economy is bound to affect China’s economy. The question is to what extent? Although Chinese financial institutions have had low direct exposure to the sub-prime financial crisis in the US, due much to its capital market restrictions and controls, the main impact of the international financial turmoil on China could come via the real economy especially in the tradable sectors. Weaker growth prospects in the US mean lower interest rates – as indicated by the rapid reduction in the US Fed interest rates in recent months – and a weaker US dollar against other major currencies, which would depress US appetite for imports. Even worse, a bursting of the US property bubble in conjunction with the sub-prime crisis-related deleveraging and a downshift in labor income could put an end to the spending binge for credit-driven US consumers. If this scenario happens, then the Chinese economy will take a hit. Indeed, this scenario must have loomed large on the Chinese Premier’s mind when he said that 2008 would be “a most difficult year,” and that “there are uncertainties in international circumstances…”