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Should China retrench backward into socialism, or keep moving forward into the unchartered terrain of deeper reform and greater opening-up? At that critical juncture, Deng Xiaoping saved China and emancipated the Chinese nation with his bold vision, courage and wisdom. According to Deng, it was not only folly but also great waste or even destruction to debate the inferiority or superiority of socialism versus capitalism in the abstract.

The great task was not to split ideological hairs. China had to refuse to be bogged down by ideological labeling and ossification. The real challenge for China was to promote development and increase productivity by whatever means and to create jobs and improve the living standards of the people. To make people rich was glorious. For this purpose, whatever worked. Thus the Chinese nation unlocked itself from a huge ideological suffocation and embarked upon an unprecedented transformation, unparalleled in scale or scope anywhere in the world.

China has already become the second largest economy in the world. Rather than being complacent, China will continue to innovate and develop. International economic cooperation has brought about this defining moment in the history of the multilateral trading system. As a result of the negotiations, China has agreed to undertake a series of important commitments to open and liberalize its regime in order to better integrate in the world economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules. In China was the 7th leading exporter and 8th largest importer of merchandise trade - exports: For commercial services China was the 12th leading exporter and the 10th largest importer - exports: The bubble started to deflate in late when housing prices began to fall, following policies responding to complaints that members of the middle-class were unable to afford homes in large cities.

The deflation of the property bubble is seen as one of the primary causes for China's declining economic growth in The phenomenon had seen average housing prices in the country triple from to ,possibly driven by both government policies and Chinese cultural attitudes. High price-to- income and price-to-rent ratios for property and the high number of unoccupied residential and commercial units have been cited as evidence of a bubble.

Critics of the bubble theory point to China's relatively conservative mortgage lending standards and trends of increasing urbanization and rising incomes as proof that property prices are justified. There have been many factors that may have led to rising housing prices. Possible contributors include low interest rates and increased bank lending, beginning in under Wen Jiabao which allowed cheap credit for the construction and purchase of property while making competing debt investments less appealing. Limited access to foreign investments for Chinese citizens increased the appeal of domestic investments such as property.

Chinese citizens also faced cultural pressures encouraging home ownership, particularly for men seeking a wife. Responding to the — global financial crisis, the spending from the China economic stimulus program may have found its way into real estate, contributing to the bubble.

Although China occupies a unique niche in the world's political economy--its vast populace and large physical size alone mark it as a powerful global presence--it is still possible to look at the Chinese experience and draw some general lessons for other developing countries. That combination can unleash a productivity boom that will propel aggregate growth.

By encouraging the growth of rural enterprises and not focusing exclusively on the urban industrial sector, China has successfully moved millions of workers off farms and into factories without creating an urban crisis. Finally, China's open-door policy has spurred foreign direct investment in the country, creating still more jobs and linking the Chinese economy with international markets.

There is a balance to be struck here between being indiscriminately inclusive and being objectionably selective. One way of achieving this balance is to see how much additional or independent information an attribute adds to those that are already included. All the attributes should be amenable to relatively uncontroversial measurement, and the data for these variables should be easily available, especially going back in time. Since the aim is to look into the future, there should be something beyond an ad hoc basis for projecting the variables over the 20 year time horizon. The greater the need to predict the future policy behavior, less confidence the projections will inspire.

There should be some reasonable and justifiable basis for weighting the variables and computing an index. There should be some way of validating the whole business of quantification and index building. Different types of resources: Overall resources: at the disposable of a country or government is measured by GDP. Military strength: example Japan benefitted from security umbrellas provided by US as during the negotiation of the Plaza Accord in the s that led to an appreciation of the yen and depreciation of the dollar. Similarly, US support for Russia after the collapse of communism was influenced by Russian Possession of Nuclear weapons.

Fiscal strength: it is the resources that govt. It is the ability of govt. Trade: Importing and the size of imports confer power because they determine how much leverage a country can get from offering or denying markets access to goods and services from other countries. Example: china used export controls to deny Japan access to important rare earth minerals, Russia uses gas exports as an instrument of foreign policy in its relations with neighbors, US has extensive restrictions on exports of high- technology products and military hardware to countries that are deemed to be potential enemies or security threats.

But export creates vulnerabilities because of their dependence on other countries actions. In financial crisis of , china found that its exports —led growth strategy was rendered vulnerable to downturns in its markets abroad, creating severe dislocations for its own workers as exports contracted sharply. Trade is a double edged sword, creating power and dependence, strength and vulnerability, at the same time. Trade vulnerability can arise from having excessively concentrated sources of supply , especially of essential goods such as oil, and from having ones exports too concentrated in terms of markets.

P a g e 30 External financial relations: debtors and creditors Countries that run current account surpluses acquire claims on foreign goods and services and are net creditors to the world. The more famous example of vulnerability as a result of dependence on foreign capital and, conversely, power as a result of being a supplier of foreign capital — was the Suez Canal crisis, with the United States the creditor dictating terms to the debtor the United kingdom. This dependence was also evident- well before the crisis- in the agreement signed between the United States and the United Kingdom as a part of the negotiations leading up to the creation of the International Monetary Fund IMF.

After receiving the overall financial package, the United Kingdom was required to ensure that its currency was convertible and did not discriminate against the US exports and to eliminate discriminatory quantitative import restrictions. The United States has been a net debtor to the rest of the world since the s, but institutionally-or more specifically by ensuring early on that it had a decisive say in IMF decision-making- it has de facto remained a net creditor, able to press its view and ply its influence.


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Partly by virtue of its reserve currency status, the Federal Reserve could essentially use its balance sheet to help the world. Countries may be able to spend more on their militaries than might be warranted by the economic strength, but the discrepancy eventually tends to correct itself.

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Military strength is difficult to project. Military expenditures are key policies choices that government will make. Predicting the future behavior of government is a difficult and fraught exercise. Correlation between the government deficits and debt and economic dominance is not clear. Running large fiscal deficit was a sign of strength rather than weakness.

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Example: the United States ran up massive fiscal deficits to finance World War II, and that episode reflected, perhaps even caused, economic dominance rather than decline. Conversely, the decline of British power after World War II was associated with fiscal surpluses and declining debt. Dominance is relative, so one needs measures that are comparable across countries.

But assessing relative fiscal strength across country is not easy. One can look at government indebtedness as a share of GDP , but cross-country comparisons are fraught with difficulties. Having a reserve currency is more a proximate than a fundamental determinant. Reserve currency status is itself an outcome and in turn determined by GDP, trade, and external financial strength.

Stock measures such as net claims may not be worth much unless a country has power and other means to compel foreigners to honor those claims. Economically dominant countries tend to have reserve currencies and hence have less need and incentive for holding reserves. Moreover, a country holding foreign reserves for example, China today is vulnerable to seeing their value erode through policy actions of the reserve currency issuing country.

Measuring the Three Determinants All measures for a country with regard to the three determinants i. This captures the essential zero-sum nature of power and dominance. We can use purchasing power parity PPP to compare the standard of living. As long as power and its use require economic resources that are part domestic and part tradable, a combination of market-based and PPP-based exchange rate measures is the right way to value these resources. A problem with measuring trade over time is that the measure might be distorted because of the increasing fragmentation of the value added chain through supply chains and outsourcing which could lead to overstatement of trade over time and hence overstating dominance from trade.

External Financial Strength Having a current account surplus is a source of power because adjustment is so painful to the deficit countries if the flow is cut-off. For a given time period, the cumulative current account balance of a country is measured. The cumulative net flow of capital for the world as a whole is calculated by adding up the surpluses for all countries running such surpluses.

The betas are equal weights accorded to each of the determinants of power, and these weights add up to one. A minority dissenting opinion questions the causal relationship described by this theory. The targeted countries responded with a wide variety of new, and mostly permanent, initiatives to contain their further dependency. The "oil price shock", along with the — stock market crash, has been regarded as the first event since the Great Depression to have a persistent economic effect.

The agreement came into force on January 1, The agreement opened the door for open trade, ending tariffs on various goods and services, and implementing equality between Canada, USA, and Mexico. NAFTA has allowed agricultural goods such as eggs, corn, and meats to be tariff-free. This allowed corporations to trade freely and import and export various goods on a North American scale.

P a g e 17 Dot-com Bubble The dot-com bubble also referred to as the dot-com boom, the Internet bubble and the Information Technology Bubble was a historic speculative bubble covering roughly — during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the Internet sector and related fields. While the latter part was a boom and bust cycle, the Internet boom is sometimes meant to refer to the steady commercial growth of the Internet with the advent of the World Wide Web, as exemplified by the first release of the Mosaic web browser in , and continuing through the s.

The period was marked by the founding and, in many cases, spectacular failure of a group of new Internet-based companies commonly referred to as dot-coms. The collapse of the bubble took place during Some companies, such as Pets. Others lost a large portion of their market capitalization but remained stable and profitable, e. Some later recovered and surpassed their dot-com-bubble peaks, e. P a g e 18 Mortgage Crisis of The U. These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products. Further, U.

After U. As adjustable-rate mortgages began to reset at higher interest rates causing higher monthly payments , mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending. Concerns about the soundness of U.

President Xi Sharpens China’s Bid for Superpower Status – Brink – The Edge of Risk

P a g e 20 By late s, Japan achieved an astoundingly rapid and complete economic recovery. Nikkei average had risen almost fourfold in the 5 years prior to Automobile an Electronic companies experienced phenomenal growth in the s. The Japanese Asset Price Bubble was an economic bubble in Japan from to in which the real estate and stock prices were highly inflated.

Formation of the Japanese Asset Price Bubble: High savings rates increased the amount of money with the banks which lead to the increase in the loans and credits offered by the banks to the local companies which eventually increased the Trade surpluses of Japan. The appreciation of Yen made the financial assets very lucrative in Japan which eventually leads to the formation of the Japanese Asset Price Bubble. P a g e 22 So much money readily available for Investment combined with financial deregulation, overconfidence and euphoria about the economic prospects made the bubble unsustainable.

Abnormalities with the Japanese economic system fueled a massive wave of speculation by Japanese companies, banks and securities companies. Combination of exceptionally high land values and exceptionally low rates of interest resulted in heightened liquidity in the markets of Japan. All of this made the Japanese Asset Price Bubble burst! China can be the next superpower in the world.

Economic history of China (1949–present)

The economy was heavily disrupted by the war against Japan and the Chinese Civil War from to , after which the victorious Communists installed a planned economy. Afterwards, the economy largely stagnated and was disrupted by the Great Leap Forward famine which killed between 30 and 40 million people, and the purges of the Cultural Revolution further disrupted the economy. From its founding in until late , the People's Republic of China was a Soviet-style centrally planned economy, without private businesses or capitalism.

To propel the country towards a modern, industrialized communist society, Mao Zedong instituted the Great Leap Forward in the early s, although this had decidedly mixed economic results. Following Mao's death in and the consequent end of the Cultural Revolution, Deng Xiaoping and the new Chinese leadership began to reform the economy and move towards a more market-oriented mixed economy under one-party rule. Agricultural collectivization was dismantled and farmlands were privatized to increase productivity. Modern-day China is mainly characterized as having a market economy based on private property ownership, and is one of the leading examples of state capitalism.

Under the post-Mao market reforms, a wide variety of small-scale private enterprises were encouraged, while the government relaxed price controls and promoted foreign investment. Foreign trade was focused upon as a major vehicle of growth, leading to the creation of Special Economic Zones SEZs , first in Shenzhen and then in other Chinese cities. Inefficient state- owned enterprises SOEs were restructured by introducing western-style management systems, with unprofitable ones being closed outright, resulting in massive job losses.

The government of the People's Republic of China gives SEZs special more free market-oriented economic policies and flexible governmental measures. This allows SEZs to utilize an economic management system that is especially conducive to doing business that does not exist in the rest of mainland China.

After Economic reforms introducing capitalist market principles began in and were carried out in two stages: The first stage, in the late s and early s, involved the decollectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start up businesses. However, most industry remained state-owned.

The private sector grew remarkably, accounting for as much as 70 percent of China GDP by China's economic growth since the reform has been very rapid, exceeding the East Asian Tigers. Since economic liberalization began in , China's investment- and export-led economy has grown almost a hundredfold and is the fastest-growing major economy in the world. Between and , China's economic growth rate was equivalent to all of the G7 countries' growth combined. China's success has been primarily due to: Manufacturing as a low-cost producer Cheap labor Good infrastructure Relatively high productivity Favorable government policy Undervalued exchange rate Sometimes blamed for China's huge trade surplus Deng Xiaoping's inspection tour to South China's Wuchang, Shenzhen, Zhuhai, and Shanghai in Twenty years ago, with the total collapse of the former Soviet Union and the socialist bloc in East Europe, as well as the euphoric claims by some people in the West about the end of history, China was at a crucial historic crossroads.

How China became a superpower: 40 years of economic reform - DW News

Should China retrench backward into socialism, or keep moving forward into the unchartered terrain of deeper reform and greater opening-up? At that critical juncture, Deng Xiaoping saved China and emancipated the Chinese nation with his bold vision, courage and wisdom. According to Deng, it was not only folly but also great waste or even destruction to debate the inferiority or superiority of socialism versus capitalism in the abstract. The great task was not to split ideological hairs. China had to refuse to be bogged down by ideological labeling and ossification.

The real challenge for China was to promote development and increase productivity by whatever means and to create jobs and improve the living standards of the people. To make people rich was glorious. For this purpose, whatever worked. Thus the Chinese nation unlocked itself from a huge ideological suffocation and embarked upon an unprecedented transformation, unparalleled in scale or scope anywhere in the world. China has already become the second largest economy in the world.

Rather than being complacent, China will continue to innovate and develop. International economic cooperation has brought about this defining moment in the history of the multilateral trading system. As a result of the negotiations, China has agreed to undertake a series of important commitments to open and liberalize its regime in order to better integrate in the world economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules. In China was the 7th leading exporter and 8th largest importer of merchandise trade - exports: For commercial services China was the 12th leading exporter and the 10th largest importer - exports: The bubble started to deflate in late when housing prices began to fall, following policies responding to complaints that members of the middle-class were unable to afford homes in large cities.

The deflation of the property bubble is seen as one of the primary causes for China's declining economic growth in The phenomenon had seen average housing prices in the country triple from to ,possibly driven by both government policies and Chinese cultural attitudes. High price-to- income and price-to-rent ratios for property and the high number of unoccupied residential and commercial units have been cited as evidence of a bubble. Critics of the bubble theory point to China's relatively conservative mortgage lending standards and trends of increasing urbanization and rising incomes as proof that property prices are justified.

There have been many factors that may have led to rising housing prices. Possible contributors include low interest rates and increased bank lending, beginning in under Wen Jiabao which allowed cheap credit for the construction and purchase of property while making competing debt investments less appealing. Limited access to foreign investments for Chinese citizens increased the appeal of domestic investments such as property.

Chinese citizens also faced cultural pressures encouraging home ownership, particularly for men seeking a wife. Responding to the — global financial crisis, the spending from the China economic stimulus program may have found its way into real estate, contributing to the bubble. Although China occupies a unique niche in the world's political economy--its vast populace and large physical size alone mark it as a powerful global presence--it is still possible to look at the Chinese experience and draw some general lessons for other developing countries.

The third event was China's entry into the World Trade Organization in , which greatly increased the country's potential for international trade. Joining the WTO opened up the world economy for China's exports, and allowed for more foreign investment into China. These three key events have left surging GDP growth in their wake. Supported by a favorable framework, China's growth has been strongly propelled by large quantities of input factors, one of the main reasons that China has been dominating competition in low-value added manufacturing.

The key inputs are labor and capital. Rapid growth has been driven in large part by the large influx of labor from rural agricultural areas to urban manufacturing jobs. The migrant worker population has supplied factories with a steady supply of low-wage labor that has given the country an incredible competitive advantage. Additionally, significant fixed asset investment over the last 30 years has provided China with the requisite capital and infrastructure to utilize the pool of low-cost labor. A lot of foreign direct investment in the country provided not only additional physical capital but, more importantly, technology transfer and managerial know-how that has been felt throughout the economy.

With a seemingly endless supply of low-wage labor, and the infrastructure to back it up, China quickly rose to become the world's largest manufacturer. One of the other factors driving growth is the intense market competition. Before the reforms, all the businesses in China were State owned; as such, there was no open competition, and incentives to improve efficiency were limited. As the process of reform began and China's economy shifted toward more of a market economy, opportunities were afforded to private entrepreneurs that gave great incentives to maximize efficiency, and consequently the level of competition skyrocketed.

In State-owned enterprises dominated, but by non State-owned entities accounted for over half of China's GDP as well as most urban employment; this transition was one of the major factors that fueled growth over these 30 years. What sets China apart from most other countries is the structure of its provinces. With a degree of autonomy, individual provinces often specialize in various economic sectors.

Province specialization leads to comparative advantages, leading to stronger national growth overall. As each province is responsible for its own economic statistics, and records are made of each province's contribution to national growth, there is aggressive competition among the provinces. This has led to many being strongly pro-business and a concerted effort to attract investment.

It is clear that China is still on the rise. Despite difficult global macroeconomic conditions, it is widely expected to maintain growth rate of about 7 percent in the near future, even as developed countries flounder at levels near stagnation. The author is chief economist at Haitong International Research.

The views do not necessarily reflect those of China Daily. Whether China is ready or not, it is rising toward superpower status.