China and the world

A changing economy makes the relationship much more complex

In terms of growth, the world's most important country is China. Even with its own slowing growth rate, it contributes 12 per cent of total global GDP and more than a quarter of global growth. Its role in determining global demand is thus critical, but its economy is changing.

China's rising middle-class and overseas consumption trends have global implications in many ways. Its citizens import foreign fashions, travel overseas and Chinese Super League teams routinely buy Europe's footballers on terms that Western clubs cannot match.

Over 25 years, China has gone from the 11th largest economy in nominal dollars to second - 60 per cent the size of the US. But in purchasing power parity, it is now the biggest.

Historically, China's global interactions centred on its industrial production: it accounted for a quarter of global manufacturing output last year, up from less than 7 per cent in 2000.

Some 20 per cent of New Zealand's exports go to China; 18 per cent of Brazil's. Chile's sales to China were less than 5 per cent of its exports in 2000, now they exceed 25 per cent. Greater trade-flows are increasing China's role in the growth rates of other countries.

But as China's economy develops, so will its trade. A shift in demand towards services and higher-value products such as pharmaceuticals could benefit Western economies including the UK, France and Switzerland besides India and the Philippines.

And China's own production is increasingly moving up the value chain, away from labour-intensive products such as toys and shoes.China knows it needs to differentiate its products through advances in technology, design or other attributes.

However, that move up the value chain creates opportunities for other emerging markets.African and Asian countries with lower manufacturing costs should benefit from a production shift away from China.

Changes in China affect other economies in many ways.For instance, Chinese purchases previously boosted Australia's commodities boom but the southward flow of tourists and students means China is now helping Australia rebalance its economy.

Last year, 120 million Chinese tourists went overseas and, to add to its long-haul routes, China Eastern Airlines recently placed a USD10 billion order for 35 wide-body aircraft with two western plane-makers.

And 'Hallyu,' the Korean cultural wave is washing over China, changing tastes for cosmetics, food and pop music. One Korean television drama was streamed more than 2.3 billion times by Chinese fans in April. The phenomenon has helped Korea's consumer economy recover after last year's outbreak of Middle East Respiratory Syndrome.

Meanwhile, capital-account liberalisation will boost direct investment by Chinese companies abroad and inward investment from overseas, as well as outward portfolio investment. China's companies are already making more overseas mergers and acquisitions.

All the world's roads now eventually lead to China but the links are multi-layered and complex. Whether they concern trade, capital flows, technology, tourism or the private sector, it is this deeper relationship with many different countries and industries that must now be understood, beyond statistics about copper, chemicals and iron ore.

Yet the paradox is that China remains a poor country, despite being the world's second-largest economy. This brings large trade and investment opportunities, but also challenges that require greater opening of both markets and minds.

Original post is here.