A New China Emerges from the Old

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A New China Emerges from the Old

For years, we've heard how China is poised to become the world's leading economy. Based on the country's meteoric economic rise, this assumption is understandable.

Thirty-five years ago, when China changed course and began engaging in the world market, its economy was smaller than Italy's. In the brief period that followed, that underdeveloped economy grew to become the second-largest in the world.

But now, like most of the world, China's economic growth has stagnated, leading many to wonder what the future holds for this country that includes such a significant percentage of the world's population.

The third quarter was particularly troubling for China's economy, with annual growth slowing to 7.4 percent, the lowest it's been since the global financial panic began in early 2009. This drop contributed to making 2012 the most sluggish year economically since 1999.1

Bert Hofman, the World Bank's Chief Economist for East Asia and the Pacific, explained the roots of this slump when he stated, "Unlike the rest of the region, China is experiencing a double whammy — the growth slowdown is driven by weaker exports as well as slow domestic demand, in particular investment growth."2

Hofman added, "This is the slowest growth rate in the Asia Pacific region since 2001. It's even slower than at the peak of the financial crisis in 2009."

In light of this slowdown, and believing it could get worse and last longer than forecast by many analysts, the World Bank reduced its 2013 economic growth forecasts for the East Asia and Pacific region, cutting the numbers from 8.0 percent to 7.6.

And yet, there have been signs of improvement. Last October, China's trade surplus jumped to its largest in 45 months, fueled by export growth of over 11 percent, a five-month high; an acceleration in infrastructure investment; and factory output that also reached a five-month high.3

Also contributing to "guarded optimism" about the direction of the economy were data that showed a slight easing of inflation, bringing that metric to its slowest pace in nearly three years.

Despite these encouraging signs for China, many doubt that the Chinese model of exporting inexpensive manufactured goods and investing tens of billions in infrastructure will sustain the country's economy in the long run. This opinion is based on the view that although all nations face economic challenges that are unique to their geographies and cultures, China faces many high hurdles that are side-effects of its uniquely fast leap into a modern economy. They see an economic engine that is running out of stream because it is still counting on a cheap workforce, an undervalued currency, and artificially low interest rates...

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