<B>The answer is China</B>

Rafael Pampillón. Professor. Instituto de Empresa

5 September 2005

Who in 2003 bumped France from fourth place in the world ranking of exporting countries? The answer is China, a country that is now positioned just behind the U.S.A., Germany and Japan in the ranking of world exporters.

What is behind the sharp increase in oil prices? The Chinese economy, whose dependence on oil to fuel its rapid growth has converted it into the world’s second-largest consumer of petroleum. Indeed, the last decade has witnessed the transformation of China, from a net exporter of oil into a net importer. What’s more, China has also become the world’s largest importer of steel and cement, as well as the largest consumer of copper, zinc, platinum, steel, iron and tin.

Raw material prices have been boosted by China’s economic growth, as well as by the world economic recovery. Who is stealing jobs from companies in Mexico and the United States? China, a country which produces at very low wage costs and is able to offer highly competitive goods and services on international markets. Add a relatively devalued exchange rate and China’s competitiveness in sectors such as toys, footwear and textiles is guaranteed. So far, unemployment in the United States has not reached worrying levels, but an upward tick in the future can’t be ruled out.

Besides competing on international markets, China has also become a driving force behind world economic growth as it sucks in goods from around the world. Thanks to soaring demand in China, exports from Europe and the U.S. are increasing at seemingly inexorable rates. Now the 2008 Olympic Games are expected to give rise to a burst of fresh investment in the country over the next five years.

What is behind the low inflation rate in developed countries? The answer is cheap Chinese products, which have a greater impact than raw materials on consumer price indices. And which country is financing the United States budget deficit through the purchase of treasury bonds? Yes, you got it… China. What’s more, it has become a world power in manufacturing, which represents 50% of its GDP, compared to less than 25% of GPD in Spain and the U.S.

[*D Thanks to soaring demand in China, exports from Europe and the U.S. are increasing at seemingly inexorable rates *]

What is the key to China’s success? Obviously not its Marxist ideology but rather the reforms implemented 25 years ago by Deng Xiaoping in an effort to take advantage of internal market strengths and encourage foreign investment and trade. Higher industrial production and increased exports were two of the most important achievements of the reform program. Thanks to these measures, GDP has grown at an annual average rate of 9%. It is important to note that the most densely populated country in the world--it represents one fifth of the planet’s population--also has the highest economic growth rate in the world.

But China has its problems too; mainly, a poor showing on the democratic front and a huge number of unprofitable and deeply indebted public companies, whose delicate financial situation is on the verge of causing the financial system to suspend payments. China holds the answer to many of the questions surrounding the future of the world economy. For example, its dollar reserves are second only to those of Japan. If the Central Bank of China decided in favour of reorganising its exchange reserves by buying euros and selling dollars, the euro would appreciate and the competitiveness of the European economy would initiate a downward slide. Finally, China, the largest and most promising emerging economy in the world, is poised to become the strongest economic power on the planet by 2040, with a larger GDP than the U.S.

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