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The World May Face Trouble Due to China’s Demand Dilemma


Sep 5, 2023

Receive regular updates on the Chinese economy for free. You will receive a daily email containing the latest news on the Chinese economy. The G20 is considered the primary forum for the global economy and the biggest economic issue currently is the lack of demand in China. President Xi Jinping’s decision not to attend the summit in New Delhi, and instead sending Premier Li Qiang, highlights the limited options other countries will have if China relies on demand from the rest of the world to solve its economic challenges. In Xi’s absence, world leaders should contemplate how they would handle this scenario.

While economic weakness in China does not significantly impact other advanced economies due to China’s reliance on itself for manufacturing and limited dependence on imports, the concern is what would happen if China attempted to export its way to economic growth, as it did in the past. China’s current account surplus is already at 2% of its enormous economy, and if Beijing sought to increase it, especially through policies aimed at devaluing its currency, it would pose problems. However, the effectiveness of such policies, given the size of China’s economy, is questionable.

The diversion of demand to China could potentially disrupt the global economy. This could displace production in other countries if China’s goods become more competitive. Additionally, a current account surplus needs to be offset by capital flows, and excessive imbalances in the global economy have been problematic in the past. The rest of the G20 countries face limited options in addressing this issue, besides urging China to generate more demand domestically.

It may initially seem attractive for China to run a larger surplus, as it would alleviate the rise in living costs and benefit western consumers, but there should now be a greater international consensus against this. China’s economy has grown significantly, and countries like Japan and Germany, which have profited from exporting luxury cars and capital equipment to China, now face competition from China’s automobile exports. Most nations, except pure commodity exporters, have a stake in this due to their competition with China in export markets.

The lack of enforcement mechanisms and the inability to discipline countries with persistent surpluses is a fundamental flaw in the global economic system. Deep reforms and collaborative management of the world economy would necessitate the cooperation of the US and China, which currently seems remote. At the G20, world leaders can signal their objection to policies that stabilize domestic economies at the expense of other countries, not just China.

By Editor

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