Just like Vin Diesel in Fast 5, China has zoomed past Japan to become the world’s second largest economy. However, along with its number 2 rank, China is faced with a new set of challenges. Here are the top 2 roadblocks in China’s ride to become the largest economy in the world:
1. Trade Protectionism
China’s rise to power as one of the largest trading nations has been accompanied by increased tension with the European Union (EU) and the United States.
China exchange rate policy is what you would call a “pegged exchange rate.” This basically means that China matches the value of the yuan to the value of a single currency. China’s currency is pegged to the U.S. dollar. For example, if the dollar weakens, China also makes sure to weaken the yuan.
China does this to stabilize the value of the yuan and to make it easier for them to conduct international trade. Unfortunately, this also makes its exports almost always cheaper and more competitive than its Western counterparts.
Peter Mandelson, a former EU trade commissioner, once said in a speech that China’s trade policy was illogical, indefensible, and totally unacceptable. He even claimed that China was rigging its currency! In the U.S., Treasury Secretary Tim Geithner flat out called China a currency manipulator.
As long as there is tension between China and the West, China will be hard-pressed to find support from the U.S. to become the number one economic powerhouse in the world.
2. Environmental Destruction
Here are a couple of very interesting facts:
- China contains six of the ten most polluted cities in the world
- More than 75% of the river water in China’s urban areas is dangerous for human contact
- The economic cost of environmental degradation cost China around 8-12% of its GDP
The sad reality is that the cost of the environmental destruction caused by China’s industrialization process is far greater than the economic growth they are experiencing.
Unless the balance between economic growth and environmental degradation is restored, China’s growth will remain capped.
I believe this is an issue not only for China, but for the rest of the world as well.
To end, let me just say that China can’t simply crash through these roadblocks like how Vin Diesel did in Fast 5 and hope that they come out unscathed, undamaged, and unharmed. China needs to think things through and find a good solution so it could go around these challenges.
What do you think China should do? Are there any other roadblocks in China’s journey to number 1?