A good article from The Globalist Dot Com where I'm one of the subscriber.

Nik
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Acknowledging China By Jianxiong Zhang | Thursday, February 28, 2008

China's economic boom of the last three decades has raised concerns about resource scarcity, pollution and trade. While China's development has made it one of the world's largest economies, hundreds of millions still live in poverty. Jianxiong Zhang argues that the United States and the European Union must acknowledge China's efforts to address climate change and trade disputes.

In the context of globalization, the economy increasingly influences international relations. This is because strengthening interdependence and intensifying frictions between economies tend to go hand-in-hand. As a result, it is no wonder China is worried about the impacts on its relations with the United States and the European Union.

The scale of China's growth

It is well-known that China's economy has been growing at an average rate over 9% for 27 years now. And, in the past five years, its annual growth rate exceeded 10%.

In 2006, China’s GDP reached $2.6 trillion (in purchasing power terms), or 5% of the world total — ranking fourth in the world.

Growth and poverty

China’s development is as an evolutionary stage, rather than an obstacle to its relations with the United States and European Union.

China has reached the top ranks of economies in the world by GDP — but it still lags behind 109 other countries in terms of per capita income.

China needs to further develop, so as to improve the living standards of its citizens, allowing them to enjoy a life comparable to that in medium-developed countries.

This is their right — and indeed one of their fundamental human rights.

Supporting the world economy

The continual growth in China makes significant contributions to the world economy. Firstly, China’s economy contributed 13.8% of the global GDP growth during the 2003-2005 period.

The rate is second only to that of the United States. That is to say, with China’s continued growth, the world economy will not substantially slide down even if the U.S. economy falls into recession.

Benefits from China

China needs to further develop, so as to improve the living standards of its citizens. This is their right — and indeed one of their fundamental human rights.

Second, cheap goods exported from China are helpful to prevent inflation in its trading partners. Third, the fruits of economic growth in China are shared by industrialized countries in general — and in the United States and the European Union in particular.

They receive a great deal of profits from their place in the international division of labor, and gain significant returns from their financial services, foreign direct investment and patent income from China.

For example, about 20% of revenues from each mobile phone, 30% from each computer and 30-40% from numerically controlled machine tools made in China go to investors or patent owners in the United States, the European Union or other countries.

Concerns from abroad

Kind-hearted people in the rest of the world are happy to see and hail the economic progress in China, for it helps millions of people there escape from poverty. Thus, it brings new impetus to economic growth globally.

However, the United States and Europe are very concerned about the consequences of China’s development. Apart from positive expectations, they wonder what negative impacts China’s development will have on them.

Managing growth

Kind-hearted people in the rest of the world hail the economic progress in China, for it helps millions of people there escape from poverty.

For instance, they wonder whether China will compete for natural resources, energy and markets with them

— and to what extent China’s development will lead to pollution and climate change. A more extreme observation even views China’s development as a “threat.”

As regards climate change, it should be noted that Beijing has already set about tackling the problem.

The Chinese government pursues a policy of “scientific development” and carries out programs to build China into a resource-conserving society, which contain a series of measures to save resources and energy.

Resources in historical perspective

From 1990 to 2005, the energy consumption per thousand dollars of GDP was cut from 2.19 to 1.17 tons of coal equivalent, with an annual reduction rate of 4.1%. This figure, however, as well as greenhouse gases emissions per unit of GDP in China, is still higher than those in the United States and the European Union.

This is largely because the United States and the European Union have been in the post-industrialized stage (where more than 70% of GDP is contributed by service sectors), while China is still in the industrializing stage (where almost half of GDP comes from the industrial sector). This can be changed only by further development — and the change is under way at an accelerating pace.

Tackling climate change

Between close trading partners, disputes are a normal phenomenon. This should not be a factor to undermine relations between them.

The Chinese government set the targets of bringing down energy consumption per unit of GDP by 20%, cutting the total discharge of major pollutants by 10% and increasing forest cover from 18.2% to 20% between the end of 2005 and 2010.

The National Program on Tackling Climate Change released in May 2007 formulates that, by 2010, China will cut CO2 emissions by one billion tons through improving technologies and replacing fossil fuels with renewable energies.

If international cooperation in developing greenhouse gas zero-discharge technologies can be accelerated, the impacts of China’s development on climate change will be further minimized.

The rights of the poor

As for the equitable distribution of energy, as well as natural resources and markets, this matter requires bilateral or multilateral consultations. Such consultations must be carried out on an equal basis.

In this process, two issues should be considered. One is the development right of poor countries. There are quite a few countries in the world where people live a life far below the living standards of industrialized countries.

A sense of equity

If international cooperation in developing greenhouse gas zero-discharge technologies can be accelerated, the impacts of China’s development on climate change will be further minimized.

When distributing the world's resources, rich countries should give more considerations to the interests and rights of poor countries. Up to now, the per capita income in China is just equal to 4.5% of that in the United States, 5% of that Japan, 5.8% of that in the eurozone and 10% of that in South Korea.

There are still 135 million people in China who live on less than $1 per day. There are 750 million such people in the world, of which China accounts for 18%.

The other issue is the principle of equality. According to the World Bank, the 2000 per capita consumption of energy was 3.8 tons of oil in the euro zone, 8.2 tons in the United States — while just 0.9 ton in China. The per capita consumption of energy in the United States is nine times that in China.

Measuring China's growth

At the same time, the per capita rate of CO2 emissions in China was two tons, compared with eight tons in the eurozone and 21 tons in the United States. In 2004, the per capita CO2 emissions in China increased to four tons.

This figure, however, was only 87% of the world average — and 33% of the OECD average.

Accepting disputes, improving relations

Along with China’s development, the trade disputes between it and the United States as well as the European Union are on the rise. Between close trading partners, disputes are a normal phenomenon. This should not undermine relations between them.

The economic structure of China can be changed only by further development — this is happening at an accelerating pace.

Trade disputes occur between the United States and the European Union, the United States and Japan, as well as the European Union and Japan. Since its inception, the WTO dispute settlement mechanism has been mostly used to deal with disputes between the United States and the European Union. The disputes, however, have never undermined the bilateral relationship.

In short, the contributions of China’s development are a net plus — even in light of its negative influences on the rest of the world. The negative effects brought about by development are controllable.

China’s development should be taken as an evolutionary process, rather than an obstacle to its relations with the United States and European Union.
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Here's something better from China Daily

China is not decoupling from US Economy
(Agencies)
Updated: 2008-01-21 10:14

BEIJING - China's central bank on Sunday poured cold water on the idea that the country's economy can decouple from the United States.

China's exports will be badly hit if US consumption weakens, Zhang Tao, deputy head of the international department of the People's Bank of China, told a financial forum.

Figures due this week are expected to show that China's gross domestic product grew more than 11 percent in the fourth quarter of 2007 from a year earlier, despite a deepening US credit crunch.

But Zhang said he saw mounting risks to US consumer demand. He noted that retail sales unexpectedly fell 0.4 percent in December, while property prices were falling and rising petrol prices were crimping disposable incomes.

"If US consumption really comes down, that's bad news for us," Zhang said. "That will have a pretty severe impact on our exports."

Wang Jian, head of the China Society of Macroeconomics, agreed that China's growing trade with Europe was unlikely to insulate it from a drop in exports to the United States.

If US demand weakened, Europe would export less to America and, in turn, would buy less from China, Wang said.

"Global demand is ultimately driven by the United States," he said.

More US interest rate cuts or a further fall in the dollar in response to a weakening economy would have an impact on Chinese monetary policy, Zhang said without elaborating.

He said the subprime crisis would not divert China from the path of financial innovation.

"It will not change our general direction. However, it serves as a warning that we need to pay attention to risk controls and launch new businesses in a steady, orderly way," he said.

Dai Genyou, director of the central bank's credit bureau department, said higher Chinese interest rates would have little impact on the ability of companies to service their debts. Nor would they derail corporate investment plans, Dai said.

nikzafri wrote:

I'm not really worried about what this news is telling us - but I'm 'a bit' concerned on the USD performance - read the news about USD currency - not conventional economics. Why am I worried? Read my original post here. If something is not done on USD current performance, then other currencies will be effected, when others are effected, then the pricing of everything will be effected, when pricing is effected, then economy will somehow be effected and of course all of us will feel it. Hedging can be one of the cause and the mortgage crisis may also become another - when lenders want to play too safe and not taking any risk.

nikzafri wrote:

Ask a forex trader (those who trade using USD) or a banker (esp. international banks) or local company linked (investment wise) to the US, they'll tell you how this subprime mortgage crisis effects the stock markets all over the world! It would start with the USD value getting hurt due to the too much dependance on subprime sector and housing market. The USD will start declining further as such as the lenders starting to charge higher and more borrowers couldn't afford to pay the loans and risk facing legal charges even the lenders promised refinancing (be careful, you could end up in more trouble if you refinance esp. Predatory Lenders)

nikzafri wrote:

Yes, it doesn't (the relationship between Malaysia stock market performance and the US economy) - because stock prices are a determinant of several factors operating on a given day - it's still about supply and demand. Thus it is technically wrong to assume it's due to one factor that is - concerns over US subprime market. So, we're quite clear that the market current underperformance has; in principle; nothing to do directly with sub-prime mortgate crisis in the United States. But why it is still effected? Why the concerns? Coincidence? No..it can't be as the WORLD stock markets are encountering the same thing.

It gets better....

The Star Business - 10/12/07 - Monday

US dollar woes far from over

IN PERSPECTIVE
By BALJEET GREWAL

CONSIDER this – 2000 years ago, Rome was running a trade shortfall equivalent to 3% of its total economy, one of the many factors that led to the empire’s eventual downfall.

Fifty years ago, Brazil had a massive trade deficit, which were critical to its decline – the currency was battered over and over again.

Eight years ago, the tiger economies of Asia were plunged into a currency crisis, due to big domestic and over-reliance on foreign capital.

Today, international bodies assert that if a country’s trade deficit exceeds 4.5% of its gross deficit product (GDP), it’s a sign of real and present economic danger.

And yet the US economy continues to flaunt history and economics. At 6.4% of GDP (US$58.9bil), US trade deficits are perilous and significantly exceed those of Rome, Brazil or any Asian country one decade ago.

With the recent decline of the US dollar, there are good reasons to expect its slide to continue. Weak economic numbers triggered the fall of the greenback against slower housing starts, sluggish durable goods orders and lethargic consumer confidence – all point to a correction in the economy.

Compounding this is the US’ current account and budget deficit (3.5% of GDP) as well as the narrowing interest rate differential between the US and regional Asian countries. The impact of the subprime market and the widespread repercussions on consumer and corporate consumption exacerbates the dollar woes. All these factors combined offer the possibility of a prolonged economic malaise which continues to weigh down the dollar.

On the contrary, improved economic fundamentals in Asia (reduced external debt and budget deficits, higher international reserves, potential sovereign ratings upgrades and sizeable portfolio capital flows into Asia) have further supported regional currencies.

Further appreciation is on the cards, driven by dwindling US macro dynamics and slower growth expectations. Year-to-date 2006, the Malaysian ringgit has appreciated 5.52% against the greenback, the Singapore dollar at 5.97% and the Thai baht at 16.96%. More telling will be a likely renminbi appreciation fuelling regional currencies given China’s imminent economic reforms and move towards a flexible mechanism. Increasingly, the fortunes of economies in the region are being lifted, driven in many cases by demand from China.

While a weak dollar has seen currencies rally against a weary US economy, a significant correction in US macro data and serious negatives from a bourgeoning current account deficit may flip dynamics if left unchecked. The largest threat globally remains an unruly adjustment of the US dollar which could send regional markets into a downward spiral premised on a sell off in US dollar assets. The tumbling dollar will not only halt export growth but also see a flight away from capital markets. The US is still the single largest trading partner of most East Asian economies, and the Achilles heel of emerging Asia.

To offset this, East Asian countries will need to ensure that their currencies appreciate in unison and do not fluctuate sharply in value relative to one another given the weightage of trade. East Asian economies can withstand about 20% decline in the trade-weighted value of the dollar provided their currencies appreciate together – consensus show that the US dollar will need to decline by 30% in trade weightage terms for trade deficit to look palatable.

Collectively, Asian central banks hold about US$3.2 trillion in foreign exchange reserves, most of it in dollars, and their large purchases of US dollar leading to 2006 have played a crucial role in curtailing the dollar's decline. If the US dollar is certain to fall further, central banks will sell dollar reserves or switch into other reserve currencies, which will exacerbate the dollar’s fall.

On the contrary, if Asian economies try to prevent their currencies from rising against the dollar to preserve export competitiveness, then the result could be broadbased weakness in Asian currencies and a rapid accumulation of currency reserves. Delicate balancing of foreign exchange reserves in this instance is crucial, especially given the trade impact; hence a communal appreciation will thwart any potential regional imbalance.

So, does a falling US dollar spell disaster for Asia? Not necessarily. Asian economies today are characterised by current account surpluses, large foreign exchange reserves and high rates of domestic savings. Equity markets across the region have been breaching all-time highs, reflecting the underlying strength of economies across the region and the perception that Asian stocks represent the best growth prospects at reasonable risk premium.

Thanks in part to the de-linking of Asia's capital markets from the US (more visible in the bond market), and a greater reliance in intra-regional trade (particularly with China), Asian markets seem well-placed to withstand the slowdown in the US that is expected in 2007.

These improved economic fundamentals will serve the region well over the next few years as the global economy slows and investors become more risk-averse. Nevertheless, the dip in Asian capital markets and a slide in Asian currencies against the US dollar in August this year, from the fallout of the subprime crisis serve as a reminder that the region is not immune to a change in global investor sentiment.

Meanwhile, positive overtures from an appreciating ringgit will continue to buoy domestic markets. The ringgit surged to its highest level post de-pegging, closing at 3.3177 (Nov 9) to the US dollar in line with strengthening regional currencies. The broadbased impact from a stronger ringgit is positive in general; especially in sectors which derive ringgit revenue with USD denominated costs.

Note: The author is group chief economist at Kuwait Finance House, Malaysia (KFH). KFH is one of the largest Islamic banks in the world and the first Islamic Bank with an Economic & Investment Research team.

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Since the author said "Not necessarily", this may also serves to mean as 'depends'.

Here are my personal hypotheses :

Despite it is understandable that trade surpluses could be the solution for future economic growth i.e. by means of amending policies not to be overdependent on foreign trade (only recently done), it may only work if country like US decide to run the corresponding trade deficit.

I may be wrong, but what if US decides to reduce the deficit?

Will it not create some 'not so nice' repercussions?

I'm not really being devil advocate here, but the gap of surpluses and deficits are not getting any smaller as we speak and it is foreseeable that the next issue will be misalignments in USD adjustment and definitely some 'not so nice' impact on global growth.

Of course, I'm neither suggesting that we should be adjusting exchange rates in Asian surplus counter nor pushing down demand and growth in deficit countries but rather I was kinda HOPING that Asian should assume a much bigger function in expanding their domestic demands and head towards becoming the catalyst to global growth (as soon as possible)

I am also yet to see two things : (anyone, please correct, I might have missed it)

a) EU coming in although much have been said by them and

b) adjustments on worldwide macroeconomic policies

When we deal with global financial management, we need a state-of-the art multilateral approaches to ensure a more predictable trading environment.

In global economy, every nation should not be left behind (or be put in the dark wondering what would be the future or what's next?) and they all deserve a more fair/equal treatment. IMF and UNCTAD should play more transparent roles rather than be seen as 'being used' to determine monetary policies and exchange rates.

The whole world is on the way towards interdependency, nobody should be ignored. Asia should no longer limit itself by merely quoting China as a benchmark of Asian or world growth, but other Asian nations as well.