What are the Pros & Cons of China being granted the ‘Market Economy’ status in 2016?

Image via © European Union 2014 – European Parliament. EP President Martin Schulz welcomes Xi Jinping, President of the People’s Republic of China in the European Parliament in Brussels on the 31/03/2014

China’s economic Then & Now

By peeling back to history, we know that since the 1980’s China’s economic system has been associated with being a ‘socialist market economy’. However, there has always been some form of denial by the Communist Party. The party rarely admits openly to the outside world that capitalists still run strong and deep into their way of life as well as the way they do business. The whole gameplay in today’s global economy with China’s presence is largely rooted to geopolitics. In saying that, the problem with China could be presented as follows;

China’s challenges

Firstly, despite China’s market slowdown it is still an export-oriented economy which puts itself in a position of dependency. The thing is, even if China is known to have one of the largest currency reserves in the world or possessing the cheapest labor force; it still depends on and relies highly on income via global exports. China is well known to function as the industrial workshop of the world, till date. So, if there is a so-called ‘party crasher’ of this existing flow, then it would be detrimental to the health of its economy with other dependent sectors tumbling after.

Subsequently, China’s Geopolitical Imperatives are overridden by these three critical factors;

1)   Maintenance of the internal unity of the Han Chinese regions  that includes;

A line in China called the 15-inch isohyet, east of which more than 15 inches of rainfall each year and west of which the annual rainfall is less. The east and south of this line are called the Han regions.

2) Maintain control of the buffer regions which includes;

Tibet, Xinjiang province (home of the Muslim Uighurs), Inner Mongolia and Manchuria (a historical name given to the region north of North Korea that now consists of the Chinese provinces of Heilongjiang, Jilin, and Liaoning).

3) Protect the coast from foreign intrusion.    

The coastal threat to China is economic though most would not call it a threat but from history, the British intrusion into China, for example, culminated in the destabilization of the country, the virtual collapse of the central government and civil war.  It was all triggered by ‘Power & Prosperity’.

It’s important as traders or investors, to first understand  the complications China has to deal with internally as well as its’ pressing strength & weaknesses before comprehending what it means for China to have adopted the ‘Market Economy’ status, once granted. Now, let us get to the bones of the matter revolving China’s Market Economy status plus its pros & cons;

How would the Votes fair amongst countries within the Euro Zone?

In this summer of 2016, The European Commission would most probably be granting China the market economy status. It maybe a shout of ‘Hoorays’ by some with some ‘Boos’ by the others, but the bottom line is that it’s not going to be totally advantageous for all. The following are some of the probable outcomes;

• There seemed to be a conflict on the timings of which this should happen; China is adamant that its’ current economic status expires after 15 years, which dates it to November 2016 and believes that It will happen automatically to become a market economy at that point. The United States think otherwise, stating that it is up to each country and not automatic.

• Italy is not too keen or in other words dreads the possibility of exposing its steel sector to Chinese competition. Italy would have the most jobs to lose if China gained market economy status hence is quite against the decision and may lead the other countries especially in within the southern regions of the Euro zone to oppose it.

• In contrast, the United Kingdom on the other hand with its’ current strong relationship with China may further benefit from China’s new status in the global economy and may lead the argument in favor of it.

• For Germany, China is viewed as an important trading partner. Additionally, superior German steel and the domestic demand from its automotive industry would probably protect Germany from severe economic drawbacks following the change, leading it towards a “yes” vote as well.

• As for France, due to growing Chinese investment may not cause France to be severely hurt so this might convince Paris to vote “yes.”

• Scandinavia is expected to not suffer many job losses as a result of China’s changing status, so this means it will most likely side with the United Kingdom

Conclusion

In summary, there is still plenty of time before a final decision is reached, and this calls for many unknowns including the voting processes involved. In essence, if China does adopt the market economy status, its’ economy will be driven by market forces, such as businesses, banks and consumers as oppose to what’s current, being controlled by institutions such as its central government. However, most probably the European Union will grant market economy status to China in November. That said, it’s probably useful to know the countries that would benefit from it and the ones be hurt by it in order to gauge the future market directions.

Disclaimer. The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of any other agency, organization, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author – and, since we are critically-thinking human beings, these views are always subject to change, revision, and rethinking at any time. Please do not hold us to them in perpetuity.