The Chinese economy has grown at a rapid pace since the introduction of the open-door policy in the late 1970s. The eyes of the world were on China recently as the country announced its second quarter GDP growth rate of 7.5 percent, even though most economists had anticipated a slowing down of the Chinese economy. The real issue is not the current pace of growth but rather how far Chinese economic growth will fall and over what time period.

To some, it seems as though China stands on the brink of economic turmoil. Some even argue that China is now in economic crisis. Many economists also like to compare what is happening in China now to what happened in Japan during the 1980s. However, when we compare China's current situation to that which faced Japan decades ago, it is important to pause for a moment and analyze the internal and external situation in China relative to Japan in the 1980s.

Currency

China does not have a free floating currency, so its foreign exchange risks are relatively less; particularly with a strong government. There is no sign that the RMB will see a dramatic appreciation in the short-term, despite the fact that it has appreciated steadily since 2005. History shows us that the Japanese Yen appreciated 50 percent in the 1980s, which contributed to the dramatic slowdown of the Japanese economy.

Economy

The Chinese economy is now more open than that of Japan in the 1980s, one example of which is the fact that China's agricultural market is wide open to U.S. farm producers. Indeed, China is now an increasingly reliable export market for American corn and soybeans. Hence, Sino-U.S. trade is more closely related to the U.S. economy than U.S.-Japan trade was in the 1980s.

Industrial structure

China's industrial structure is less competitive in today's world than Japan's was in the 1970s and 1980s. Japanese cars successfully entered the U.S. market in the late 1970s and have sustained a dominant market share for decades. By contrast, there is no Chinese industry which can solely compete in the U.S. market today. After ten years of economic transition, China continues to employ a huge, cheap labor force which creates a "China Price" for world markets. All this is without a single dominant industry in the world markets.

Banking industry

The Chinese banking industry is less market-oriented, which makes the Chinese economy more vulnerable. This partly explains why the Chinese government began to remove the lending rate floor for banks in the hope of a more market-driven financial regime beginning July 20. A large economy has to be a large market-oriented economy in order to be sustainable.

A slowing Chinese economy is therefore expected, but it is unlikely to go the same way as the Japanese slump in the 1990s, which continues to the present day. China's economic growth model is unique and the government can take quick, and often unexpected, steps to visibly intervene in markets. Chinese businesses and consumers have very high expectations related to government policy and initiatives. Indeed, many foreigners worry about China's banks, but very few Chinese seem to worry and hold huge savings in state-owned banks. Why? Because people trust that the central government will get involved if any unexpected risks or crisis occur.

It is true that cheap labor and huge investment have fueled China's economic growth for decades. China has produced too much but consumed too little. But the real challenge for China is to manage its virtual economy. The financial sector is seen as a live volcano within the overall Chinese economy and it is unclear now what kind of financial reform would work better in order to sustain the Chinese economy. Banking and investment liberalization could be a real improvement; but the lack of a comprehensive rule-of-law will always make it difficult to respond to any problems which may crop up later. Banking reform must be undertaken in a gradual manner and there is no overnight solution to issues brought on by both toxic assets and toxic local government debts. As far as the future of the Chinese economy is concerned, my advice is to be ready to expect the unexpected.

The author is a columnist with China.org.cn. For more information please visit: http://m.formacion-profesional-a-distancia.com/opinion/zhanglijuan.htm

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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