China's transformation to a free market economy

¶ … transformation of China to a market economy -- to call it "free" would be putting the cart far before the horse -- is a critical issue for our time. For me personally, the issue resonates because my background and the community from which I come. The issue also has great significance for our generation as a whole. The impact that China's emergence as a market economy will have on generations to come is substantial and will have a profound impact on all of us.

The Chinese economy has been undergoing a process of opening up to the market system since the late 1970s. With low labor costs, decent education, low land costs and an artificially cheap currency, China has been able to enjoy rapid economic growth over the past thirty years. The result has been not only the wholesale transformation of China but also the wholesale transformation of the U.S. economy.

The trade deficit has ballooned as a result of trade with China, exacerbated by low U.S. savings rates and high Chinese savings rates. The refusal of the Chinese government to allow the yuan to float freely has allowed for substantial economic growth in that nation but also contributes to the trade deficit and the corresponding balance of payments problem that the U.S. has. The wealth transfer from the U.S. To China will continue unabated for decades.

Thus far, the Chinese transition has been the product of heavy-handed government intervention. In addition to active exchange rate management, China has also provided low interest loans through its banking system and has highly regulated its stock markets. The Chinese people, therefore, know a brand of capitalism that is largely unfamiliar to the west. Without this government intervention, it is unlikely that China would be able to grow as rapidly as it has.

The market reform process in China is proceeding at a slow pace, in order not to shock the economy. This also gives China the time to progress along the learning curve as it brings in talent from more developed Asian countries and from the West in order to help Chinese managers adapt to capitalistic business practices. Over time, however, China will need to loosen its restrictions, which could have severe negative ramifications for future economic development in the country.

This is significant to myself and my generation for two reasons. One is that there is strong demand for Western business acumen in China. This can provide significant opportunities for people such as myself to work in China or invest there, thereby gaining from that nation's strong growth.

However, there is also the threat posed by China's economic development. It threatens to slow the U.S. economy, to increase taxes for debt service and could impact on government infrastructure spending levels, further stunting America's economic progress. The trade deficit with China must be curtailed in order to ensure future economic stability, reduce volatility in the U.S. dollar, to allow domestic savings rates to increase and to ensure that taxes and inefficiencies are kept to current levels.