What Are The Pros And Cons Of China Being Granted 'Market Economy' Status In 2016?

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Summary

Since the 1980s, China's economic system has been described as being a "socialist market economy".

In this summer of 2016, the European Commission would most probably grant the country market economy status.

Italy would have the most jobs to lose if China gained market economy status.

By Kenny Simon

Xi Jinping at the EP

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 31/03/2014.

China's economy then and now

By peeling back to history, we know that since the 1980s, China's economic system has been described as 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 with China's presence in today's global economy is largely rooted to geopolitics. In saying that, the problem with the country could be presented as follows.

Challenges for China

First, 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 the country 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 greatly on income via global exports. China is 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.

China's geopolitical imperatives are overridden by these three critical factors:

1) Maintaining internal unity of the Han Chinese regions, which includes...

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

2) Maintaining 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) Protecting the coast from foreign intrusion

The coastal threat to China is an economic one, 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 and 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 and weaknesses before comprehending what it means for the country to have adopted market economy status, once granted.

Let us get to the bones of the matter of China's market economy status, plus its pros and cons.

How would the votes fare amongst countries within the eurozone?

In the summer of 2016, the European Commission would most probably grant China market economy status. There may be "hoorays" from some and some "boos" from 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 some conflict on the timing for this to happen. China is adamant that its current economic status expires after 15 years, which dates it to November 2016, and believes that it will automatically become a market economy at that point. The United States think otherwise, stating that this is up to each country and does not happen automatically.
  • 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, and hence, is quite against the decision and may lead the other countries - especially within the southern regions of the eurozone - to oppose it.
  • In contrast, the United Kingdom, with its current strong relationship with China, may further benefit from the country's new status in the global economy and may lead the argument in favor of it.
  • Germany views China as an important trading partner. Additionally, superior German steel and the domestic demand from its automotive industry would probably protect the country from severe economic drawbacks following the change, leading it towards a "yes" vote as well.
  • As for France, growing Chinese investment may not cause France to be severely hurt, which might convince Paris to vote "yes".
  • Scandinavia is expected to not suffer many job losses as a result of China's changing status. 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 there are 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 opposed to what's current - being controlled by institutions such as its central government. It could well be November by the time the European Union grants market economy status to China. That said, it's probably useful to know the countries that would benefit from it and the ones that could be hurt by it in order to gauge the future market direction.

Source:

1. Maloney, Michael Guide To Investing in Gold & Silver: Protect Your Financial Future. RDA Press, LLC, 2015.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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