For example, having China’s total GDP remaining the same at $12 trillion at an increasing population, instead of $60/hr for $12 trillion/200billion, it will be $50/hr for 12trillion/300billion. Not only that, having surplus of labour forces also shows that China must have the rapid movement of workers from rural agriculture into higher productivity jobs in industry and agriculture. This had been completed by U. S more than half a century ago.
Another biggest challenge for China is to have currency appreciating on their Yuan. As exerted from ANU E. Press (2010:154), Leaders in the United States would like renminbi to appreciate significantly and quickly to encourage an expansion in US exports and employment. Chinese leaders, however, regard the pressure to revalue the renminbi and various protectionist trade policies from the west as unfair, and they believe they threaten China’s development.
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When China’s currency appreciates, it means that the Chinese will be better-off and able to spend more that makes their imports more competitive and exports more costly. Parkin (2009) define net exports are exports of goods and services minus imports of goods and services. A lower price on the imported consumption goods and services and a higher price on their exported consumption goods and services will induce a net loss. On the other hand, weaker export prospects could affect foreign (inward) investments to China.
Foreign investment is one of the important drivers to China’s economic growth. Vice versa, stronger Yuan encourages more outward investments from China as it is cheaper for Chinese firms to purchase foreign companies, real estate and other assets. With China’s decline in cost competitiveness of labor to manufacturing, this will result in reduction in export foreign investment and eventually a loss in the nature of capital inflow. This would reduce China’s global current account surplus and US global current account deficit.
As Blankert (2009) posits, productivity growth is the key to determine the real exchange rate so if China appreciate it currency ahead of its productivity gains, it will lead to bubbles and deflation. Meaning to say, with rapidly increasingly wage growth due to its currency appreciation, Chinese manufacturing firm facing bankruptcy in time to come due to its inability to meet productivity growth and to meet ever higher currency appreciation.
Thus, China hesitates to appreciate its Yuan to correct the trade imbalances as they are afraid that their business cycles might fluctuate too fast above its potential GDP. In conclusion, I strongly agree with Berry (2005) saying that China will remain an awesome strength economic competitor while the U. S. economy will remain the largest in the world. Perhaps certain regions of China might well surpass the US, while others especially the rural regions will remain at levels that will not be very pride-inducing.
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