Discussion Reply- Response 1-2 paragraphs with 1-2 references Watts

It has been widely commented that China is on pace to become the world’s largest economy in the next few decades (Hill, 2018). There is little doubt that this changing of the guard could have real-world impacts beyond China’s borders. In particular, the world trading economy, monetary and currency exchange systems, and the global commodity systems may all look different as China’s economy continues to grow.

As the world economy has become more globalized, individual tastes have also become more globalized with the exchanging of goods between countries (Hill, 2018). I believe this will have an impact on the world trading system, specifically as it pertains to the difference between trade imports and exports between China and their trade partners. As Chinese consumers gain more purchasing power, they may become bigger consumers of international goods. Although this trend alone will not balance existing trade deficits, it may cause them to shrink. Other than simply adopting a more globalized taste in goods, a stronger Chinese economy should cause their currency to appreciate relative to their trade partners. All else being equal, this will cause Chinese exports to become more affordable to consumers in other countries which will accelerate the convergence of import and export volumes. The world trading system may also be impacted by China’s view on global concerns, such as sustainability. For example, China’s recent entrance into palm oil commodities could indirectly undermine sustainability trends as the Chinese market’s lack of transparency may encourage investment in firms that do not share global sustainability goals (Tan, 2018). If practicing sustainability causes costs to rise, those markets trading unsustainable goods may yield lower prices and capital may find those new markets more attractive which will have negative consequences for firms who practice sustainability and could put their financial future in jeopardy.

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The U.S. dollar has long been the world’s currency in large part to being both the world’s largest economy and one of the most stable economies. As China’s economy continues to grow, it is also trying to improve investors’ perspective of the strength of the Yuan (He, 2017). If they are successful in changing investors’ perspective, it may decrease the demand for other currencies which could threaten the relative stability of the U.S. dollar. However, it should be noted that merely becoming the world’s largest economy may not be enough to unseat the current currency benchmarks. China’s weak legal system, weak banks, and lack of transparency in financial trading could stand in their way (He, 2017). If they fail to adopt a freer market, Chinese nationals with wealth may continue to invest internationally by way of Foreign Direct Investment which could allow other countries to indirectly benefit from China’s growing economy (Frum, 2018). China’s recent entrance into commodity trading may also impact the currency exchange system as demand for the Yuan increase if trades are not conducted in U.S. dollars. This is a step in China’s strategy to international its currency (Tan, 2018).

China’s entrance into commodity trading may also have widespread impacts on the global commodity system. When investors have access to multiple commodity markets, arbitrage opportunities may arise which can undermine the fundamental principle of capital markets being efficient (Tan, 2018). Arbitrage opportunities will increase speculative investments which could destabilize markets in the wake of more short term and speculative trading and relatively less fundamental long-term investments.

As China continues to grow at a faster rate than established economies, the global financial landscape may be impacted both directly and indirectly. However, it must be considered that China will need to evolve in other business arenas to recognize the full impact of becoming the world’s largest economy.

 

References

Frum, D. (2018, June 30). The Trade Deficit Is China’s Problem. The Atlantic. Retrieved from https://www.theatlantic.com/politics/archive/2018/06/china-losing-the-trade-war/563030/

He, L. (2017). China urged to play a bigger role in setting global commodity prices. Retrieved 27 June 2018, from http://www.scmp.com/business/markets/article/2080537/china-urged-play-bigger-role-setting-global-commodity-prices

Hill, C.W. (2018). International Business: Competing in the Global Marketplace (12th ed.). New York, NY: McGraw Hill Education.

Tan, H. (2018).  China is working to change global commodities trading – to its own benefit.  Retrieved from https://www.cnbc.com/2018/06/06/china-is-working-to-change-global-commodities-trading.html

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