In the first part of this article, the author provided the striking details for the need to be mindful of the economic pace of development in China. The suggestion was based on an exclusive analysis of economic growth characteristics of economic super powers from a phase of economic miracles to the phase of economic malaise. The author advocated for the need for policies that would mollify the negative impact on the world economy should there be any failure of the Chinese economy. In this second part of the article, the author would like to start with a prefatory discussion of what an economic bubble burst is and the controversies surrounding it. Next, the article would discuss some future precautionary changes China is expected to initiate in order to sustain its economy avoiding any economic quake and reducing the impact of any failure on the world economy. In fact, this ensuing discussion is not a panacea for any future expectant economic frailties but rather a perspective analysis of reality and what needs to be done. Again, it is not a vitriolic censure of China's economic achievements but rather a meticulous assessment of the current situation which can serve as a harbinger to any future eventuality of economic fiasco.
Now, an economic bubble burst in simple terms occur when an economy experiences huge accumulation of bad debts (bankruptcies) and deterioration of asset values. Deterioration of assets occurs because both good and bad assets appreciate excessively beyond their intrinsic value. This is prevalent when interest rates are low and investors borrow from banks to invest in financial assets resulting in more money in the system as against few assets. Ultimately, the increase in demand of assets culminates in over-valuation of their market value as against their intrinsic value. Furthermore, inappropriate monetary policies that enable unscrupulous lending practices by banks can lead to the formation of asset price "bubbles". To explicate this point, it is possible that indiscriminate lending practices will result in unredeemable loans and consequently the accumulation of bad debts. So two financial mishaps are inevitable here that is the creation of bad debts and huge losses in asset values.
Such situations actuate an economic chain reaction called economic bubble burst which spreads to other parts of the economy. A recent example is what occurred in the U.S housing sector in 2007 when bad debts were maximal and home sale lost value dramatically. The negative situation created spread to other parts of the U.S economy because the housing sector is an integral part of the greater economy. Now, there are a lot of controversies surrounding the formation of economic bubble burst. There are those who argue that the phenomenon can occur in times when prices are correctly price and market seems efficient. And that the time of occurrence is very uncertain and that makes it very difficult to decipher accurately it causes. Despite the hullabaloo, the net effect of the bubble burst is loss of great wealth and possible failure of the economic system.
A remedial measure for economic bubble burst is for governments to increase interest rate or bank reserves requirement so as to reduce the availability of loanable funds and also the amount of money in the system. As at now, it is known that the Chinese government is putting in place monetary and fiscal policies that can prevent the creation of bad debts and subsequently an economic bubble burst. This is very commendable. However, there are other factors that gravitate indirectly towards an economic bubble burst which needs to be addressed. In this context, to ensure the sustainability of China's economy and prevent any economic quake which would resonate with the world economy, it is imperative that much consideration is given to the ensuing propositions which address these factors.
The country would have to review the factors that compositely control its economic freedom and political freedom locally and internationally. The factors to consider are investment freedom, financial freedom, property rights freedom, freedom from corruption and invariably civil rights freedom. There is the need to remove restrictions on investment freedom especially the caps and delineation of certain sectors for foreign investors. Furthermore, the state inordinate control of its financial systems predominantly the banks needs to be revised. The revision should be focused on the current regulatory framework which limits foreign investors in capital markets and also curtails the expansion of financial services to the locals and foreigners alike. In fact, revisions of this sort in the financial sector would increase the contribution of the financial system to GDP growth in addition to providing jobs in the sector. There is also the need to enforce intellectual property rights protection to curb copyright activities and associated fraudulent deals on patents, trademarks and the likes.
Next, pragmatic eradication of any corruption is essential to promote regulatory transparency in the financial sector as well as government activities and projects at the state and local level. As matter of fact, in any progressive economy corruption at the governmental and individual level is a set back to direct foreign investment. Unfortunately, if not controlled can adulterate the decency of economic growth gradually bringing it to a halt. Also corruption at this level can lead to creation of bad debts as it has the tendency to promote indiscriminate and vague transactions (including lending practices) consequently initiating an economic bubble burst. Indiscriminate transactions also include unplanned spending practices promoting the scramble for assets which could result in assets over-valuation. In reality, corruption from this perspective is a potential "land mine" for initiation and causation of an economic bubble burst. Generally, the influence of the ruling communist party on the market economy is inhibiting investment, financial and property rights freedom besides indirectly enhancing corruption. Also, China is presumed to have a very low tolerance for political freedom with particular reference to human rights.
Truly, a proper reformation of these components of its economic freedom and political freedom would enhance its reputation on the international scene fomenting the prosperity of its strategic investments in places like Africa, South America and the developed world. Rumors have it that China's investment in places like Africa is a form of neo-colonialism and this is expected to impede the pace of strategic investments (mergers and acquisitions) in these foreign countries. Only time would tell if China's activities are pro neo-colonialist. For there is a proverbial saying that fire is a good servant but a bad master and it remains to be known if the activities of China would conform to this saying. China must prove its critics wrong! The critics argue that Africa has become a fertile ground for China for doing business primarily because China is more interested in doing business than in conforming to moral and ethical standards of detesting corruption, human rights abuses and probably environmental pollution impacts. Substantiating their claim is the assertion that the country is aggressively doing business in places like Sudan, Zimbabwe, Democratic Republic of Congo where human rights abuse, genocide and corruption are at their zenith and also in countries like Ghana and Zambia where environmental pollution is on the ascendency but a secondary issue. The western world sees the violation here and is agitating for adherence to ethical standards and unfortunately African governments seem not to welcome the western world utterances.
Nevertheless, with a record trade surplus of $35.2 billion as at September 2008, China has the capability to invest any where even though the trade surplus is expected to dwindle in the face of sluggish exports and domestic demand. The growing raw material needs for its industrial and manufacturing sector also adds to the urgency to invest. Currently, China has managed to secure several oil projects and investments in Africa because China is the second largest consumer of oil after United States and so it needs these oil sources to sustain its economy. For your information, the continent of Africa holds about 8% of the world's oil reserves besides several potential undiscovered reserves. Additionally, China is supplying technical assistance and loans to some African countries that it deems as viable business partners. It has also inundated the continent with its low cost goods creating competition in respective country markets. These are positive developments for Africa and the world though some degree of skepticism surrounds these international business transactions because of the possibility of default loans. China would have to review its foreign policy in this wise.
Finally, African leaders may be celebrating their new found supposed "win-win" relationship with China just because they believe the strategic investments would provide the much needed long awaited jobs. However, these governments should do the math well to ascertain whether Chinese foreign policies and investments have the capability to do just that without a future price to pay. Furthermore, whether these investments are sustainable from the view point of geopolitical risk (that is policy changes in investments and labor) encompassing China and host countries.
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