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Thursday, 12th November 2015

China's Economic Downturn: the Facts Behind the Myth

Source: European Council on Foreign Relations

Summary:

The crisis of confidence that has followed China’s stock market shock is misplaced. The downturn is less a sign of catastrophe than of the long- awaited shift to a market economy model that is service-based and consumption-driven.

It remains to be seen whether China’s government will stay the course and continue this transition despite the pessimism of domestic and international actors, and the Xi administration’s reluctance to commit to deep economic reform.

Beijing must choose between cut-throat international competition to maintain its current growth model, or taking a path of slower growth and greater international legitimacy, with market-driven interest rates implying a free-floating currency.

The impact of China’s downturn on the world economy has been overestimated. It will hurt economies that are dependent on exports to China - commodity exporters above all - but consumer countries will benefit from lower prices.

Europe does not depend greatly on China as an export market, and can benefit from low prices caused by the downturn. European governments should act in unison to seize the moment and push for greater access to China’s economy, while seeking Chinese investment in large-scale projects.

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