Is China at the verge to become a market economy?

Is China at the verge to become a market economy?

By Virginia F. Bodmer-Altura

Last week there were high level discussions held between EU and Chinese government representatives and since China is seeking to become a market economy it looks like that his question is somewhat linked to possible Chinese support to ease the burdens of the debt crisis

EU Karel de Gucht, EU trade commissioner declared that China has been stepping up the political commitment in view to become an EU recognised market economy. He further commented that he had seen no sign that China was actually undertaking the free market measures in order to qualify as an economy where the market drives business decisions more than government policy. If China would allow greater independence to the state controlled banking sector to issue loans based on commercial principles and pay back methods this could be a major step in the right direction. Today, banks allocate credits based on government policies and not on market principles.

On the other hand status quo of China as a non market economy allows European Companies to raise an easier anti-dumping case against Chinese competitors and if China would be recognised as a market economy such procedures would be more difficult. The market economy status of China would – according to de Gucht – give worries what it means for imports and employment in Europe’s manufacturing sector. In this respect also the limits on export credits for Chinese exporters are more important on the agenda as these exporters seek to enhance their global market share at non market conditions since they receive government orchestrated loans at very low interest rates and thus leading to unfair competition. The EU commissioner stated clearly: “That effectively takes European and American bidders out of the market”. We add that this would wipe out many enterprises in the textile and clothing sector of Europe.

For all of these reasons the EU and the U.S.A are hesitant to grant the market economy status to China. On the other hand it has to be taken into account that China holds about a quarter of its USD3.18 trillion foreign exchange reserves in euro-denominated assets and particularly in German government bonds but there are rumours that China has been secretly buying small sums of securities from the EU financial stability fund.

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