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China Syndrome: The Unbalanced Bicycle of Growth


The country's economic growth model was a contributing factor in the current global crisis.

In 1971, Ralph Lapp, a nuclear physicist, used the term "China Syndrome" to describe a hypothetical nuclear reactor meltdown where the molten core breaches containment barriers and melts through the crust of the Earth, reaching China. The economic equivalent of the China Syndrome describes a process where China's strong growth, abundant savings, and foreign exchange reserves assists a rapid restoration of global growth.

The nuclear metaphor ignores the geographical fact that the opposite side of the globe from the USA is actually the Indian Ocean, and that the entire idea is physically impossible. The economic metaphor conveniently discards some significant doubts about the ability of China to act as a catalyst for global recovery.

The Unbalanced Bicycle

China's economic growth model was a contributing factor in the current Global Financial Crisis (GFC).

Under Deng Xiaoping, leader of the Communist Party from 1978, China undertook Gaige Kaifang (Reforms and Openness) -- reform of domestic, social, political, and economic policy. Economic stagnation and serious social and institutional woes that could be traced to Mao's Cultural Revolution forced the change.

The centerpiece was economic reform that combined socialism with elements of the market economy. It entailed engagement with the global economy, reversing the traditional policy of economic self-reliance and a lack of interest in trade. As Robert Hart, nineteenth century British trade commissioner for China, wrote: "[The] Chinese have the best food in the world, rice; the best drink, tea; and the best clothing, cotton, silk, fur. Possessing these staples and their innumerable native adjuncts, they do not need to buy a penny's worth elsewhere."

In embracing markets, Deng famously observed that: "It doesn't matter if a cat is black or white, so long as it catches mice." Deng also embraced a change in philosophy: "Poverty is not socialism. To be rich is glorious."

China's economic reforms coincided with the "Great Moderation" -- a period of strong growth in the global economy based on low interest rates, low oil prices, and deregulation of key industries such as banking and telecommunications. The boom was also based on increases in global trade and investment driven, in part, by the fall of the Berlin Wall, the collapse of the Soviet Union, and integration of socialist economies into the world economy.

China's growth model, inspired by the post-war recovery of Japan, used trade to accelerate the growth and modernization of its economy. The economic engine was export-driven growth. Special Economic Zones (SEZ), for example in Shenzen located strategically close to Hong Kong, were established to encourage investment and industry.

The model took advantage of China's large, cheap labor force. The strategy benefited from rising costs in neighboring Asian countries such as Japan, South Korea, Taiwan, Hong Kong, and Singapore. China was able to attract significant foreign investment, technology, and management and trading skills from countries keen on outsourcing manufacturing to lower cost locations to improve declining competitiveness.
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