Big Test Ahead for Chinese Economic Miracle

At first glance, it looks like everything’s coming up roses for China. The nation is enjoying prosperity the degree of which would have been considered fantastic not so many years ago.

Now the fourth-largest economy in the world, China’s annual economic expansion of 10.6 percent over the past five years has provided bigger houses and better cars for many Chinese and made the Chinese vehicle market the third largest in the world.

The country’s trade surplus hit $19.49 billion last month as foreign demand for exports remained staunch despite growing anxiety about slowing global growth.

Chinese exports stand at an unprecedented $109.7 billion — and Shanghai analysts expect the U.S. tax rebate will benefit Chinese exporters even more as belt-tightening American consumers abandon middle and high-end marketers in favor of Wal-Mart.

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All this success hasn’t stopped the World Trade Organization and the International Monetary Fund from taking positions against China.

The WTO just ruled against China in a complaint filed jointly by the U.S. and Canada that may fuel more complaint filings about Chinese commercial practices with the international trade group.

"My prediction is that there are going to be significant cases brought against China,” international trade attorney Lawrence Herman told Bloomberg.

"There are enough signals that this is going to be part of a trend, not because it's fashionable, but because China is challenging in trade terms a lot of countries, the U.S. in particular,” he said.

The WTO ruled that Chinese duties on imported car parts violate global trade law and that China ignores trade accords by applying tariffs that lead automakers to source a substantial number of components domestically.

Observers expect that China’s reaction to the action will provide a clear indicator of the country’s future responses and do much to determine how other countries interact with it.

Three of the four cases against China currently awaiting hearings before the WTO were filed by the U.S.: They concern Chinese copyright violations, sales of foreign publications and audiovisual products, and subsidies that China's steel, wood products and information technology industries receive.

The fourth complaint, filed by Mexico, accuses China of illegally giving tax breaks to its manufacturers and restricting foreign investment.

Meanwhile, IMF Director Dominique Strauss-Kahn wants Chinese leaders to ease exchange-rate controls to help resolve global financial imbalances as well as China’s own economic challenges.

"More domestic demand growth will be what China needs, not export-driven growth,” says Strauss-Kahn, adding that a more flexible exchange rate could reduce reliance on exports by encouraging Chinese consumers to spend more.

If Beijing doesn’t revalue the yuan in a timely manner, analysts suspect that the U.S. trade deficit with China will come back to bite the Asian giant in the butt.

At $18.8 billion in December, the trade gap has caused numerous American companies to lobby Washington for protectionist actions and some U.S. legislators to call for punitive action against China.

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