Is China losing friends in the developing world?

Why the Middle Kingdom's popularity is about to take a nosedive.

By Ben Simpfendorfer

China's reputation as a major economic power is growing by the day. Talk of a "G-2" symbolizes the growing importance of the U.S.-China relationship to the global economy. Financial markets are meanwhile captivated by China's speculation on the future of the dollar, while economists hope that a Chinese economic recovery will drag the rest of the world up with it.

Yet China's reputation as a leader of the emerging world is about to take a tumble: The country's exports to emerging markets are surging, and the resulting increase in cheap Chinese goods could create a long-term backlash that will undermine China's patient "charm offensive" for years to come.

Over the last five years alone, the annual value of China's shipments to Africa, Latin America, and the Middle East rose from $38 billion to $192 billion (in fact, China recently overtook the United States as the world's largest exporter to the Middle East). This surge in exports is a rational response to economic problems at home and a collapse in demand in China's traditional markets in Europe and the United States. The global economy has weakened purchasing power in the West, and the competition is less intense -- and the profit margins higher -- in the developing world.

But there is an economic and social cost to this shift in trade patterns. For now, households from Egypt to Brazil are delighted at their newfound ability to purchase ordinary goods once considered unaffordable. A new middle class is rising to meet falling prices for microwave ovens and washing machines. But the cheap imports are hurting local producers, as a flood of "made-in-China" imports shuts down factories across the emerging world.

India's largest commercial body recently noted that nearly two thirds of small- and medium-sized enterprises are suffering from the sudden rise in Chinese capital and consumer goods imports. Meanwhile, manufacturers in the Palestinian city of Hebron claim that the number of textile workers has fallen from 15,000 to 5,000. Textile factories in the Syrian city of Aleppo are closing while factory owners complain about unfair competition from cheap imports. Similar grumblings can be heard in Iran's bazaars.

China faces a dilemma. It needs to protect jobs at home to secure social stability, so it has repeatedly hiked rebates for the value-added tax applied to exports to stem the pace of factory closures. These policies appear to be working. But they could backfire if governments in the emerging world are unable to bear the economic and social costs of a flood of cheap "made-in-China" imports. Indeed, Syria has recently imposed new tariffs on textile imports, while the number of anti-dumping cases filed by India against China has jumped. So far, China has yet to adjust its rebate policy.

If Beijing can manage to strengthen the Chinese currency and economy, production will shift from China to other emerging economies, and Chinese demand for goods produced abroad will increase -- the best-case scenario for everyone. But the rebalancing will take years, if not decades.

China's status as a major economic power is rising as a result of the economic crisis. But its relations with the emerging world are about to provide an important test of its leadership qualities.

Ben Simpfendorfer is chief China economist for the Royal Bank of Scotland and author of The New Silk Road: How a Rising Arab World Is Turning Away from the West and Rediscovering China.

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