China Effect which is a huge economic growth of the China has a big impact on all other countries. As GDP is growing rapidly in China and the country faces increased demand and demand-pull inflation, the UK will face inflationary pressure from this country and as China is the top producer of coal, steel, cement, and 10 kinds of metal, not only UK but all parts of the world will suffer from inflation. This might lead to an increased trade deficit in the UK when the amount of imports exceeds the amount of exports. But as Saunders, the economist of Citigroup said: “At the same time, growing demand from these countries is pushing up commodity prices across the board”. Also UK faces a high competitiveness from China and has to increase its spending on supply side policies in order to increase productive capacity and remain competitive in the market. Also UK has to increase its lower productivity and reduce unemployment when facing increased demand for goods from overseas.
China’s exchange rates are relatively low compared to pounds and so UK could enjoy cheaper imports for a while however this will not be always “and the exchange rate provides just temporary shelter against import price rises.”
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