CHINA & THE GLOBAL ECONOMY
From outside China, the Bo Xilai trial looks like the Chinese news event of the year, one of the preoccupations of Western media, along with corporate corruption and the clampdown on American and European companies. Yet these issues are no more than sideshows to the most important economic event of recent times; the unveiling and ratification of a major programme for reforms for the next decade. The reforms would bring another great leap forward in China's dramatic ascent.
Chinese officials will reveal, this November, how long China will need to make the transition from an investment-led, middle-income country to an innovative, consumer-driven, high-income one and, thus, when it will become the world's largest economy. The challenges that China's new leadership faces in pushing for rising levels of innovation, entrepreneurship and skills will be the main discussion points at the New Champions Summit in Dalian, China, organized by the World Economic Forum. The Summit recognizes that China's degree of success will determine global growth: it will determine whether the twenty-first century will be the Asian century, and whether by mid-century Asia will represent half or just a third.
On paper, the November plenum of the 18th party committee is just the latest in a sequence of party events that celebrate China's new leadership. Yet it is the culmination of a carefully-planned process of deliberation on reforms. It started with the Central Work Conference last year, the second plenum in March, the National People's Conference in June and, most recently, this summer's brainstorming session at the seaside Beidaihe retreat. Historically, third plenums have turned out to be much more than run-of-the-mill events. At the third plenum of the 11th party committee in 1978, Deng Xiaoping launched the market reforms that set China on its industrial course to becoming the world's second-largest economy. During the third plenum of the 14th committee in 1993, under Zhu Rongji, Chinese leadership ratified a “socialist market approach” of combining markets and state decisions, which led to an unprecedented era of industrial growth.
Now with the third plenum focusing on China's next challenge, the aim is to double average incomes by 2020, to achieve 70 per cent-plus urbanization by 2025 and to have the world's largest supply of graduates. If it succeeds, China will quickly surpass America as the world's largest economy. By 2025, it will probably move from middle-income status to high-income status and make around 1 billion of China's 1.3 billion population “moderately prosperous”.
By “deepening reforms in all aspects” across those remnants of the command economy that survived the market push from the 1980s, economic policy will now give priority to structural changes, reinforcing the “socialism with Chinese characteristics.” According to the new premier, Mr Li Keqiang, “China can no longer afford to continue with the old model of consumption and high investment.” Reform, as he puts it, is “the driving force.”
It is, of course, inevitable that as China moves from a focus on export-led growth, it will have to address structural issues, such as restrictions on labour mobility and private credit. In recent years, under the first wave of modernization, China's progress to middle-income status has been astounding. In the first decade of the century, China became the world's largest manufacturer. In 2009, China surpassed Germany as the world's largest exporter. In 2010, it passed the US to become the world's largest car producer.
In the first decade of the century, China became the world's largest manufacturer. In 2009, China surpassed Germany as the world's largest exporter. In 2010, it passed the US to become the world's largest car producer.
China is gradually reducing its role as a processor of lower-value-added technological goods. As a share of national income, services have just overtaken manufacturing, and since 2011 consumer spending has been a bigger driver of growth than investment. In the future, China will depend less on exports to the West. In the last 10 years, merchandise exports to developing economies have already doubled, to 25 per cent. China's portfolio of $110 billion in loans since 2000 rivals that of the World Bank.
For 35 years, China's export-led growth has been spectacular, steering 500 million Chinese out of poverty. But as the World Bank “China 2030” report acknowledged, productivity per worker and income per head are still far below America's, so the second wave of modernization must break China out of that potential “middle-income trap.” Typically, a country's growth slows as soon as its income is among the top 30 in the world. This slowdown occurs because as a country's income rises, it is no longer able to compete on low wages, and it is unable to compete on value-added because of low productivity. Indeed, the “China 2030” report forecasts the loss of 80 million of China's 130 million manufacturing jobs to lower-wage Asia and Africa.
China's leadership believes it can beat the odds. Many economists believe that within fifteen years China will make it to a $20,000 average per capita income by combining its current manufacturing dominance with its future role as the geographic centre of a global supply chain.
Of course, China cannot rely on “one-off” advantages such as the move from an agricultural to an industrial economy, comparatively low-cost labour, and the boost from membership in the WTO. With its urban population expected to expand by 300 million, China knows it will have to move quickly to exploit the “Third Industrial Revolution” from 3D printing and digital design to nanotechnology, biotechnology and genetics, hence its one million research and development workers and its plans for 100 million more graduates. The new growth agenda will need that talent, but it will also need an obsessive focus on innovation, enterprise and social reform. The requirements are:
1. Liberalization of interest rates and the prices of producer goods and utilities;
2. A fairer competitive environment for private enterprises;
3. The opening up of the land ownership and household registration systems;
4. Local government fiscal reforms and the end of an overreliance on highly-volatile land sales through the creation of a solid local tax base;
5. The gradual internationalization of the yuan, most recently with free convertibility with the Australia dollar and the UK currency swap agreement.
Perhaps the most important barriers to long-term success are the disparities in wealth, now being addressed under the premier's desire to “promote social equity.” This is a prompting for tax reforms and plans for better health and welfare benefits. A phrase unfamiliar to the West!
If the United States could increase its share of China's imports from its current 7 per cent to 10 per cent, that increase alone would, over time, boost US exports by an additional $100 billion, and support almost 500,000 new jobs, a win-win for both countries.
But like other emerging market economies, China's success depends not just on a new reforming government, but on a continuously expanding world economy. China's historic decision to join the G-20 was not just a recognition of the country's new status in the world, but the start of a new era of China’s world leadership. Chinese leaders are too shrewd to believe post-2008 stories about the decoupling of the West and the rest. But, with the West looking inwards, recent G-20 meetings have done little to halt the slowdown in world growth from a potential 5 per cent to 3 per cent.
The global way forward is through cooperation comparable to the creation of the liberal trading orders in the years after World War II. The West — once the world's biggest producer and consumer — could stimulate world growth. In the mid-2020s Asia will be strong enough to drive the world economy forward. But today, we are at a transition point. The majority of production is now outside of the West. But with the majority of consumption still in the West, neither the West nor the emerging markets can prosper in isolation from each other. China and America should return to the idea pioneered by the G-20 of 2009: a global growth compact under which China agrees to boost growth, increasing its consumer imports in return for America and Europe boosting growth through expanding investment and infrastructure. Today, inflation is low, there is surplus of savings and if the United States could increase its share of China's imports from its current 7 per cent to 10 per cent, that increase alone would, over time, boost US exports by an additional $100 billion, and support almost 500,000 new jobs, a win-win for both countries.
Instead of struggling through the fallout from yet another failed G-20, heightened cooperation would raise growth, increase employment, raise living standards all round and address poverty — the rocket the post-crisis world now needs.
The writer is former Prime Minister of the UK.
Foreign Writers