How will China shape the world?

George Magnus

China is set to overtake the USA as the world’s biggest economy in the next few years. But growth has begun to slow, so the government will have to find a new economic focus in order for the economy to keep expanding

In less than half of a lifetime for most people, China has exploded out of poverty to take its place at the heart of the global economic system, become the world’s second largest economy and its biggest export nation – and emerged as a geopolitical rival to the USA. The speed of this transformation is unprecedented. Many believe that a rising China, juxtaposed against the alleged decline of the West, will spread its economic and political influence around the world. Some even think the wheels of history are turning full circle as a Sino-centric world re-emerges for the first time since the 18th century. But there is also much hyperbole behind these simplistic assertions. China’s ability to shape the world depends in large measure on how it shapes itself. 

It certainly seems likely that China’s rising economic weight in the world will affect the way that the world economy and global economic governance work. Sometime in the next five to seven years, China is likely to overtake the USA to become the largest economy in the world. It will use its economic power to secure a bigger say and a greater advantage in global institutions, such as the IMF and World Bank, and over matters from global security to climate change. It will seek to extract political and economic gains from trade and investment arrangements in Asia and Europe, and can be expected to counter the US initiative to develop the Trans Pacific Partnership. It has already become the second-biggest recipient of foreign direct investment and is gradually establishing itself as a source too. For example, it has concluded important agreements with the UK in 2013 to invest in the nuclear and financial services industries. In international monetary relations, China has been quite open in its criticism of a US dollar-dominated system, and has been actively pursuing policies to internationalise the Yuan and expand its usage among central banks, in trade invoicing and settlement, and in the denomination of international bond issues. 

In other ways, however, China’s ability to shape the world is more questionable. Being the biggest economy in the world, for example, confers a certain gravitas, but China’s capacity to influence the world will only really increase if its growth model changes from one based on investment and property construction to one based on consumption and innovation. 

Most people reckon that China’s expanding middle class will be the nucleus of the world’s next billion consumers in emerging markets. Income per head is now about US$6,500, but in many urban areas it is the same as in Chile and Mexico, and in the 25 largest metropolitan centres it is more like in Portugal. China’s urban population is predicted to grow by 50 per cent, or 300 million, to about a billion by 2030, and national income per head could more than triple to around $20,000 if seven per cent annual growth were sustained. But this consumer transformation cannot happen in a vacuum. It will require the determined pursuit of economic policies and political strategies designed to shift wealth, resources and income formation away from the state to the private sector, and the development of more robust institutions, including establishment of the rule of law and an independent judiciary. 

Chinese companies are also leaving global footprints. There are now 89 companies headquartered in China in the Fortune 500 list, based on revenues, compared with just 34 in 2008 and 12 in 2000. Chinese banks are already among the biggest in the world, ranked by assets. Companies like Lenovo (personal computers and laptops), Alibaba (e-commerce), Huawei and ZTE (telecommunications), Haier (white goods) and Geely (automotive) are already well known (see pages 22-23). COMAC (Commercial Aircraft Corporation of China) plans to challenge Boeing and Airbus with its C919 model. But China’s largest companies are state owned for the most part, beholden to political patrons and ranking poorly, or not at all, in surveys measuring innovative capacity and best corporate practices, including strong management, business strategy, ethical standards, competitive edge and profitability. 

It is also important to understand other limitations. China’s decade of double-digit economic growth has already given way to a slightly more subdued 7-7.5 per cent, and should be expected to continue to slide to perhaps four to five per cent for three important reasons. 

First, the exceptionally benign global economic conditions in which China prospered during the last 25 years have ended, as a kind of secular stagnation settles in the Western world and growth prospects in other emerging markets disappoint. 

Second, China cannot exploit the many phenomena that contributed to its turbo-charged growth for a second time. These include accession to the World Trade Organization, labour transfer from agriculture to higher value manufacturing, better exploitation of land and improved industrial organisation, high secondary school educational attainment levels, improved public health and the provision of essential infrastructure. 

Third, now that it has become a more modern, complex middle-income country, China has to build a new economic and social model if it is to continue to enjoy sustained, high economic growth. This will require a large change in focus away from investment, state dominance of finance and enterprise, and the relentless pursuit of GDP growth. Instead, the country needs to look towards better provision of household goods and services, private sector entrepreneurship and innovation, and better governance. 

In November 2013, the Communist Party agreed a long list of economic reform proposals to address China’s growth hiatus and sustainability problems. Markets are to be given a ‘decisive’ role in the determination of prices; stronger governance and accountability; measures to reduce overcapacity and red tape; improved social welfare; and land and urban registration reforms all figure among initiatives designed to refresh China’s economic model in the next decade. 

It will not be clear for some time whether the proposals go far enough to transform China’s economic prospects, and we can only guess whether China’s leaders will be able to bridge the familiar chasm between mostly good policy intentions and weak implementation in the face of strong vested interests. What we do know is that all changes are designed to strengthen the authority of the Party, and that there will be no political reform and no shift to greater political participation, let alone political competition. In their absence, the potential for incremental economic reforms is likely to remain limited and the capacity for private sector entrepreneurship and innovation to pick up the baton will be severely constrained. 

China may yet shape the world in more substantial ways, but perhaps not until we know how the demands for more extensive political change will be met. 


About the author:

George Magnus is an economic consultant and author of Uprising: Will Emerging Markets Shape or Shake the World Economy?


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