CHINAwatch

The rise and fall of the Chinese economy

In the November 2015 McKinsey Quarterly, Jonathan Woetzel, director of the McKinsey Global Institute, argues that while predictions of China's woes are plentiful, weighing the evidence, the sky is not about to fall down. In particular, he debunks the following Five myths about the Chinese economy -

1. China has been faking it.
2. China's economy lacks the capacity to innovate.
3. China's environmental degradation is at the point of no return.
4. Unproductive investment and rising debt fuels China’s rapid growth
5. Social inequities and disenfranchised people threaten stability

Tyler Cowen is an American economist, academic, and writer. He occupies the Holbert C. Harris Chair of economics, as a professor at George Mason University, and is co-author, with Alex Tabarrok, of the popular economics blog Marginal Revolution. His latest take on the rise and fall of China's economy is also educative.

The Chinese juggernaut is changing course in a major transition towards a slower, more innovative, more sustainable, and more equitable growth model where services and consumption take up a larger share of the economy with less energy-intensive inputs.These changes are beginning to emerge from economic data for the third-quarter.

The Economist has this to say - 

"..... China is changing. The services sector expanded 8.6% year on year in the third quarter, matching its strongest growth since 2011....... The transition can also be seen in the seemingly relentless slowdown of investment versus much more robust consumption. Overall investment rose 10.3% year on year in the first nine months of 2015, the lowest in 15 years. But retail sales nudged up to 10.8% growth year on year in real terms in September, a seven-month high. A healthy labor market has supported this re-balancing. Income growth actually improved a touch in the third quarter, accelerating to a 7.7% year-on-year increase in real terms."

As services and consumption now account for the bulk of China's economy, it's no wonder that the much-hyped, so-called, "Li Keqiang Index" of using electricity consumption, railway freight volume, and bank loans to gauge the nations's "real" economic growth now risks being wide off the mark. 

Listen to a podcast on the Chinese economy and the coming Five Year Plan (2015-20) by Stephen Roach, senior fellow at Yale University’s Jackson Institute of Global Affairs and former Chairman of  Morgan Stanley Asia. 

Ybmc-1605_roach

However, as China's economy is slowing significantly, stability begins to trump everything else to the extent that China is hamstrung in not delaying, at least temporarily, much of the financial liberalization needed to transition to more sustainable growth. In this scenario, a target growth rate of even six per cent may be over-ambitious, according to a report in the Wall Street Journal on 6 November. 

On FT Markets, George Magnus, Senior Economic Advisor to UBS, opines that China appears to want both growth and financial reform. The risk is that China could run the risks of ending up with neither. 

For the longer-term, however, more enthusiasm than scepticism is beginning to emerge for China's bold and epic vision of the One Belt, One Road initiative. This is being seen in more inclusive terms of lifting all boats, including China's, rather than just a Cold War strategy of reinforcing China's economic dominance. Click here, here, here, here, and here.

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Footnote: On specific aspects of the Chinese economy, please visit the following analyses - 

Is China about to crack up?

China's stock market crash reflects a closed economy?

Why China's consumers will continue to surprise the world

Reforming shadow banking in China   The Rise and Fall of Shadow Banking in China

Historic Xi-Ma meeting and Cross-Strait relations

Excerpts of my TV interview on China Xinhua News Network Corporation (CNC), a 24-hour TV news network under Xinhua News Agency for overseas audiences. As at July 2013, CNC WORLD was accessible in more than 60 countries and regions via cable TV, digital TV, satellite and IPTV networks, including the Asia-Pacific, North America, Central America, Europe, Middle East, Oceania and Africa. 

Appearance on the Chinese channel (drag the green time-counter bar at screen bottom to 19:16)

Appearance on the English  channel (drag the green time-counter bar at screen bottom to 08:33 (towards the end).

An in-depth analysis of the calculus of the Xi-Ma meeting is provided by a November 2015 Wikistrat Report. 

The changing face of China

An edited version of a dinner speech at the Biennial Dinner of the Royal Society for Asian Affairs in May, 2015 by Lord Stephen Green, ex-Chairman of HSBC and an ordained Church of England priest, as appeared on the RSAA weblog on 11 November, 2015.

Download Stephen Green_ The Changing Face of China - Asian Affairs Journal Weblog

I agree with Lord Green's observations, notwithstanding China's perceived warts and all one is constantly reminded of.

The Middle Kingdom seems to be reviving her ancient name as China now sits at the centre of the global supply and value chains. Look at any widget and you will fine China embedded somewhere. This economic centrality is unlikely to change very much regardless of the concluded Trans-Pacific Partnership (TPP) or the proposed Trans-Atlantic Trade and Investment Partnership excluding China, or for that matter, by any display of military dominance. In any case, there is already an alphabet-soup of regional and bilateral free-trade agreements where China is playing a pivotal role. Click here 

I might add that China's growing clout is exemplified by recent "Owned by China" phenomenon on both sides of the pond. 

Post-2015 African Development Agenda and implications for China and India

A Brookings Institution African Growth Initiative Report “Foresight Africa: Top Priorities for the Continent in 2015” highlights the overarching importance of poverty relief, food security, job creation, infrastructure, governance, peace and security in fulfilling the new UN Sustainable Development Goals.

Download Brookings 2015 Africa Foresight Report

Download UN Sustainable Development Goals

This takes into account the reality that at current growth rates, by 2025, three-fifths of sub-Sahara African countries are becoming middle-class, driven by resource boom, services (such as telecommunications, transportation and tourism), agriculture, private-sector investments, and export. Yet Africa remains home to the bulk of the world’s poor, rising from 41% to 81% in a business-as-usual scenario, let alone trapped in youth unemployment, social divide, environmental degradation, inadequate sanitation and healthcare, as well as armed conflicts threatening long-term stability and development.

China has become Africa’s largest trading partner and a major investor. The coming 6th Forum  for China-Africa Cooperation (FOCAC) in Johannesburg from 4-5 December is said to focus on support for Africa’s industrialization, healthcare and regional peace and stability. China has promised to devote over half of foreign aid to Africa, helping to build high-speed trains, expressways and regional aviation. Click here China will also increase credit lines to Africa by US$10 billion and will boost the China-Africa Development Fund by US$2 billion, bringing the latter to a total of US$5 billion. Click here

However, following the collapse of commodity prices worldwide, China’s investments in green-field and expansion projects in Africa have since dwindled by 84%, according to a report in the Financial Times on 21 October, 2015.  Instead, investments in resources have doubled.

As in the case of China earlier, India is entering into a stage of rapid industrialization, possibly becoming dependent on oil imports by as much as 90% by 2040. Click here

Additionally, India is rivaling China for global influence including in Africa, a vast continent with a cornucopia of resources including oil needed for India’s rapid economic trajectory. Moreover, India cherishes the aim of gathering enough support in the United Nations for inclusion as a Permanent Member of the Security Council. It’s therefore no surprise that the Modi government has dramatically expanded its African footprint.

Reminiscent of China’s FOCAC, the 3^rd India-Africa Forum Summit in New Delhi in October attracted 40 heads of state from 54 African countries. Similar, albeit not yet surpassing China’s African endeavors, India has pledged to double its Line of Credit to $10 billion, the establishment of nearly 100 Indian Africa Training Institutes across the continent, as well as the provision of 50,000 scholarships.

Although India-Africa trade has not met its 2015 target of $90 billion, it has multiplied 16 times in the past 15 years. However, petroleum crude accounted for a significant 67 percent of India’s total imports from Africa during 2014-15. Other major items imported from Africa include gold, inorganic chemicals, metal ores and metal scrap and cashew nuts.

Hence, India’s African ventures are, like China’s, largely resources-driven.

The BRICS countries account for 25% of Africa’s Foreign Direct Investment (FDI), about two thirds going to resource extraction. It goes without saying that the lion share accrues to China and India.

The African Union has flagged up the imperative for “structural transformation for inclusive and people-centred development”. In the light of unsatisfactory experiences after the 2002 Monterrey Consensus on “Finance for Development”, the July 2015 Addis Ababa Conference focused on financing with positive outcomes, including implementation and accountability.

Africa’s Post-2015 sustainable development goals will continue to challenge China and India on how their African initiatives will deliver agricultural productivity, food security, technological upgrading, corporate social responsibility, and improvement in governance through such institutions as the Extractive Industries Transparency Initiative (EITI). They will continue to beg the question whether China and India would be able to harness a broader range of local and international non-state actors, including non-governmental organisations (NGOs), to bring about real advances towards the UN Sustainable Goals. 

Specifically, where foreign investments are resources-centred, the question will remain whether the host African countries have the political will and bargaining power to ensure that economic benefits are shared by their peoples inclusively and that there are strategic social, economic and institutional "linkages" in place to develop broader skills and economic infrastructure required to hone uniquely-competitive and sustainable local economies. Click here

America has more to gain from soft power than hard power

(The following is my original text of my Op-ed published in the South China Morning Post of 9 November, 2015 with the tagline How a softer approach by the US to balancing a rising China could pay dividends)

America has vowed to continue Freedom of Navigation Operations (FONOP) such as conducted by USS Larsen to challenge China’s island-building activities in the South China Sea under the United Nations Convention on the Law of the Sea (UNCLOS) (1) Click here This is part of America’s Asia-Pacific military strategy to maintain freedom of navigation and to “re-balance” against a more assertive China.

The stakes are high on both sides. America wants to pre-empt the risk, however far-fetched, of China imposing a “Monroe Doctrine ” in the Asia Pacific (2).  Besides the Malacca Strait choke-point controlled by the Seventh Fleet, US power projection has been fortified by stronger regional military alliances, including joint naval exercises. The “Asia Pivot” aims to deploy 60% of global US naval assets to the region by 2020. Meanwhile, reminiscent of the kind of “outsourced balancing” theorized by Mearsheimer in The Tragedy of Great Power Politics (2001) (3), Japan has revised her pacifist Constitution to permit “collective self-defence” with allies including the United States. Balancing against China is clearly the unspoken agenda.

For China, the South China Sea is not just about territorial integrity, an inviolable “core interest”. It is also about vital sea lanes of communication for trade and import of resources, on which national security and regime stability depend. China has long been uncomfortable with perceived encirclement by “island chains” imposed by US navies operating from Okinawa and Guam. Decades of phenomenal economic growth have enabled China to upgrade a wide range of asymmetric military capabilities, including survivable long-range nuclear deterrence, a burgeoning blue-ocean navy with nuclear submarines, mobile anti-satellite and “aircraft-killer” precision-guided missiles, cyber-warfare, and integrated warfare capabilities including Anti-Access and Area Denial (A2/AD), and Command and Control, Intelligence, Surveillance and Reconnaissance (C2ISR). China now feels confident in safeguarding vital sea lanes in the Dongsha (Pratas) Islands, the Xishha (Paracel) Islands, and the Nansha (Spratley) Islands, critical choke points in the South China Sea. The intention to project naval power for national defence is clear in China’s first-ever White Paper on Military Strategy published in May (4).

Nevertheless, both sides are wary of dangers of unintended escalation to an all-out war. A major conventional war in the region, let alone nuclear Armageddon, is not something either wants to contemplate, least of all their own peoples or other regional neighbours. Both agree on the imperative of crisis management and continuing military-to-military dialogue according to the Code for Unplanned Encounters at Sea (CUES) (5). Click here

The other theatre of US-China hard-power tussle is economic. The recently-concluded Trans-Pacific Partnership (TPP) of 12 nations representing 40% of global economy excludes China. The aim is to form a US-led economic coalition with higher standards for labour, environment, and level-playing field before China can join. In addition, the United States is negotiating the Trans-Atlantic Trade and Investment Partnership (TTIP) to form the world’s largest free-trade bloc with the European Union.

China’s trump card is economic centrality firmly locked into the global production and value chain. Look carefully into any gadget and one will find China embedded. Six of the top eight container ports are located in China, including Hong Kong. Moreover, there is an alphabet-soup of bilateral or regional free trade agreements where China already enjoys a central role. One notable example is the ASEAN-China Free Trade Area effective 1^st January, 2010. Under active negotiation is the Regional Comprehensive Economic Partnership (RCEP) comprising all ASEAN members and their free-trade partners. Following Premier Li Keqiang’s recent visit, a bilateral free trade agreement with South Korea is expected by year end (6). Click here Additionally, China continues to push for a Free Trade Area of the Asia Pacific (FTAAP). 

The scale and centrality of China’s economic linkages are unlikely to change very much as a result of exclusive trade agreements or military alliances. Few, if any, of America’s military allies want to choose between the two great powers, as virtually all rely on China for markets and jobs. 

It is also becoming clear to the European Union which side their bread is likely to be buttered. Recall how quickly the United Kingdom, a key US ally, jumped on the China-led Asian Infrastructure Investment Bank (AIIB) bandwagon. The UK has recently greeted President Xi’s state visit with uncharacteristic pomp and circumstance. This was followed in a matter of weeks by visits to Beijing of German Chancellor Merkel, President Hollande of France, and King Willem-Alexander of the Netherlands.

China’s new One Belt, One Road (OBOR) initiative offers an ambitious   blueprint linking the nation’s vast market to Europe, Central Asia and Eurasia, including potential investments in high-speed rail, ports and expressways. The collapse of energy prices worldwide has deepened China’s pockets. OBOR is also calculated to open up alternative routes for flows of energy, minerals, trade and investment, bypassing the choke points in the South China Sea.

A more promising theatre to balance against a rising China, however, is institutional. The TPP is partly designed to spread adherence to higher standards. Future OBOR economic linkages with Western Europe will also offer many opportunities for assimilating China into global values and norms. 

Moreover, China has embraced the world in knowledge and education. The nation is churning out some 7 million university graduates a year, adding up to some 200 million graduates by 2030 (7). Click here Many will have been educated abroad in Western universities. According to the Institute of International Education (IIE), 274,439 students from China studied in the United States in 2013/14, 16.5% more than the previous year. (8) Click here At the same time, China is changing course towards a more sustainable model of development, including innovation, higher value-added production, greener economy, a more equitable and inclusive society, and the rule of law. There will be a cornucopia of opportunities for bridging differences in ideas and value systems. Recent academic interest in China in studying the Magna Carta during its 800^th anniversary is a case in point (9). Click here

The Cold War mindset is passé. Aircraft carriers and supersonic bombers cannot sustain economic growth, job creation and social stability. Nor can they change a “flat” world (10) where the United States and China increasingly share common interests ranging from trade, investment, currencies, nuclear non-proliferation, anti-terrorism, climate change, to global governance. During his state visit to the United States, President Xi stressed that the so-called “Thucydides Trap” engulfing past rival great powers needs not be repeated in the 21^st century. (11) Click here In an inter-connected and inter-dependent world, power can be projected as much, if not more, by value systems as by military dominance or economic connectivity.  

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(1) Lassen Faire in the South China Sea: Takeaways From the First US FONOP, The Diplomat, 28 October 2015

(2) China’s Monroe Doctrine, New York Times, 8 May, 2015

(3) The Tragedy of Great Power Politics, John J Mearsheimer, University of Chicago, Norton: New York and London, 2001(“balancing and buck-passing”, p.13, Introduction)

(4)   The Big Story Behind China’s New Military Strategy, The Diplomat, 5 June, 2015

(5)   China naval chief says minor incident could spark war in South China Sea, Reuters 30 October, 

(6)   Premier Li's visit boosts China-South Korea ties, promotes detente with Japan, China Daily, 3 November, 2015

(7)   The Competition that Really Matters - Comparing U.S., Chinese, and Indian Investments in the Next-Generation Workforce, Centre for American Progress, 21 August, 2012

(8)   Chinese enrollment in the US shifting increasingly to undergraduate studies, ICEF Monitor, 27 May, 2015

(9)   China and Magna Carta - How Chinese view the historic document – and their own Constitution. The Diplomat, 23 July, 2015

(10) The World is Flat, Thomas Friedman, Farrar, Straus and Giroux, 2005

(11)      China Voice: Ten reasons China, U.S. can avoid Thucydides Trap, Xinhua News, 27 September, 2015 

 

First China-Japan-South Korea Trilateral Summit in three years

My live TV interview on 1 November, 2015 with Turkish Radio Television (TRT), a newly-founded state-owned international English-language radio and TV channel based in Istanbul.