Martin Jacques - When China Rules the World

At the centre of any discussion about China ’s future role in the world — let alone talk of a Chinese century — lies the country’s economic prospects. A commitment to a growth rate of around 10 per cent remains fundamental to the government’s strategy. China needs to create 8 million jobs a year for its expanding urban population, plus another 15 million or so for the new rural migrants who seek urban employment every year. [458] [458] Yu Yongding, ‘China’s Macroeconomic Development, Exchange Rate Policy and Global Imbalances’, unpublished paper, Asahi Shimbun Symposium, October 2005, pp. 2–3. Rapid economic growth will therefore remain at the heart of government strategy, with any serious and sustained drop below 8 per cent carrying the threat of serious social unrest. But, after a quarter-century, can this kind of growth rate be sustained? What are the limits to China ’s present growth path? Could its present strategy go badly wrong? And, crucially, what will be the impact of the global contraction that has transformed the short-term outlook for China?

The basic global competitiveness of the Chinese economy — the remarkable performance of its exports, which have driven economic growth and made the country such an attractive destination for foreign investment — will persist for many years to come because the condition on which it rests, the huge migration of rural labour into the cities, is destined to continue for several decades. Even if labour costs rise, as is already happening in the coastal regions and the Shanghai area, the inland provinces, fuelled by migrant rural labour, will help to contain inflationary pressures. [459] [459] Tom Mitchell and Geoff Dyer, ‘Heat in the Workshop’, Financial Times , 14 October 2007; ‘Inflation: China ’s Least Wanted Export’, Financial Times , 12 November 2007. China ’s present economic path, thus, can potentially be sustained, at least in its broadest outlines, subject to significant reform, for at least the next five to ten years, perhaps longer. [460] [460] Interview with Yu Yongding, Beijing, 6 December 2005. But there are no guarantees. Yu Yongding, one of China ’s top economists, suggested in an interview in 2006 that there was a 30 per cent chance of things going seriously wrong. [461] [461] Ibid. The economy, given its high degree of exposure to trade, is very sensitive to exogenous developments. The global recession will be a major test of the extent to which the Chinese economy can maintain rapid economic growth in a situation where it can no longer depend to the same extent on Western export markets — prior to the global crisis, the European Union accounted for around 22 per cent of Chinese exports and the United States 18 per cent. [462] [462] The World Bank predicted a fall of almost 2 per cent in China’s growth rate in 2008 as compared with 2007; ‘China “On Course for Growth Slowdown”’, Financial Times , 4 February, 2008.

In the context of the gathering recession, China ’s economic growth rate is estimated to have been 9 per cent in 2008 and is projected to fall to 6–8 per cent in 2009, from 12 per cent in 2006 and 2007, and an average of well over 10 per cent since 2002. The government is seeking to compensate for falling Western demand by encouraging domestic consumption, which accounts for around one-third of total output, and engaging in large-scale public expenditure, mainly on infrastructure, education and health. The government is fortunate in enjoying very strong finances and is therefore in a position to lavish considerable resources on stimulating the economy. The contrast, here, between the debt-laden, cash-impoverished, low-growth Western economies and the cash-rich, fast-growth, surplus-generating Chinese economy could hardly be greater, not to mention the fact that while the Western financial sector is effectively bankrupt, that of China is deposit-rich. This notwithstanding, the problems facing the Chinese economy are severe. In early 2009, it was estimated that 20 million migrant workers had already lost their jobs, with the prospects for those many millions planning to leave the countryside in search of work in the cities bleak. It is possible that the government’s efforts to compensate for the drastic fall in exports and declining foreign investment by increased public spending on infrastructure and social services, together with increased consumer expenditure, will ameliorate the effects of the downturn. Much will depend on the gravity of the recession in the West. If it results in a major contraction in the size of their economies, as seems possible, and if the recession persists for several years, the consequences for the Chinese economy are likely to be severe, with growth rates falling below 6–7 per cent, and perhaps even lower. In such circumstances, the government might face rising social unrest as unemployment escalates. The most benign scenario is one in which the Western recession is not too deep and relatively short-lived, and the Chinese government’s counter-measures are relatively effective. The most pessimistic scenario is one in which the Western recession bears strong echoes of the slump in the 1930s, both deep and protracted, the US resorts to protectionist measures against China and the Chinese government’s compensatory policies simply cannot cope with the collapse of its exports and inward foreign investment; such an outcome could presage social instability and might weaken the government’s own position.

One advantage that the government enjoys in this situation is that the renminbi is a non-tradeable currency and therefore not subject to volatile movement or speculation. The government has hitherto resisted the temptation to liberalize the capital account and allow the renminbi to float, which would have the effect of enhancing the renminbi’s role, promoting China ’s financial position and making it easier for Chinese firms to invest abroad. The main downside with such a strategy is that the savings which have underpinned China’s huge level of investment might be undermined as savers go abroad in search of rates of return far in excess of the paltry levels they can find at home, thereby denying the country the funds for investment that it has hitherto enjoyed, with the inevitable consequence that the growth rate would decline. In addition, a floating renminbi would be vulnerable to the kind of speculative attack suffered by the Korean won, Thai baht and Indonesian rupiah in the Asian financial crisis. [463] [463] Yu Yongding, ‘Opinions on Structure Reform and Exchange Rate Regimes’, pp. 1, 6–8. Although Zhu Rongji, the then Chinese premier, intended to begin the liberalization of the capital account in 2000, the Asian financial crisis persuaded him that such a change would be imprudent. The present global financial turmoil only goes to confirm the wisdom of the Chinese leadership in continuing to regulate the capital account, despite persistent calls from the West to deregulate. In due course, a gradual liberalization could well be initiated, indeed there are already clear signs of this, but the Chinese government is aware that the existing system provides the economy with a crucial firewall, especially given its open character and consequent exposure to external events. [464] [464] Interview with Yu Yongding, Singapore, 3 March 2006; and Yu Yongding, ‘Opinions on Structure Reform and Exchange Rate Regimes’.

Whatever the consequences of the global recession, there are powerful reasons for believing that the present growth model is unsustainable in the long run, and probably even in the medium term. Indeed, there has been a growing recognition amongst Chinese policy-makers and advisors that important modifications already need to be made to the model ushered in by Deng and intimately associated with his successor Jiang Zemin. [465] [465] Yu Yongding, ‘ China ’s Structural Adjustment’, pp. 1–5. That process, championed by Hu Jintao, has already begun, with a shift away from the neo-liberal excesses of the nineties and towards a more harmonious society, echoing an older Confucian theme, with a new emphasis on egalitarianism, greater weight attached to social protection, a desire to lessen the importance of exports and increase that of domestic consumer spending, and a turn away from the influence of the United States — or ‘de-Americanization’, as it has become known. [466] [466] Interview with Zhu Wenhui, Beijing, 20 November 2006; interview with Fang Ning, Beijing, 7 December 2005; and interview with Wang Hui, Beijing, 23 May 2006. Such changes are likely to be hastened by the global crisis and attempts to mitigate its effects.