Dragon Weathering the Storm: Blue Sky Ahead

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Dragon Weathering the Storm Blue Sky Ahead?

• Tsang Shu-ki
• Department of Economics
• Hong Kong Baptist University
• www.sktsang.com
• Conference on Global Economy and China
• CPU, HKSARG and DRC, Mainland China
• 28 September 2009

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Abstract

• The global economic crisis has been handled by
  most authorities with unprecedented monetary and
  fiscal loosening, with the fundamental imbalances
  largely left aside. A relief rebound is not
  surprising, but new complications arise.
• In the coming years, the consequences for the
  global economy might take any or a mixture of the
  following shapes V/U/W/L/H/X.
• China has been weathering the storm relatively
  well in terms of macroeconomics. However, social
  cracks arising from long-term factors seem to be
  surfacing as the relief policies have mainly
  benefited the asset markets.
• Whatever the direction for the global economy,
  Chinas future structural challenges are
  three-fold i.e. the 3Rs Rebalancing
  Regionalization and Resource management.
• Although unique, China might learn more from the
  history of Germany, rather than from Britain,
  Japan or the US.
• In short, China should rebalance with a greater
  emphasis on regional economic cooperation and aim
  at overcoming the developmental constraints of
  its limited resources.
• And no one promises a blue sky.

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Main points

• The global crisis and the aftermath
• Chinas macroeconomic robustness and social
  weakness
• Chinas future challenges The 3Rs
• Chinas first challenge Rebalancing
• Chinas second challenge Internalization,
  Regionalization and globalization
• Chinas third challenge Overcoming the Resource
  constraints
• An integrative historical summary

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I. The global crisis and the aftermath
Unprecedented quantitative easing
Source www.oecd.org/OECDEconomicOulook ,
September 2009
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I. The global crisis and the aftermathHuge
fiscal stimulus
Source IMF World Economic Outlook, April 2009
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I. The global crisis and the aftermath

• Given these unprecedented global policy responses
  to the financial tsunami, a relief economic
  rebound is not surprising in the near term. What
  else could one expect?
• For the sake of crisis management, perhaps
  justifiably, the fundamental imbalances which
  generated the global crisis have largely been
  left for further actions and reforms.
  Unfortunately, new complications have been
  fermented by the flood of liquidity, especially
  via the asset markets, and the creation of new
  debts over the world.
• Exit is a very tricky question for quantitative
  easing, and timing is crucial, as the following
  chart of Bank of Japans policy rate in the
  second lost decade illustrates.
• Hence a double dip or right-inclined W could
  not be ruled out. Indeed, the global economy
  might take any or a mixture of the following
  shapes V/U/W/L/H/X.

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I. The global crisis and the aftermath
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II. Chinas macroeconomic robustness
and social weakness

• As to China, exports have been hard hit (falling
  22.2 in the first eight months of 2009).
  However, the authorities have resorted to
  monetary and fiscal loosening not seen in many
  years, investment and, to a lesser extent,
  consumption have been showing above-trend
  increases.
• New loans amounted to RMB8,150 billion in the
  first eight months of 2009 (compared with
  RMB4,180 billion for the whole of 2008).
  Government expenditure also increased by 22.7
  year on year in January-August.
• As a result, the dip in overall growth turns out
  to be relatively mild. GDP rose by 6.1 and 7.9
  in Q1 and Q2 respectively.

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II. Chinas macroeconomic robustness
and social weakness
China
Source www.oecd.org/OECDEconomicOulook ,
September 2009
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II. Chinas macroeconomic robustness
and social weakness

• The trouble is that China, given its evolving
  socioeconomic system, needs to grow at a certain
  percentage to contain social dissent. A real GDP
  growth rate of 8 is believed by many to be the
  social threshold.
• That can probably be done. However, and
  unfortunately, signs of social cracks are
  emerging, regionally and vertically, despite the
  comforting macroeconomic statistics. This is
  unlikely to be what the top leadership has
  wanted.
• The preliminary evidence is that the financial
  tsunami has aggravated at least urban-rural
  income inequality despite government policies to
  help the rural areas.
• The benefits of loose monetary and fiscal
  policies, mostly via the assets markets and
  infrastructure projects, have not exactly gone to
  the normal consumers, the crucial agents of
  rebalancing the Chinese economy.

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II. Chinas macroeconomic robustness
and social weakness
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III. Chinas future challenges The 3Rs

• Irrespective of what would happen to the global
  economy (i.e. V/U/W/L/H/X), China probably will
  not face severe downward pressure in terms of
  macroeconomic statistics. However, three major
  structural challenges loom in the future
• Rebalancing its structure of economic
  development from external demand to domestic
  demand from investment to consumption.
• Increasing participation in internalization
  Regionalisation versus globalization
• Managing its relative lack of Resources in
  becoming a genuine global economic power.

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IV. Chinas first challenge Rebalancing

• Everyone agrees about the need for China to shift
  from export-led and investment-driven growth to a
  trajectory in which domestic demand and
  consumption play a more important role. But how?
• This has been the top agenda for the leadership
  since 2003, anyway, with an emphasis on social
  harmony.
• If a country wants to stimulate domestic demand,
  it involves a long process of switching incomes
  and implementing institutional changes. The
  global economic crisis has not made this process
  easier for China.
• The evidence (using both real and nominal
  statistics) is that urban-rural income inequality
  has not improved and the financial tsunami has
  apparently aggravated it in spite of various
  government policies.

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IV. Chinas first challenge Rebalancing
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IV. Chinas first challenge Rebalancing
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IV. Chinas first challenge Rebalancing
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IV. Chinas first challenge Rebalancing

• On the other hand, China is not in imminent
  danger, like Japan, of building bridges to
  nowhere. It still needs a lot of railways,
  highways and bridges. This is really a dilemma
  investment versus consumption yet confronting
  the need to develop fast.
• Given Chinas large rural population and
  elementary social security system, it would take
  a long time to effect the changes. Economically,
  a gradual but steadfast approach seems to be the
  best choice. Socially, a quicker equalization
  process is called for. It seems like a bridge
  over troubled water for China.
• On the other hand, political reforms that aim at
  the empowerment of the grass-root levels of the
  populace is important, especially at the levels
  of counties and townships.
• As Nobel Laureate Amartyr Sen so aptly argues,
  empowerment is one of the best ways to solve the
  problems of poverty, ignorance, and to speed up
  sustainable development.

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V. Chinas second challenge Internalization,
Regionalization and globalization

• The media like to talk about China as the rising
  global power. Nevertheless, with a population of
  1.3 billion, and the majority living in rural
  areas (54 in 2008), it is difficult to imagine
  China, already the worlds third largest economy
  in terms of absolute GDP (but far behind
  regarding per capita income) challenging the US
  any time soon.
• The global financial crisis has shaken the US
  economy, but its leadership in international
  trade and monetary systems is unlikely to be
  seriously undermined in the near term.
• The Chinese economy should doubtlessly be further
  internationalized but internationalization is
  not equivalent to globalization.

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V. Chinas second challenge Internalization,
Regionalization and globalization

• Internationalization can take many forms
  bilateral or multilateral regionalization or
  globalization under an over-arching worldwide
  institution.
• The experience in the past few years has
  demonstrated that a simple-minded policy to
  participate in US-led globalization may not be
  optimal for a developing economy like China.
• Globalization (taking into account worldwide
  data) has shown historical long waves of dramatic
  swings, as the two following charts by several
  scholars reveal.

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V. Chinas second challenge
Regionalization versus globalization
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V. Chinas second challenge
Regionalization versus globalization
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V. Chinas second challenge
Regionalization versus globalization

• A strange phenomenon is that in this era of
  globalization, sub-global (bilateral or
  multilateral) trade and investment agreements
  have increased sharply in the past two decades.
• According to the information provided by WTO, the
  supreme global trade institution, regional trade
  agreements (RTAs) are the tidal current. By the
  end of 2008, a total of 421 had been notified to
  GATT/WTO. Of these, 230 are currently in force.
  Most of them were created after 1995.
• This leads to an interesting, and perhaps
  paradoxical, question posted by none other than
  WTO itself Regionalism friends or rivals?
  (www.wto.org/english/thewto_e/whatis_e/tif_e/bey1_
  e.htm )

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V. Chinas second challenge
Regionalization versus globalization

• Should a nation concentrate on bilateral,
  multilateral, regional or global economic
  cooperation, if its political and economic
  resources are limited? The answer will obviously
  not be clear cut.
• Like Germany and the EU, it could be a waste of
  time to directly challenge the sitting world
  hegemony. So sub-global regionalization may be a
  useful building block or fall-back position in a
  less dramatic process of revival and development.
• It is not an easy task, as East Asia is unlike
  EU. But,. a start has to be made, and already
  made ASEAN10 3 BRIC meetings, and Chinas
  proliferating bilateral trade and financial
  agreements..
• Of course, it does not mean that China should
  reduce participation in the global economy or
  give up efforts to push for global financial and
  trade reforms. It does imply a shift in emphasis.

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VI. Chinas third challenge
Overcoming the Resource constraints

• China has the largest population in the world,
  but its per capita resource endowments are
  woefully lacking e.g.
• per capita mineral resource is only 58 of the
  worlds average, ranked as the 53rd in the global
  league
• per capita arable land is 30 and water resource
  is ¼ (and highly unevenly distributed)etc.
• Even for coal, it is only about 55, not to
  mention oil and natural gas. It sounds like a
  horror story for a rising dragon!
• The result is an upward trend of external
  dependency on resource provisions. The sharp
  spike in the Commodity Research Bureau (CRB)
  index in early 2008 might have been aggravated by
  speculation. However, expectations on Chinas
  huge, albeit future, demands have reportedly been
  built into the commodity markets.

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VI. Chinas third challenge
Overcoming the Resource constraints
CRB index
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VII. An integrative historical summary

• How should China handle the fight for resources
  after the global storm? Outsourcing and
  increasing utilisation efficiency (of existing
  resources in the circular economy) are the
  obvious steps.
• Looking back to history, different countries in
  their global ascendancy resorted to various
  development and political strategies.
• At the risk of over-simplification, I think that
  China should handle its three R challenges
  (rebalancing, regionalization and resource
  management) in an integrated manner, preparing
  for the worst and avoiding short-term drastic
  actions.
• Let us take a historical look at the geopolitical
  contexts of the rise to global significance of
  different countries.

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Fight for resources in a multi-polar world ---
China surrounded
http//www.lib.utexas.edu/maps/middle_east_and_asi
a/china_rel01.pdf
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Fight for resources Britains island strategy
(colonialism)
http//www.lib.utexas.edu/maps/europe/europe_ref_2
008.pdf
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Fight for resources Japans island strategy
(world war)
http//www.lib.utexas.edu/maps/cia08/japan_sm_2008
.gif
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Fight for resources Germanys breakout (world
wars) and compromise
(EU)
http//www.lib.utexas.edu/maps/cia08/germany_sm_20
08.gif
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Fight for resources US evolving from
isolationism to hegemonic
expansionism
http//www.lib.utexas.edu/maps/americas/north_amer
ica_ref_2007.jpg
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Chinas strategy in the fight for resources ---
Learning from Germany or others?
http//www.lib.utexas.edu/maps/middle_east_and_asi
a/china_rel01.pdf
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VII. An integrative historical summary

• Every countrys development is unique and there
  is no ready model that one could copy.
  Nevertheless, if China is to learn something from
  history, I would suggest that the painful
  experience of Germany might be of more value,
  given the geopolitical and economic environment
  that the dragon is caught in.
• Can China do it the British, Japanese or American
  way?
• I rather doubt it. Even if that were to be a
  choice by any future leadership, the consequences
  would be rather counterproductive.

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VII. An integrative historical summary

• All in all, in the new era of the 21st century
  after the global financial tsunami and economic
  crisis, with all the possible twists and turns,
  China needs to nurture a new path of development.
• Structurally, China has to solve its 3R
  challenges in an integrative manner.
• In short, China should rebalance with a greater
  emphasis on regional economic cooperation and aim
  at overcoming the developmental constraints of
  its limited resources.

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References

• Estevadeordal, Antoni, Frantz, Brian and Taylor,
  Alan M. (2003) The Rise and Fall of World Trade,
  1870-1939, Quarterly Journal of Economics, Vol.
  CXVIII, No.2, May, pp.359-407?
• Taylor, Alan M. (2002), Globalization, Trade and
  Development Some Lessons from History, NBER
  Working Paper 9326, November.
• Tsang Shu-ki,  (2008),  The Economic Basis of
  Regionalization,  The Pan-Pearl River Delta An
  emerging regional economy in a globalizing
  China,  in Y.M. Yeung and Shen Jianfa (eds.), The
  Chinese University Press89-113.
• ??? (Tsang Shu-ki) (2008) ??????????? (The
  Global and the Chinese Economy from the Long
  View) (in Chinese) posted on the authors
  website www.sktsang.com/ArchiveIII/CBC_sktsang_0
  81011.pdf.
• Tsang Shu-ki, Wither the global polity/economy?
  (15/9/2009), article posted on the authors
  website www.sktsang.com/RF/Tsang_0909.pdf