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 CPU, d DRC, DRC M Mainland i l d Chi 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 g y left aside. A relief rebound is not surprising, p g 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 t t l challenges h ll are three-fold: th f ld i.e. i the th 3Rs: 3R Rebalancing; b l i Regionalization and Resource management. Although unique, China might learn more from the history of G Germany , rather h than h f from Britain, i i Japan or the h US. S In short, China should rebalance with a greater emphasis on regional economic cooperation and aim at overcoming the developmental constraints t i t of f its it limited li it d resources. And no one promises a blue sky.

Main points
I. II. III. IV. V. VI. VII. The global crisis and the aftermath Chinas macroeconomic robustness and social weakness k Chinas future challenges: The 3Rs Chinas first challenge: Rebalancing Chinas second challenge: Internalization, Regionalization i li i and d globalization l b li i Chinas third challenge: Overcoming the Resource constraints t i t An integrative historical summary
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I. The global crisis and the aftermath: Unprecedented p q quantitative easing g

Source: www.oecd.org/OECDEconomicOulook , September 2009

I. The global crisis and the aftermath: Huge fiscal stimulus

Source: IMF World Economic Outlook, April 2009

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 h fl flood d of f liquidity, li idi especially i ll via i the h asset markets, k and d the creation of new debts over the world. Exit Exit is a very tricky question for quantitative easing, 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 g global crisis and the aftermath

II. Chinas China s 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) 2008). Government expenditure also increased by 22.7% year on year in January-August. result the dip in overall growth turns out to be As a result, 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

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. threshold That can probably be done. However, and unfortunately, signs of social cracks are emerging, regionally and vertically, despite the comforting f ti macroeconomic i statistics. t ti ti This Thi is i unlikely lik l to t be b what h t the top leadership has wanted. The preliminary evidence is that the financial tsunami has aggravated at least l urban-rural b l income i inequality i li despite d i government policies li i to help the rural areas. y and fiscal policies, p , mostly y via the The benefits of loose monetary 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

Recent Quarterly Urban-Rual Income Differentials (in nominal terms)
3.4 3.3

Cumula ative multi iples

3.2 3.1 3 2.9 28 2.8 2.7 1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009
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Quarter Source: National Bureau of Statistics of China

III Chinas III. Chi f future t challenges: h ll Th 3R The 3Rs

Irrespective I ti of f what h t would ld happen h to t the th global l b l economy (i.e. (i V/U/W/L/H/X), China probably will not face severe pressure in terms of macroeconomic statistics. downward p However, three major structural challenges loom in the future: 1. Rebalancing its structure of economic development: from external demand to domestic demand; from investment to consumption. consumption Increasing participation in internalization: Regionalisation versus globalization Managing its relative lack of Resources in becoming a gen ine global economic power. genuine po er
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2. 3.

IV Chinas IV. China s first challenge: Rebalancing

Everyone agrees about the need for China to shift from export-led l d and d investment-driven i di growth h to a trajectory j in i 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. policies
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IV China IV. Chinas s first challenge: Rebalancing

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IV Chinas IV. China s first challenge: Rebalancing

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IV. Chinas China s first challenge: Rebalancing

Recent Quarterly Urban-Rual Income Differentials (in nominal terms)
3.4 3.3

Cumu ulative mul ltiples

3.2 3.1 3 2.9 2.8 2.7 1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009

Quarter Source: National Bureau of Statistics of China

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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 China Chinas s 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. O On th the other th hand, h d political liti l reforms f that th t aim i at t the th 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, g and to speed p up p sustainable development. p
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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 li i in living i rural l areas (54% in i 2008), 2008) it is i difficult diffi lt to t imagine i i China, already the worlds third largest economy in terms of absolute GDP ( (but far behind regarding g gp per capita p income) ) challenging the US any time soon. The g global financial crisis has shaken the US economy, y, 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. globalization
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V. Chinas second challenge: Internalization, Regionalization and globalization

I Internationalization i li i can take k many forms f : bilateral bil l or multilateral regionalization or globalization under an over-arching over arching worldwide institution 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 ti l for f a developing d l i economy like lik China. Chi (taking g into account worldwide data) ) Globalization ( 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 h is i that h in i this hi era of f globalization, l b li i 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. current By the end of 2008, 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? rivals? (www.wto.org/english/thewto_e/whatis_e/tif_e/bey1_e.htm )

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V. Chinas second challenge: R i Regionalization li ti versus globalization l b li ti

Sh Should ld a nation ti concentrate t t on bilateral, bil t l multilateral, ltil t l regional i l or global economic cooperation, if its political and economic resources are limited? The answer will obviously not be clear cut. cut Like Germany and the EU, it could be a waste of time to directly challenge the sitting world hegemony. So sub-global regionalization i li ti may be b a useful f l building b ildi block bl k or fall-back f ll b k position in a less dramatic process of revival and development. y task, as East Asia is unlike EU. But,. a start It is not an easy 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 reso rce is only onl 58% of the worlds orlds average, ranked as the 53rd in the global league; per p capita p arable land is 30% and water resource is ( (and highly unevenly distributed)etc. Even for coal, it is only about 55%, not to mention oil and natural gas gas. It sounds like a horror story for a rising rising dragon dragon! !
The result is an upward trend of external dependency on resource provisions. The sharp spike in the Commodity Research Bureau (CRB) index i d in i early l 2008 might i h have h been b aggravated d by b 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
Reuters/Jefferies-CRB Index (1967=100)
(monthly close) September 1956 - August 2009
Thomson Reuters

Index Value 500

450

400

350

300

250

200

150

100

50 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

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VII An integrative historical summary VII.

How should China handle the fight for resources after th global the l b l storm? t ? Outsourcing O t i and d increasing i i utilisation tili ti efficiency (of existing resources in the circular economy) y ) are the obvious steps. p Looking back to history, different countries in their global ascendancy resorted to various development and political li i l strategies. i At the risk of over-simplification, I think that China should h ld handle h dl it its th three R challenges h ll (rebalancing, ( b l i regionalization and resource management) in an integrated g manner, p preparing p g for the worst and avoiding g short-term drastic actions. Let us take a historical look at the geopolitical contexts of f the h rise i to global l b l significance i ifi of f different diff countries. i
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Fight g for resources in a multi-polar p world --- China surrounded

http://www.lib.utexas.edu/maps/middle_east_and_asia/china_rel01.pdf
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Fight for resources Britains Britain s island strategy (colonialism)

http://www.lib.utexas.edu/maps/europe/europe_ref_2008.pdf

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Fight for resources Japans Japan s island strategy (world war)

http://www.lib.utexas.edu/maps/cia08/japan_sm_2008.gif

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Fight for resources Germanys Germany s breakout (world wars) and compromise (EU)

http://www.lib.utexas.edu/maps/cia08/germany_sm_2008.gif

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Fight for resources US evolving g from isolationism to hegemonic expansionism

http://www.lib.utexas.edu/maps/americas/north_america_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_asia/china_rel01.pdf

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VII An integrative historical summary VII.

Every country countrys s development is unique and there is no ready model that one could copy. Nevertheless, if China is to learn something g from history, y, I would suggest gg that the painful experience of Germany might be of more value, given the geopolitical and economic environment th t the that th dragon d is i caught ht in. i 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, p, the consequences q would be rather counterproductive.
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VII. An integrative g historical summary y

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 d turns, China hi needs d 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. Vol CXVIII, CXVIII No No.2, 2 May May, pp pp.359-407 359 407 Taylor, Alan M. (2002), Globalization, Trade and Development: Some Lessons from History, NBER Working Paper 9326, N November. b Tsang Shu-ki, (2008), The Economic Basis of Regionalization, Regionalization , The Pan-Pearl Pan Pearl River Delta: An emerging regional economy in a globalizing China, in Y.M. Yeung and Shen Jianfa (eds.), The Chinese University Press:89-113. (Tsang Shu-ki) Shu ki) (2008) ( (The The Global and the Chinese Economy from the Long View) (in Chinese); posted on the authors website: www.sktsang.com/ArchiveIII/CBC sktsang 081011.pdf. www.sktsang.com/ArchiveIII/CBC_sktsang_081011.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 www.sktsang.com/RF/Tsang_0909.pdf
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