Transcript Dragon Weathering the Storm: Blue Sky Ahead?

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
1
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, China’s 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.
2
Main points
I.
The global crisis and the aftermath
II.
China’s macroeconomic robustness and social
weakness
III.
China’s future challenges: The 3Rs
IV.
China’s first challenge: Rebalancing
V.
China’s second challenge: Internalization,
Regionalization and globalization
VI.
China’s third challenge: Overcoming the Resource
constraints
VII.
An integrative historical summary
3
I. The global crisis and the aftermath:
Unprecedented quantitative easing
Source: www.oecd.org/OECDEconomicOulook , September 2009
4
I. The global crisis and the aftermath:
Huge fiscal stimulus
5
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 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 Japan’s
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.
6
I. The global crisis and the aftermath
7
II. 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). 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.
8
II. China’s macroeconomic robustness
and social weakness
China
Source: www.oecd.org/OECDEconomicOulook , September 2009
9
II. China’s 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.
10
II. China’s macroeconomic robustness
and social weakness
Recent Quarterly Urban-Rual Income Differentials
(in nominal terms)
3.4
Cumulative multiples
3.3
3.2
3.1
3
2.9
2.8
2.7
1Q2008
2Q2008
3Q2008
4Q2008
1Q2009
Quarter
Source: National Bureau of Statistics of China
2Q2009
11
III. China’s 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:
1. Rebalancing its structure of economic development:
from external demand to domestic demand; from
investment to consumption.
2. Increasing participation in internalization:
Regionalisation versus globalization
3. Managing its relative lack of Resources in becoming a
genuine global economic power.
12
IV. China’s 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.
13
IV. China’s first challenge: Rebalancing
14
IV. China’s first challenge: Rebalancing
15
IV. China’s first challenge: Rebalancing
Recent Quarterly Urban-Rual Income Differentials
(in nominal terms)
3.4
Cumulative multiples
3.3
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
16
IV. China’s 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’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.
• 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.
17
V. China’s 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 world’s 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.
18
V. China’s 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.
19
V. China’s second challenge:
Regionalization versus globalization
20
V. China’s second challenge:
Regionalization versus globalization
21
V. China’s 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 )
22
V. China’s 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 China’s 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.
23
24
VI. China’s 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 world’s
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 China’s huge, albeit future,
demands have reportedly been built into the commodity markets.
25
VI. China’s third challenge:
Overcoming the Resource constraints
Reuters/Jefferies-CRB® Index (1967=100)
CRB index
© Thomson Reuters
(monthly close) September 1956 - August 2009
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
26
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.
27
Fight for resources in a multi-polar world
--- China surrounded
http://www.lib.utexas.edu/maps/middle_east_and_asia/china_rel01.pdf
28
Fight for resources —
Britain’s island strategy (colonialism)
http://www.lib.utexas.edu/maps/europe/europe_ref_2008.pdf
29
Fight for resources —
Japan’s island strategy (world war)
http://www.lib.utexas.edu/maps/cia08/japan_sm_2008.gif
30
Fight for resources —
Germany’s breakout (world wars)
and compromise (EU)
http://www.lib.utexas.edu/maps/cia08/germany_sm_2008.gif
31
Fight for resources —
US evolving from isolationism to
hegemonic expansionism
http://www.lib.utexas.edu/maps/americas/north_america_ref_2007.jpg
32
China’s strategy in the fight for resources
--- Learning from Germany or others?
http://www.lib.utexas.edu/maps/middle_east_and_asia/china_rel01.pdf
33
VII. An integrative historical summary
• Every country’s 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.
34
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.
35
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 Press:89-113.
• 曾澍基 (Tsang Shu-ki) (2008) “從長遠看世界與中國經濟” (“The
Global and the Chinese Economy from the Long View”) (in
Chinese); posted on the author’s website:
www.sktsang.com/ArchiveIII/CBC_sktsang_081011.pdf.
• Tsang Shu-ki, “Wither the global polity/economy?” (15/9/2009),
article posted on the author’s website:
www.sktsang.com/RF/Tsang_0909.pdf
36