May 26th 2017

Rethinking the Next China


NEW HAVEN – For the past seven years, I have taught a popular class at Yale, called “The Next China.” From the start, the focus has been on the transitional imperatives of the modern Chinese economy – namely, the shift from a long-successful producer model to one driven increasingly by household consumption. Considerable attention is devoted to the risks and opportunities of this rebalancing – and to the related consequences for sustainable Chinese development and the broader global economy.

While many of the key building blocks of China’s transitional framework have fallen into place – especially rapid growth in services and accelerated urbanization – there can be no mistaking a new and important twist: China now appears to be changing from an adapter to a driver of globalization. In effect, the Next China is upping the ante on its connection to an increasingly integrated world – and creating a new set of risks and opportunities along the way.

The handwriting has been on the wall for several years. This strategic shift is very much a reflection of the leadership imprint of President Xi Jinping – in particular, his focus on the “China Dream.” Initially, the dream was something of a nationalist mantra, framed as a rejuvenation by which China would recapture its former position of global prominence, commensurate with its status as the world’s second largest economy.

But now the China Dream is taking shape as a concrete plan of action, centered on China’s One Belt, One Road (OBOR) plan. This ambitious pan-regional infrastructure initiative combines economic assistance with geostrategic power projection, supported by a new set of China-centric financial institutions – the Asian Infrastructure Investment Bank (AIIB), the New (BRICS) Development Bank, and the Silk Road Fund.

For those of us studying China’s economic transformation, this is hardly a trivial development. While the shift remains a work in progress, I would stress three tentative implications.

First, China has not made a full about-face. As an economist, I am prone to placing too much emphasis on models and on the related presumption that policymakers can flip the switch from one model to another. Yet it is not that black and white – for China or for any other country.

China’s leaders have, for all practical purposes, now conceded that a consumer-led growth strategy is tougher to pull off than originally thought. The consumption share of GDP has risen just 2.5 percentage points since 2010 – far short of the boost to personal incomes that might be expected from the 7.5-percentage-point increase in the share of services and a 7.3-percentage-point increase in the high-wage urban share of its population over the same period.

This disconnect largely reflects a porous social safety net that continues to foster high levels of fear-driven precautionary saving, which is inhibiting the growth of discretionary consumption. While still committed to urbanization and services development, China has elected to draw on a new external source of growth to compensate for a shortfall of internal demand.

Second, this global push has many of the features of the old producer model. It enables an increasingly worrisome overhang of domestic excess capacity to be directed at OBOR’s infrastructure requirements. And it relies on state-owned enterprises (SOEs) to drive that investment, forestalling long-needed reforms in this bloated segment of Chinese industry.

The flip side of this newfound support for the producer model has been a de-prioritization of consumer-led growth. In Prime Minister Li Keqiang’s annual Work Report – the official statement of economic policy – emphasis on the consumer-led structural transformation has been downgraded in each of the last two years (ranked third in both 2016 and 2017, as so-called supply-side initiatives have gained higher priority).

Third, China’s new global approach reflects a recasting of governance. Xi’s consolidation of domestic power is only part of the story. The shift in economic decision-making away from the State Council’s National Development and Reform Commission (NDRC) toward Party-based Leading Small Groups is particularly important, as are the anti-corruption campaign, heightened Internet censorship, and new regulations on non-governmental organizations (NGOs).

The irony of such power centralization is unmistakable. After all, Xi issued early promises to break up deeply entrenched power blocs, and the Third Plenum reforms of November 2013 emphasized the promotion of a more decisive role for markets.

But there is an even deeper irony for China’s new global push. It runs against the grain of a populist anti-globalization backlash that is brewing in many developed countries. As a producer-focused economy, China has long been the greatest beneficiary of globalization – both in terms of export-led growth and poverty reduction stemming from the absorption of surplus labor. That approach has now been stymied by China’s mounting internal imbalances, a post-crisis slowdown in global trade, and an increase in China-focused protectionism. As a result, China’s new attempts to gain increased leverage from globalization are not without serious challenges of their own.

A more global China also has important ramifications for Chinese foreign policy. Territorial disputes in the South China Sea loom particularly large, but China’s footprints in Africa and Latin America are also drawing heightened scrutiny. This new strategy raises perhaps the biggest issue of all – whether China fills a hegemonic void created by the isolationist “America first” approach of US President Donald Trump.

In short, the Next China is shaping up to be more outwardly focused, more assertive, and more power-centric than I envisioned when I started teaching this course in 2010. At the same time, there appears to be less commitment to a market-based reform agenda featuring private consumption and SOE restructuring. The jury is out on whether this changes the final destination of Chinese rebalancing. I hope that is not the case. But that is what makes it more interesting to teach an applied course, where the focus is always a moving target.


Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.

Copyright: Project Syndicate, 2017.
www.project-syndicate.org



To subscribe to Facts and Arts' weekly newsletter, please click here.

To follow Facts & Arts' Editor, Olli Raae, on Twitter, please click here.

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Jun 11th 2022
EXTRACT: "If Trump had his way, then Vice-President Pence would have also broken his oath to the constitution and derailed the certification of electoral votes. Our continued existence as a Republic might very well have hung on Pence’s actions that day. The mob’s response was to call for Pence to be hanged, and a noose and scaffold was erected apparently for that very purpose. What was Trump’s reaction when he was told that the mob was calling for Pence’s summary execution? His words were: “Maybe our supporters have the right idea.” Mike Pence “deserves” it."
Jun 10th 2022
EXTRACTS: "Speaking to journalist Sophie Raworth on the BBC’s Sunday Morning show recently, former war crimes prosecutor Sir Howard Morrison, now an advisor to the Ukraine government, highlighted the dangers posed by the negative – often insulting and dehumanising – statements made by some Russian politicians and media personalities about Ukraine and its people." ---- "The conditions and attitudes described by Morrison have existed for centuries: Russians have viewed Ukrainians as inferior since before the Soviet era." ----- "And, as Morrison said, stereotyping and denigrating a people as inferior or lacking agency makes atrocities and looting more likely to happen, as we are seeing in Ukraine."
Jun 9th 2022
EXTRACT: "Unless Russia realises that the west is willing and able to push back, a new, stable security order in Europe will not be possible. Concessions to Russia, by Ukraine or the EU and Nato, are not the way to achieve this. That this has been realised beyond Ukraine’s most ardent supporters in the Baltic states, Poland, the UK and the US is clear from German support for strengthening Nato’s northern flank and a general increase in Nato members’ defence spending."
Jun 8th 2022
EXTRACT: "Highly civilized people can turn into barbarians when demagogues and dictators exploit their fears and trigger their most atavistic instincts. Rape, torture, and massacres often happen when soldiers invade foreign countries. Commanding officers sometimes actively encourage such behavior to terrorize an enemy into submission. And sometimes it occurs when the officer corps loses control and discipline breaks down. Japanese and Germans know this, as do Serbs, Koreans, Americans, Russians, and many others."
Jun 1st 2022
EXTRACTS: "Like Metternich, Kissinger commits the fatal error of believing that a few wise policymakers can impose their will on the world. Worse, he believes they can halt domestically generated change and the power of nationalism. Many years ago, this is what Senator William Fulbright termed the “arrogance of power.” This approach failed in Vietnam, Iraq, and Afghanistan. It is also doomed to fail in Russia and Ukraine." ------ "Not surprisingly, Kissinger misunderstands Russia. He appears to believe that, because Russia has been an “essential part of Europe” for over four centuries, it is therefore fated to remain so for the foreseeable future.The claim is completely at odds with history." ---- "Finally, Kissinger misunderstands the implications of his own analysis for Western relations with Russia. “We are facing,” he said, “a situation now where Russia could alienate itself completely from Europe and seek a permanent alliance elsewhere." ---- "But what’s so bad about Russia’s isolating itself from Europe and becoming a vassal state of China? "
Jun 1st 2022
EXTRACTS: "According to the latest figures from China’s National Bureau of Statistics, China’s population grew from 1.41212 billion to just 1.41260 billion in 2021 – a record low increase of just 480,000, a mere fraction of the annual growth of eight million or so common a decade ago." ----- "China’s total fertility rate (births per woman) was 2.6 in the late 1980s – well above the 2.1 needed to replace deaths. It has been between 1.6 and 1.7 since 1994, and slipped to 1.3 in 2020 and just 1.15 in 2021."
Jun 1st 2022
EXTRACTS: "Casualties are very high. A very conservative estimate of overall Russian losses is that they have lost more troops killed since February 24 than in ten years of fighting in Afghanistan. This implies well over 40,000 men taken out of the fight, including the wounded." ----- "Away from the cauldron of Donbas, Belarus has been rattling its somewhat rusty sabre by deploying troops to its border with Ukraine. This is unlikely to trouble Kyiv. The Belarus president, Alexander Lukashenko, is well aware that he may need them at home to shore up his shaky regime."
May 27th 2022
EXTRACTS: "Monetary policymakers are talking tough nowadays about fighting inflation to head off the risk of it spinning out of control. But that doesn’t mean they won’t eventually wimp out and allow the inflation rate to rise above target. Since hitting the target most likely requires a hard landing, they could end up raising rates and then getting cold feet once that scenario becomes more likely. Moreover, because there is so much private and public debt in the system (348% of GDP globally), interest-rate hikes could trigger a further sharp downturn in bond, stock, and credit markets, giving central banks yet another reason to backpedal." ----- "The historical evidence shows that a soft landing is highly improbable. That leaves either a hard landing and a return to lower inflation, or a stagflationary scenario. Either way, a recession in the next two years is likely."
May 26th 2022
EXTRACT: "No, I am not arguing that Powell needs to replicate Volcker’s tightening campaign. But if the Fed wishes to avoid a replay of the stagflation of the late 1970s and early 1980s, it needs to recognize the extraordinary gulf between Volcker’s 4.4% real interest rate and Powell’s -2.25%. It is delusional to believe that such a wildly accommodative policy trajectory can solve America’s worst inflation problem in a generation."
May 26th 2022
EXTRACT: "It will be critical in this context how China will act and whether it will prioritise its economic interests (continuing trade with Europe and the US) or current ideological preferences (an alliance with Russia that makes the world safe for autocracies)."
May 26th 2022
EXTRACT: "The document is full of embarrassing and damming stories of illegal gatherings and bad behaviour. There was “excessive alcohol consumption”, a regular fixture referred to as “wine time Fridays” and altercations between staff. Aides are shown to have left Downing Street after 4am (and not because they had worked into these early hours). Cleaning staff and junior aides were abused, and a Number 10 adviser is on record before the infamous “bring your own booze” party...."
May 17th 2022
EXTRACT: "But even a resounding Russian defeat is an ominous scenario. Yes, under such circumstances – and only such circumstances – Putin might be toppled in some kind of coup led by elements of Russia’s security apparatus. But the chances that this would produce a liberal democratic Russia that abandons Putin’s grand strategic designs are slim. More likely, Russia would be a rogue nuclear superpower ruled by military coup-makers with revanchist impulses. Germany after World War I comes to mind."
May 4th 2022
EXTRACT: ".....a remarkable transformation is taking place in Ukraine’s army amounting to its de facto military integration into Nato. As western equipment filters through to the frontline, Nato-standard weaponry and ammunition will be brought into Ukrainian service. This is of far higher quality than the mainly former Soviet weapons with which the Ukrainians have fought so capably. The longer this process continues and deepens, the worse the situation will be for the already inefficient Russian army and air force."
May 3rd 2022
EXTRACT: " The conventional wisdom among students of the Russian arts and sciences is that Russian culture is “great.” The problem is that, while there are surely great individuals within Russian culture, the culture as a whole cannot avoid responsibility for Putin and his regime’s crimes." ---- "Russianists will not be able to avoid examining themselves and their Russian cultural icons for harbingers of the present catastrophe. What does it mean that Fyodor Dostoevsky was a Russian chauvinist? That Nikolai Gogol and Anton Chekhov were Ukrainian? That Aleksandr Solzhenitsyn was an unvarnished imperialist? That Aleksandr Pushkin was a troubadour of Russian imperial greatness? May these writers still be read without one eye on the ongoing atrocities in Ukraine?"
Apr 29th 2022
EXTRACT: "The following day Lavrov met his Eritrean counterpart, Osman Saleh, in Moscow. Eritrea was the only African country to vote against the UN resolution condemning the invasion. In this refusal to condemn Russia, Eritrea was joined by only Belarus, North Korea and Syria. Even longstanding allies such as Cuba and China abstained. It’s an indication of Russia’s increasingly limited diplomatic options as this war continues."
Apr 24th 2022
EXTRACT: "Although the milestone lasted only for a brief time, it points to a future in which California runs on 100% wind, solar, hydro and batteries, a future that will certainly arrive even faster than the state plans. As it is, California is ahead of its green energy goals." ...... "A world of 100% green energy and electric cars is not only a healthier and more comfortable world, it is a world where oil and gas dictators like Vladimir Putin are defunded."
Apr 17th 2022
EXTRACT: "Kazakhstan’s authorities have also showed uncharacteristic leniency in allowing public rallies in support of Ukraine. Thousands of protesters holding banners reading “Russians, leave Ukraine”, “Long Live Ukraine” and “Bring Putin to trial” marched across the capital, Almaty, wrapping monuments to Lenin and other Soviet-era figures with yellow and blue balloons symbolising the Ukrainian flag."
Apr 15th 2022
EXTRACT: "People’s identification with the Soviet Union appears to have a clear and growing basis in Russian public opinion. Surveys we have conducted throughout the Putin period show that Soviet identification among the general population – something that had been steadily declining after the collapse of the Soviet Union in 1991 – began to increase in 2014, when the Russian government annexed Crimea and supported rebellions in the Ukrainian regions of Luhansk and Donetsk. By 2021, almost 50% of those surveyed identified with the Soviet Union rather than the Russian Federation."
Apr 13th 2022
EXTRACT: "Worse yet, the Hungarian government has effectively been helping Putin by prohibiting the shipment of weapons to Ukraine across its borders. Hungarian public TV spreads Russian disinformation day and night. The day before the election, an assembly of ordinary people expressing solidarity with Ukraine was framed on state television as a “pro-war rally.” "
Apr 13th 2022
EXTRACT: "It may well be that the Russian army’s fate has already been sealed in what is likely to be a long war. The single qualification to this may be that Russia could default to escalation using “weapons of mass destruction” of one form or another – whether tactical nuclear warheads or chemical weapons."