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China’s New Role in the Global Arena
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China’s New Role in the Global Arena

Professor Daniele Schilirò, University of Messina

 

This article is a revised version of the speech given at the Horasis Global China Business Meeting, 10-11 November, in The Hague, The Netherlands

More than thirty years ago China launched economic reforms that would transform the country and its place in the world. At a speed no one could have predicted even a fifteen years ago, China has generated rapid growth and lifted more than 500 million citizens out of poverty (IMF Report, 2013). The country has been pounding away at 10 per cent growth or more for almost thirty years now. Today China is the second biggest economy and it has become an export superpower. China’s exports to the United States (partly an aspect of the global economic imbalance) increased 1,600 per cent in fifteen years. The country is also the biggest manufacturer of steel and user of concrete in the world (its secondary sector, which includes Industry – 40 percent of GDP – and Construction – 9 percent of GDP – is the most important), and it has seen an astonishing development of its own infrastructure. Moreover, China has the largest foreign exchange reserves in the world – a quarter of the global total – and the Chinese development bank is the largest development institute globally.

Lastly, China is leader of Sovereign Wealth Funds, built on the enormous accumulation of foreign exchange reserves in recent years. In fact, China created in 2007 the China Investment Corporation (CIC) which is the most important Sovereign Wealth Fund with total assets of 575 billion dollars (2013) that has greatly strengthened its positions in Europe. So the nation has emerged as a global player on multiple fronts: primarily in technology and in international finance. Of course, China's transformation has created its own problems: environmental, social and political.

However in the last two years, China’s economy has, de facto, turned from high growth to moderate growth. China's annual growth rate of GDP slowed to 7.5 percent in the second quarter of 2013 and it is moving at a yearly rate of 7%. Although GDP expanded 7.8 percent in the third quarter of 2013 over the same quarter of the previous year, partly due to the strong momentum of the property market, but also driven by tax reforms taken in Summer (2013) by the China's new leaders (who took charge in March) and by investment in railway infrastructures. The reasons of this moderate growth are the decline in export, investment and industrial production, determined also by the slowdown in key markets such as the US and Europe that hurted demand for its exports. In addition, there are weaknesses in the financial sector, local government finances, and real estate. One of the major challenges facing China, today and in the next years, is the uneven development that has accompanied the impressive national growth rates and rapid urbanization.

China’s role in the global arena is obviously evolving. Today, China's economy is featured by a more sophisticated structure with more technology, more innovation, more skilled people, more brands. Despite there is still only one global superpower, i.e. the United States., it is very difficult to think of any global problem (i.e. global economic imbalances and trade, environmental challenges) that could be resolved satisfactorily without China’s involvement.

Of course, about China’s role in the global arena, there are different views. I can cite two important and interesting books in order to summarize two main lines of thought. In both cases, no one denies the growing role of China in the global scenario.

The first book is that of Arvind Subramanian ECLIPSE: Living in the Shadow of China’s Economic Dominance (Peterson Institute for International Economics, 2011). Subramanian shows that China is representing a great shift in economic power that is changing the world. His attempt to quantify and project economic and currency dominance leads him to the conclusion that China's dominance is not only more imminent, but also broader in scope, and much larger in magnitude, than is currently imagined.

A different opinion on China’s role is CHINA GOES GLOBAL: The Partial Power (Oxford University Press, 2013) by David Shambaugh a leading expert in Chinese studies. In this book the author tries to answer to the following question: Is China trying to establish itself a global power, a challenger to the United States as a global leader? Shambaugh offers a comprehensive account of China’s prominence in the global arena. Assessing China’s activities all across the world and along six different dimensions—perceptual, diplomatic, global governance, economic, cultural, and strategic. He argues that China lacks influence in most international domains and is not the kind of challenge to global order and the United States that many argue it is. Shambaugh shows how China’s growing economic power has given the nation access to many activities, ranging from mineral mines in Africa, to currency markets in the West, to oilfields in the Middle East, to agribusiness in Latin America and to the factories of East Asia. He highlights China’s ambition by pointing to its growing military power and presence in diplomatic affairs, as well as its increasing cultural influence and the large role it plays in commercialism across the world. In spite of its astronomic growth, however, Shambaugh maintains that China’s influence is still more broad than deep and that it lacks the influence attributed to a major world power. Thus, according to him, China is a “partial power.”

My opinion about China’s Global Role is that China looks like a superpower that is non sustainable, since it is strongly unbalanced. In addition, China is still not an hard power at the global level like the United States and it has not a global cultural influence. But, at the same time, China has emerged from both regional and global economic crises stronger than many other countries and its global influence is rising. Moreover, China’s identity is reinforcing, whilst its nationalist sentiment is raising.

China’s global power is already very relevant, there is now a minor unbalance of global economic power. China possesses a significant counterweight to USA economic pressure and a powerful bargaining chip in any confrontation. China might not be able to compel the most powerful states to do what it wants, but it can at least deter them from trying to impose their wills on China. And this has been reflected in newly assertive Chinese positions on matters relating to external interference in sovereign national affairs and on Chinese territorial claims in the South China and East China seas. In addition, China has become a new important actor in the global scenario, especially for third world countries. Finally, the recent nuclear agreements that China has signed with Saudi Arabia, Turkey and UK, where Beijing demonstrates its financial power and technological potential, it’s a proof of its rising influence. This might create, particularly in the Western countries, a feeling of fear about the emerging power of China. But, China, on the whole, has demonstrated to be a responsible power. Deng Xiaoping once counselled those running China, ‘Hide your brightness, bide your time’. His argument was that China should simply ascend and develop without causing any friction. However, recently, the “China’s peaceful rise” theorized by Deng, for a variety of reasons, seems to be no longer the basic strategy of China’s government. In particular, China’s military rise (specifically, its naval capability) poses to neighbour countries such as Japan, South Korea, Singapore and the Philippines issues of how re-balance their own positions. Conversely, for the United States raises the need to revise and focus more on Western Pacific.

It is without doubt that Beijing has become an ever more important centre regionally, so the balance of power in those bilateral relationships has tipped further towards China, causing greater unease in some parts of East and South-East Asia about the Chinese role.

Moreover, China has been more confident in asserting its discontent with the current global order, and the need for a greater say for developing countries towards ultimately parity with the developed world. Membership of the G20 is an important signal of China's centrality in the creation of any reformed mechanism of global governance.

In economic affairs, the basic message is that China has started playing a major global role, but it is not a leading role yet, the existing global powers shall continue to take the lion's share of global responsibilities. Even though China surpassed Japan to become the world's second largest economy in the second quarter of 2010, this does not mean that China is on par with the USA and other Western states. China is still a developing country, the country is only 103rd in a league table of global per capita GNP, it has over 150 million people living in poverty and is reliant on foreign companies to produce most of its export value and its environmental and social problems are becoming huge and worrying.

Indeed, there are concerns about long run viability of China’s model of development. More specifically, first, this model appears unbalanced, with exports and investment playing too great a role compared to domestic consumption. Second, and very much related, the extent to which this growth model was dependent on overseas sources of finance and overseas markets for export goods produced in China; this has created a sort of double dependence on the global economy. Third, the pattern of global engagement had contributed to an uneven spatial distribution of growth and inequality, which in turn was deemed to present a challenge to social stability. Finally, there was a question over the ‘quality’ of growth. This is why the IMF, in its last Report (October 2013), insists on a process of reforms that China needs, to avoid an eventual and potentially devastating crisis, so that its growth can become “sustainable”.

On the other hand, however, many observers did not pay much attention to the rise of the Chinese yuan to a level 20-year high versus the U.S. dollar over the past weeks, which may have a hugely beneficial impact not only on China, but on the rest of the world. This revaluatuon of the chinese currency is very important since up to now we have witnessed a permanent devaluation of the yuan. In fact, the signficant undervaluation of yuan was one of the key drivers behind the 2008 financial crisis. It allowed China to become an exporting powerhouse. But there is another equally important aspect that concerns the Chinese currency. Recently, China has completed agreements with the ECB for transactions in their respective currencies. In a similar manner China has signed bilateral trade with Japan and Australia, and between the BRICS to trade in their respective currencies. Finally, it has entered into an agreement with Russia for the supply of oil and goods ruble / yuan.

These actions prove that China is preparing the ground for a greater use of the yuan as an international currency and the replacement of the dollar as world reserve currency. Even the massive buying of gold on the markets by China, followed by the fall of the price of the yellow metal and the sales by Western central banks (especially the Fed), is part of a long-term currency strategy pursued by the Chinese authorities.

Chinese Premier Li Keqiang has promised to lead the transition towards a model of quality growth with an economy driven by internal consumption rather than exports. So far the Chinese household consumption were estimated at some 34-36% of GDP, while in the West we are at 58% of Germans and 70% of Americans. Now China is actively pursuing a strong yuan policy. The reason why is doing this, it’s because the country’s exporters are strong enough to withstand a higher yuan.

The rising yuan represents a dramatic change in Chinese policy. The country’s leaders are aware that the export-led economic model which has powered China over the past two decades isn’t sustainable. A stronger yuan will help re-balance the economy, with consumption becoming a larger contributor to growth.

Chinese leaders are also in the process of addressing other related issues. China, for instance, continues to strengthens its infrastructure, in particular it aims at the development of logistics and of canal system to bring the water from South to North of China. A relevant point here is about the social experiment that the new China's leaders want to bring forward, regarding the process of urbanization of central and western regions of rural migrants. Of course, this experiment is very challenging since there are social, economical and environmental risks. On the whole, a stronger yuan and related reforms can help put China on a more sustainable economic path. With China consuming more of its production, that may mean less goods being sent overseas. That could go some way to addressing the current oversupply in goods. In other words, it could remove a key impediment to a global economic recovery. In addition, it can halp by going in the direction of removing a central problem in global trade: that of a significant trade imbalance between China and United States. However, transition to a new economic model will take time and it may cause short-term pains for China.

Certainly, China new economic strategy, confirmed in the recent program of the plenum of the Chinese Communist Party’s Central Committee, of strengthening the role of market by setting the stage for currency and interest rate liberalization, a loosening of restrictions on rural residents’ ability to settle in cities and a shift in the power and priviledges of the country’s powerful state-owned enterprises, seems aimed at reforming the economic and social system towards a more sustainable path. Thanks to its future higher level of home consumption China will tend to become gradually an alternative to declining Western consumption, so to be a ‘stabiliser’ of the global economy. Paradoxically, the crisis has helped put China's leaders in a position where they have more power to protect core interests defined as maintaining the ‘sovereignty and territorial integrity’ and ‘the continued stable development of China‘s economy and society’.

In conclusion, the recent decisions of the CCP’s Central Committee has sought to meet the economic and social needs felt by most of the Chinese people, such as, for example, the abandonment of population policy based on One Child, so to ease social hardship among the population. If we pay also the attention to the recent rise of the yuan, and to the economic policy that aims at increasing the home consumption, to the strengthening of the market forces, we will have a more complete view of the future economic strategy China is pursuing. As we all know, the former economic strategy was based on the undervaluation of yuan and boosting exports, that allowed China to become an export superpower and to accumulate huge financial capital in its Sovereign Wealth Funds. The social experiment of urbanization of central and western regions plus this new strategy of economy policy based on a further liberalization, a revaluation of the yuan and the increase of home consumption can be a big change for China and the global economy. Of course, this new policy is very challenging since there are social, economic and environmental risks.

But as we stated before, China also aims to have a more wider and deep role in world economic affairs, so its strategy concerning investment abroad in raw materials, energy, in the nuclear sector, in banking and finance will surely give China a more extensive and influent economic and political power in the next few years.

 


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