China's Economic Superpower Aspiration in the New Paradigm

PUBLISHED : Sunday, 22 July, 2012, 12:00am
UPDATED : Sunday, 22 July, 2012, 12:00am


China's Economic Superpower Aspiration in the New Paradigm
by Chi Lo
Enrich Professional Publishing

Many China watchers view the country's recent ascent through the prism of global political and economic rivalry. They ask: is the mainland getting stronger or weaker vis-a-vis the West, especially the United States?

Chi Lo, a Hong Kong-based fund manager, poses the same question in his book in light of the continuing global financial crisis.

Lo has worked as an economist at major financial institutions such as Standard Chartered and HSBC. Given his professional background, his book sometimes reads like an expanded version of a power-point presentation.

Lo begins by describing how the economies of Western powers have been weakened by the sub-prime crisis of 2007-2009. In theory, this could help China to realise sooner its ambition to become a super economic power.

After all, China was able to make full use of the 1997-1998 Asian financial crisis to its advantage, learning from the mistakes of its neighbours and speeding up reform. As a result, its economy grew to become the world's second largest, after the US, in 2010.

The current global crisis, however, is a double-edged sword for China, Lo notes. On the one hand, Beijing should be aware not to have over-leveraged financial institutions that can destabilise an economy and that bailing them out with public funds could lead to more moral hazard.

On the other, the global problems have had their impact on the mainland economy as well. With shrinking world demand, Chinese exports dropped steeply and pulled down the country's GDP growth.

In the fourth quarter of 2008, its GDP growth slowed to a year-on-year 6.4 per cent. Beijing, alarmed by the low growth, followed what the US did: flood the economy with new money to avoid a downturn.

In November 2008, China announced a four trillion yuan (HK$4.54 trillion) stimulus package. The sudden injection of liquidity increased growth sharply but also aggravated two long-standing problems of China, Lo notes.

First is the mainland's tendency to over-invest and allow excess capacity to pile up wastefully.

Second, indiscriminate lending by banks. When Beijing increased the money supply in 2008, the banks had a field day. A total of 10.5 trillion yuan in new bank loans were made in 2009, 110.4 per cent up from 2008. Behind the lending frenzy was a pile of bad loans in the making.

Lo notes that economic reform has moved more slowly in recent years. The last major reform was in the late 1990s, when former premier Zhu Rongji privatised the economy and made the currency convertible on current account transactions.

That privatisation drive, Lo argues, unleashed huge productivity gains that sustained the economy through a low-inflation boom lasting a decade. 'In a way, the current leadership is still reaping benefits of the dramatic corporate restructuring that took place in the 1990s,' he writes.

In contrast to Zhu, the leadership today opts for economic policies that boost political popularity and promote long-term structural development. It still relies on administrative measures, not market forces, to regulate the economy. Private enterprises have been kept out of core industries such as telecommunications, steel and energy.

China still has a long way to go to become a superpower, Lo says.