G20 offers China a chance to save the world economy – by saving its own
Andy Xie says success of the summit won’t be decided by how flawless a host China is, but by how far Beijing will go to restructure its economy, thereby lifting global growth
China is heavily invested in the G20 summit in Hangzhou (杭州) to ensure its success. But, how should success be defined? Since its inaugural meeting in 1999, it’s hard to recall any significant success from G20 summits. Violent anti-globalisation protesters tussling with heavily armed police seem to be the most memorable G20 imagery. One thing we can be sure of is that the Hangzhou summit will have none of that. But, apart from exquisite dinner banquets and perfect group photos of global leaders by the West Lake, could this summit achieve more?
If not, it would be a great pity. The world is at its most critical juncture since the end of the cold war in 1989. The global consensus on globalisation is broken, especially among its main promoters in the West. It is largely a consequence of mistakes made by the Western elite. They didn’t take policy measures to help those whose wages were dragged down by globalisation. And they took advantage of low inflation due to global competition to pursue expansionary monetary policies, which inflated non-tradeable sectors like housing, education and health care, enriching a small minority of asset owners by squeezing the middle class.
The political backlashes could throw the West into a prolonged period of instability. It may end globalisation as we know it. China has been the largest beneficiary of the globalisation in the past quarter of a century. It has more at stake than anyone else, and should do something about it.
If China stops overinvesting and balances its economy, the global economy would receive a huge positive boost. The resulting virtuous cycle would sharply decrease the negative sentiment towards globalisation.
China’s potential growth rate is falling into the 4-5 per cent range. Given such levels of growth, the sustainable level of investment should be less than 30 per cent of gross domestic product. The current level is about half of GDP, and it is being propped up by subsidies with “forced savings”. Hence, the return on investment is artificially depressed to extremely low levels. Because China’s investment is very large, the overinvestment is holding down investment everywhere else. This is the reason for weak economies and bubbles everywhere.
Unless China changes, stimulus by central banks can only make things worse. Reforms in China can revive China’s and the global economy.
The necessary structural reforms would make it the largest consumer market in the world. Every other economy would benefit. China’s global status would be recognised by all. China is big; it doesn’t need to fight for global status. If China makes its domestic economy efficient, it will be assured of its global status automatically.
China should not fall into the trap of strategic competition. It may feel exciting to gain a little advantage here and there. The process could feel like a Hollywood thriller, enticing players and spectators alike. But, in the end, without fundamentals, the result would be worse for everyone. History is full of victims who fell for the thrills of great games.
The latest example is Russia. When oil prices were high, it spent too many resources on strategic competition and neglected to diversify its economy away from natural resources. Now, as oil prices have collapsed and are likely to stay low for a long time to come, it is trapped. Even though Russia is still gaining points in strategic competition, they really don’t matter. Unless it can build a dynamic economy, it doesn’t have the resources to back up its global ambitions.
During the cold war, the Soviet Union and the US spent trillions of dollars trying to outsmart each other. If we look back now, none of it made any difference. The US spent tens of billions of dollars on intelligence each year. Yet none of the agencies made the correct predictions. It was just a waste. The US came out the winner because it had a dynamic economy and the Soviet Union had the opposite.
Seven decades ago, Britain and France, severely weakened by the two world wars, ignored their weakened fundamentals and tried to reclaim their empires through strategies and tricks. The resulting failures have pushed them permanently into being bit players in the world. Some mistakes are fatal.
China could do much at home that would enhance its global status. In addition to balancing the economy, repairing a severely damaged environment would dramatically improve people’s livelihoods and earn kudos around the world. It doesn’t make sense to cut costs at the expense of the environment. If China could detail an environmental strategy in Hangzhou, it would receive far more praise than any overseas initiatives.
In Hangzhou, China has a great opportunity to tell the world how it would move forward to revive its economy and benefit the world. Balancing the economy and repairing the environment should top the agenda. China has the potential to lead the world by example. Now is the moment to seize the opportunity.
Andy Xie is an independent economist