China’s global ambitions can wait while it rebalances its economy
Stephen Roach says while the Chinese economy is more resilient than widely believed, the country isn’t yet ready to seize the reins of global leadership
Another growth scare has come and gone for the Chinese economy. This, of course, is very much at odds with Western conventional wisdom, which has long expected a hard landing in China. Once again, the Western perspective missed the Chinese context – a resilient system that places a high premium on stability.
Premier Li Keqiang (李克強) said it all in his final comments at the recent China Development Forum. I have attended this gathering for 17 consecutive years and have learned to read between the lines of premier-speak. Most of the time, senior Chinese leaders stay on message with rather boring statements about accomplishments and targets, toeing the official line of the annual government work report on the economy that is delivered to the National People’s Congress.
This year was different. Initially, Li seemed subdued in his responses to questions from an audience of global luminaries that focused on issues such as trade frictions, globalisation, digitisation and automation. But he came alive in his closing remarks – offering an unprompted declaration about the Chinese economy’s underlying strength. “There will be no hard landing,” he exclaimed.
The all-clear sign from Li was in sync with official data in the first two months of 2017: solid strength in retail sales, industrial output, electricity consumption, steel production, fixed investment and service sector activity (the latter signalled by a new monthly indicator developed by the National Bureau of Statistics). Meanwhile, foreign-exchange reserves rebounded in February for the first time in eight months, pointing to an easing of capital outflows.
At the same time, the People’s Bank of China took its cue from the US Federal Reserve’s rate hike this month, boosting Chinese policy rates by about 10 basis points. The PBOC would not have taken that step had it been overly concerned about the state of China’s economy.
But the icing on the cake came from the trade data – namely, annual export growth of 4 per cent in January and February, following a 5.2 per cent contraction in the fourth quarter of 2016. This underscores a key contrast between the latest and previous Chinese growth scares.
Call it the Trump effect: the revival of the global economy’s “animal spirits” in recent months has provided important relief for a Chinese economy that is still heavily dependent on exports. Whereas earlier growth scares were exacerbated by chronic downward pressures from sputtering post-crisis global demand, this time external headwinds have given way to tailwinds.
But, while the near-term prognosis for the Chinese economy is far more encouraging than most had expected, an eerie sense of denial, bordering on hubris, appears to be creeping into China’s strategic groupthink. With the US looking inward, Chinese decision-makers seem to be pondering the opportunity that might arise from a seismic shift in global leadership.
I was repeatedly asked about the possibility of a China-centric globalisation – reinforced by Chinese leadership in multilateral trade (the 16-nation Regional Comprehensive Economic Partnership, or RCEP), pan-regional investment (China’s “One Belt, One Road” initiative), and a new institutional architecture (the Chinese-dominated Asian Infrastructure Investment Bank and the New Development Bank). It’s as if China had been preparing to fill the void being left by President Donald Trump’s “America first” US.
The Chinese are keen students of history. They know that shifts in global leadership and economic power are glacial, not abrupt. Yet I get the sense that they view the current circumstances in a very different light: Trump, the great disruptor, has changed the rules of engagement for what had long been a US-centric globalisation. Many in China are now wondering whether this may be an opportunity to seize the reins of global power.
Anything is possible – especially in a world where uncertainty is the only certainty. But there is another lesson of history that the Chinese must bear in mind. As Yale historian Paul Kennedy has long maintained, the rise and fall of great powers invariably occurs under conditions of “geostrategic overreach” – when a state’s global power projection is undermined by weakness in its domestic economic fundamentals. Global leadership starts with strength at home, and China still faces a long road of rebalancing and restructuring before it reaches the Promised Land of what its leadership calls the “new normal”.
Here there is another important disconnect between the view inside China and perceptions in the West. The view from outside is that Chinese reforms, the means to rebalancing, have stalled over the past five years under President Xi Jinping ( 習近平 ). The same view prevailed under the prior 10-year leadership of Hu Jintao ( 胡錦濤 ). But is this really what is happening in China?
Results matter more than grand pronouncements. Since 2007, when former premier Wen Jiabao ( 溫家寶 ) laid down the rebalancing gauntlet for a Chinese economy that had become “unstable, unbalanced, uncoordinated and unsustainable”, China’s economic structure has, in fact, undergone a dramatic transformation. The gross domestic product share of the so-called secondary sector (manufacturing and construction) fell from 47 per cent in 2007 to 40 per cent in 2016, whereas the share of the tertiary sector (services) increased from 43 per cent to nearly 52 per cent. Structural shifts of this magnitude are a big deal. The key point missed by reform deniers is that China is actually making rapid progress on the road to rebalancing.
All of which brings us back to the questions raised at this year’s China Development Forum. The combination of near-term resilience and an inward-looking US appears to offer a tantalising opportunity for China. But China should resist the temptations of global power projection and stay focused on executing its domestic strategy. The challenge now is to realise the “tremendous opportunity” that Li touted in ruling out a hard landing.
Stephen S. Roach, a faculty member at Yale, is a former chairman of Morgan Stanley Asia. Copyright: Project Syndicate