Trade war threat a reminder of the global risks to China’s 2050 growth plan
Stephen Roach says as Beijing throws itself into structural rebalancing of the economy, it must know that the challenge is not just internal, but also shaped by the global economy and China’s relationships with other major nations
The Chinese economy is at a pivotal point in its modern history. On the occasion of this 40-year anniversary of reforms and opening, it is tempting to look backwards and celebrate the extraordinary accomplishments of economic development. The greater challenge is to look forward to 2050 and the aspirational goals of what the Chinese Communist Party and its leadership have dubbed China’s “new era”.
The transition ahead is daunting, to say the least. On the one hand, it entails a full complement of internal adjustments aimed at the structural rebalancing of the Chinese economy – from manufacturing to services, from exports to household consumption, from surplus saving to saving absorption, and from state-directed to market-based resource allocation. Some progress on this journey is already evident.
While the Chinese economy is a good deal less dependent on the vicissitudes of external demand than was the case before the 2008 global financial crisis, exports still account for fully 20 per cent of the nation’s gross domestic product. With consumer-led rebalancing still in its very early stages, any disruption in the global climate could prove problematic for China.
Significantly, the rebalancing of China’s internal economic structure cannot occur in a vacuum. Important shifts in the global economy and in China’s relationships with other major economies also have a critical bearing on the outcome. In that vein, China has much to learn from recent developments in a volatile world – including lessons from the Asian financial crisis of the late 1990s, the 2008 financial crisis, and the long string of “lost decades” in Japan.
Japan, as modern Asia’s first troubled growth miracle, offers three lessons especially relevant for a debt-intensive Chinese economy. First, avoid the currency suppression of an export-led growth model and the trade tensions it provokes from the rest of the world. Second, do not ignore the potentially lethal interplay between asset bubbles and leverage. And third, avoid subsidising ossified zombie companies and the risks they pose to productivity growth.
While China has grounds for concern on all three counts, its recent focus on deleveraging and stability – especially the establishment of a new financial stability oversight committee – are hopeful signs that it can avoid the Japan syndrome. At the same time, the recent shift in its strategy to reform state-owned enterprises – towards the mixed ownership restructuring approach of China Unicom – is worrisome, in that it promotes a structure of cross shareholdings reminiscent of Japan’s keiretsu, the epicentre of that nation’s protracted post-bubble zombie problems.
Notwithstanding China’s progress on the road to rebalancing, it is still facing a legacy of pressures traceable to its original growth strategy. China’s export-led growth miracle has made it the largest exporter in the world. Unfortunately, the underpinnings of external demand turned out to be built on quicksand. Following the unprecedented 10.5 per cent plunge in global trade in 2009, growth in global trade has averaged only 3 per cent. China could hardly dodge that bullet. Washington’s recent imposition of tariffs has made that into an urgent reality.
The US strategy is seriously flawed. The Trump administration, focused on reducing an outsized bilateral trade deficit with China by initiating aggressive tariffs and other sanctions, doesn’t appreciate the scope of America’s multilateral trade deficits with 102 nations. This macroeconomic imbalance stems from a shortfall in domestic saving that is about to worsen as federal budget deficits rise following the enactment of large tax cuts in late 2017.
And that’s where the problem goes from bad to worse. If the US opts for protectionism at a time when its current account and multilateral trade imbalances are likely to widen, financial markets could come under considerable pressure. And then another lesson of Japan could come back to haunt those economies that have become overly dependent on asset appreciation as the sustenance of growth.
As central banks start to normalise monetary policy, excess liquidity will be drained from overvalued financial markets – putting pressure on asset-dependent economies, with collateral damage to major trading nations like China.
All these considerations should weigh heavily on China as it frames macroeconomic policies and reforms for the years ahead. Particularly worrisome would be a premature celebration of its new era. This requires a deepening of China’s strategic approach to meeting its economic challenges, shifting its focus from the quantity to the quality of growth, from the targets of state-directed industrial policy to the forecasts of a market-driven private economy, and from imported technologies to the indigenous innovations required to escape the dreaded middle-income trap.
For 40 years, strategy has been one of China’s greatest strengths. That may be all the more essential for a nation aspiring to great-power status by 2050. History tell us that nations are truly great only if they draw strength from within. Yale historian Paul Kennedy famously warned of the destabilising interplay between shifts in relative economic power and global stability – cautioning against the temptations of geostrategic overreach without attending to the foundations of strength at home. China’s ambitious “Belt and Road Initiative” raises especially important questions in that context.
In the end, China’s powerful economic take-off was a levered play on globalisation, global trade and ultimately the global economy. Yet the lessons of Japan, the Asian financial crisis and the global financial crisis underscore the systemic perils of an externally focused growth strategy. In the 19th party congress last October, President Xi Jinping and the party leadership focused attention on the “unbalanced and inadequate” characteristics that have emerged as the so-called principal contradiction in the first stage of its development. Staying the old course is no longer an option for a nation and a party determined to resolve this contradiction.
China’s experience over the past 20 years underscores that it should not take global risks lightly. The threat of a trade war with the US drives this point home. Clarifying its new course becomes all the more urgent.
Stephen Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is author of Unbalanced: The Codependency of America and China. This article is based on a paper prepared for the 19th Annual China Development Forum, March 24 to 26, in Beijing. Reprinted with permission from YaleGlobal Online. http://yaleglobal.yale.edu