Dragon Weathering the Storm: Blue Sky Ahead?

7/30/2019 Dragon Weathering the Storm: Blue Sky Ahead?

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Dragon Weathering the Storm:

Tsang Shu-kiDepartment of Economics

Hong Kong Baptist Universitywww.sktsang.com

Conference on Global Economy and China, an , a n an na

28 September 2009

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Abstract

The global economic crisis has been handled by most authorities withunprecedented monetary and fiscal loosening, with the fundamentalimbalances largely left aside. A relief rebound is not surprising, butnew complications arise.

In the coming years, the consequences for the global economy might

China has been weathering the storm relatively well in terms ofmacroeconomics. However,social cracks arising from long-term

benefited the asset markets.

Whatever the direction for the global economy, Chinas futures ruc ura c a enges are ree- o : .e. e s: e a anc ng;Regionalization andResource management.

Although unique, China might learn more from the history ofGermany, rat er t an rom Br ta n, Japan or t e US.

In short, China shouldrebalance with a greater emphasis on regionaleconomic cooperation and aim at overcoming the developmental

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constra nts o ts m te resources.

And no one promises a blue sky.


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I. The global crisis and the aftermath

II. Chinas macroeconomic robustness and socialwea ness

III. Chinas future challenges: The 3Rs

IV. Chinas first challenge: RebalancingV. Chinas second challenge: Internalization,

Reg ona zat on an g o a zat on

VI. Chinas third challenge: Overcoming the Resource

cons ra n s

VII. An integrative historical summary

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I. The global crisis and the aftermath:Un recedented uantitative easin

4Source: www.oecd.org/OECDEconomicOulook , September 2009


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I. The global crisis and the aftermath:

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Source: IMF World Economic Outlook, April 2009


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I. The global crisis and the aftermath

Given these unprecedented global policy responses to the

surprising in the near term. What else could one expect?

For the sake of crisis management, perhaps justifiably, thefundamental imbalances which generated the global crisishave largely been left for further actions and reforms.Unfortunately, new complications have been fermented by

the flood of liquidity, especially via the asset markets, andthe creation of new debts over the world.

,timing is crucial, as the following chart of Bank of Japans

policy rate in the second lost decade illustrates. Hence a double dip or right-inclined W could not be

ruled out. Indeed, the global economy might take any or amixture of the followin sha es: U L H X.

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I. The lobal crisis and the aftermath

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II. Chinas macroeconomic robustnessand social weakness

As to China, exports have been hard hit (falling 22.2% in

the first eight months of 2009). However, the authoritiesin many years, investment and, to a lesser extent,consumption have been showing above-trend increases.

New loans amounted to RMB8,150 billion in the firsteight months of 2009 (compared with RMB4,180 billion

.increased by 22.7% year on year in January-August.

,relatively mild. GDP rose by 6.1% and 7.9% in Q1 andQ2 respectively.

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II. Chinas macroeconomic robustness

China

9Source: www.oecd.org/OECDEconomicOulook , September 2009


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and social weakness

The trouble is that China, given its evolving socioeconomic system,needs to grow at a certain percentage to contain social dissent. A real

GDP growth rate of 8% is believed by many to be the social.

That can probably be done. However, and unfortunately, signs ofsocial cracks are emerging, regionally and vertically, despite thecom or ng macroeconom c s a s cs. s s un e y o e w a

the top leadership has wanted.

The preliminary evidence is that the financial tsunami has aggravatedat east ur an-rura ncome nequa ty esp te government po c es tohelp the rural areas.

The benefits of loose monetar and fiscal olicies mostl via theassets markets and infrastructure projects, have not exactly gone tothe normal consumers, the crucial agents of rebalancing the Chineseeconomy.

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Recent Quarterly Urban-Rual Income Differentials

(in nominal terms)

3.4

3.2

3.3

ples

3

3.1

ativemult

2.9Cumul

2.7

.

1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009

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Quarter

Source: National Bureau of Statistics of China


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. na s u ure c a enges: e s

rrespec ve o w a wou appen o e g o a economy .e.V/U/W/L/H/X), China probably will not face severe

downward ressure in terms of macroeconomic statistics.However, three major structural challenges loom in thefuture:

1. Rebalancing its structure of economic development:from external demand to domestic demand; from

.

2. Increasing participation in internalization:

3. Managing its relative lack ofResources in becoming a

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genu ne g o a econom c power.


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. Everyone agrees about the need for China to shift from

export- e an nvestment- r ven growt to a tra ectory nwhich domestic demand and consumption play a more

important role. But how?

This has been the top agenda for the leadership since 2003,anyway, with an emphasis on social harmony.

If a country wants to stimulate domestic demand, it involves along process ofswitching incomes andimplementing

.made this process easier for China.

urban-rural income inequality has not improved and thefinancial tsunami has apparently aggravated it in spite of

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.


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.

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.

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Recent Quarterly Urban-Rual Income Differentials

(in nominal terms)

3.4

3.2

3.3

tiples

3

3.1

lativem

ul

2.8

2.9Cum

2.7

1Q2008 2Q2008 3Q2008 4Q2008 1Q2009 2Q2009

uarter

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Source: National Bureau of Statistics of China


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IV. Chinas first challenge: Rebalancing

On the other hand, China is not in imminent danger, like Japan,of building bridges to nowhere. It still needs a lot of railways,highways and bridges. This is really a dilemma: investmentversus consumption; yet confronting the need to develop fast.

security system, it would take a long time to effect the changes.Economically, a gradual but steadfast approach seems to be

called for. It seems like a bridge overtroubled water forChina.

n e o er an , po ca re orms a a m a eempowerment of the grass-root levels of the populace is

important, especially at the levels of counties and townships. As Nobel Laureate Amartyr Sen so aptly argues, empowerment

is one of the best ways to solve the problems of poverty,ignorance, and to speed up sustainable development.

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V. Chinas second challenge: Internalization,

Regionalization and globalization

The media like to talk about China as the rising global power.

Nevertheless, with a population of 1.3 billion, and the majorityv ng n rura areas n , s cu o mag ne

China, already the worlds third largest economy in terms ofabsolute GDP but far behind re ardin er ca ita income

challenging the US any time soon.

The lobal financial crisis has shaken the US econom but itsleadership in international trade and monetary systems isunlikely to be seriously undermined in the near term.

The Chinese economy should doubtlessly be furtherinternationalized: but internationalization is not equivalent

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.


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V. Chinas second challenge: Internalization,

Regionalization and globalization

nternat ona zat on can ta e many orms: atera

or multilateral regionalization or globalization under- .

The experience in the past few years has

demonstrated that a simple-minded policy toparticipate in US-led globalization may not beop ma or a eve op ng economy e na.

Globalization takin into account worldwide datahas shown historical long waves of dramatic swings,as the two following charts by several scholars reveal.

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V. Chinas second challenge:

Regionalization versus globalization

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Regionalization versus globalization

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z v u z

strange p enomenon s t at n t s era o g o a zat on ,sub-global (bilateral or multilateral) trade and investment

agreements have increased sharply in the past two decades.

According to the information provided by WTO, the supremeglobal trade institution, regional trade agreements (RTAs)

. ,

been notified to GATT/WTO. Of these, 230 are currently inforce. Most of them were created after 1995.

This leads to an interesting, and perhaps paradoxical,question posted by none other than WTO itself (www.wto.org/english/thewto_e/whatis_e/tif_e/bey1_e.htm )

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eg ona za on versus g o a za on

ou a na on concen ra e on a era , mu a era , reg ona or global economic cooperation, if its political and economic

resources are limited? The answer will obviously not be clear.

Like Germany and the EU, it could be a waste of time to directlychallenge the sitting world hegemony. So sub-globalreg ona za on may e a use u u ng oc or a - ac

position in a less dramatic process of revival and development.

It is not an easy task, as East Asia is unlike EU. But,. a starthas to be made, and already made: ASEAN10 + 3; BRICmeetings, and Chinas proliferating bilateral trade and financial

agreements.. Of course, it does not mean that China should reduce

participation in the global economy or give up efforts to push forglobal financial and trade reforms. It does imply a shift in

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emphasis.


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VI. Chinas third challenge:

Overcoming the Resource constraints

China has the largest population in the world, but its per capitaresource endowments are woefully lacking: e.g.

per cap a m nera resource s on y o e wor saverage, ranked as the 53rd in the global league;

er ca ita arable land is 30% and water resource is and

highly unevenly distributed)etc. Even for coal, it is only about 55%, not to mention oil and

.

The result is an upward trend of external dependency on resource

provisions. The sharp spike in the Commodity Research Bureaun ex n ear y m g t ave een aggravate yspeculation. However, expectations on Chinas huge, albeit future,demands have reportedly been built into the commodity markets.

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VI. Chinas third challenge:

Overcoming the Resource constraints

CRB indexReuters/Jefferies-CRBIndex (1967=100)

(monthly close) September 1956 - August 2009

500

Thomson Reuters

Index Value

400

450

300

350

200

250

100

150

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50

1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008


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.

How should China handle the fight for resources aftere g o a s orm u sourc ng an ncreas ng u sa on

efficiency (of existing resources in the circular

economy) are the obvious steps.

Looking back to history, different countries in theirglobal ascendancy resorted to various development andpo t ca strateg es.

At the risk of over-simplification, I think that Chinas ou an e s ree c a enges re a anc ng,regionalization and resource management) in an

integrated manner, preparing for the worst and avoidingshort-term drastic actions.

Let us take a historical look at the geopolitical contexts

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o t e r se to g o a s gn cance o erent countr es.


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Fi ht for resources in a multi- olar world

--- China surrounded

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http://www.lib.utexas.edu/maps/middle_east_and_asia/china_rel01.pdf


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Fight for resources

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http://www.lib.utexas.edu/maps/europe/europe_ref_2008.pdf


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Fight for resources

30http://www.lib.utexas.edu/maps/cia08/japan_sm_2008.gif


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Fight for resources

and compromise (EU)

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http://www.lib.utexas.edu/maps/cia08/germany_sm_2008.gif

Fi ht f


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Fight for resources US evolvin from isolationism to

hegemonic expansionism

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http://www.lib.utexas.edu/maps/americas/north_america_ref_2007.jpg


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Chinas strategy in the fight for resources

---

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http://www.lib.utexas.edu/maps/middle_east_and_asia/china_rel01.pdf


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.

ready model that one could copy. Nevertheless, if China

is to learn somethin from histor , I would su est thatthe painful experience ofGermany might be of morevalue, given the geopolitical and economic environment

a e ragon s caug n.

Can China do it the British, Japanese or American way?

I rather doubt it. Even if that were to be a choice by any

future leadershi the conse uences would be rathercounterproductive.

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VII. An inte rative historical summar

after the global financial tsunami and

economic crisis, with all the possible twistsand turns, China needs to nurture a new pathof development.

Structurally, China has to solve its 3Rchallenges in an integrative manner.

In short, China shouldrebalance with a greater

and aim at overcoming the developmentalconstraints of its limitedresources.

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References Estevadeordal, Antoni, Frantz, Brian and Taylor, Alan M. (2003)

The Rise and Fall of World Trade, 1870-1939, Quarterly , . , . , , . -

Taylor, Alan M. (2002), Globalization, Trade and Development:

Some Lessons from History,NBER Working Paper 9326,November.

Tsang Shu-ki, (2008), The Economic Basis ofRe ionalization The Pan-Pearl River Delta: An emer inregional economy in a globalizing China

, in Y.M. Yeung and ShenJianfa (eds.), The Chinese University Press:89-113.

-Global and the Chinese Economy from the Long View) (inChinese); posted on the authors website:

www.sktsan .com/ArchiveIII/CBC sktsan 081011. df._ _

Tsang Shu-ki, Wither the global polity/economy? (15/9/2009),article posted on the authors website:

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Dragon Weathering the Storm: Blue Sky Ahead?