How China managed to win the race
Aug 22 2013
Both in 2008, when the global financial crisis shook the world, and now, there have been doubts whether China would be able to maintain the momentum of its economic growth. Indeed, growth rates came down and there were, and continue to be serious worries about the stability of its financial system. Looking at the track record of the Chinese government in dealing with challenges, both by domestic and global economic developments, we can see a remarkable degree of professionalism. Even the western industrialised countries, forget about the other BRIC countries, could learn a good deal from Beijing’s crisis management. In 2008, China reacted with a gigantic stimulus programme to counter the negative effects that came in from the world markets and threatened the stability of an economy that was too dependent on exports. After the one trillion dollar intervention, high growth rates swiftly returned.
At present, the problems are more significant on the domestic side and Beijing has to grapple with difficulties that are the result of a glaring lack of transparency in the Chinese financial system. Since years, experts have been warning that China’s economy is too focused on capital goods and infrastructure investments as well as on an overblown market in high priced real estate in big cities. There have been admonishments, both domestic and external, that more emphasis should be put on domestic consumption. Bearing in mind the powerful interests linked to the non-bank financial sector, it is unlikely that far-reaching reforms will be speedily implemented.
In spite of all this, China has won the race not only to beat India, but also to become an economic superpower. There will certainly be hiccups and crises in the future. This is in the nature of economic development. The main question relates to sustainability. Will it last? Is there a solid base beyond which there will be no return? While in the case of India we are currently witnessing a serious erosion of economic fundamentals, China is in the comfortable situation that for the past three decades, it has followed a course of step-by-step reforms, where the foundation of a modern economy has been put together block by block. Even if there are temporary relapses in growth, the extensive infrastructure that has been put into place and the gigantic industrial base that has been built up, will not be affected. Furthermore, China has pursued a mercantilist trade policy and in the course of the past two decades, has accumulated the world’s largest foreign exchange reserves. Of course, owning over $3 trillion worth of reserves creates its own problem, but the power this huge bolster provides is substantial. In all fora, amongst the G-20, amongst the BRIC states, in the World Bank and in the IMF, finally in relations to the US, China will play in a much higher league than India.
Not least the huge reserves that have been accumulated provide China with the means to decide on its own, how it will pursue the future course of economic modernisation. They also provide the necessary funds to fight economic crises and to counter short-term downturns. The cautious monetary policies of China’s national bank have ensured that China has not only the financial, but also the institutional means to successfully fight any foreign attempts at destabilising its currency. In the past, the US had repeatedly pressurised the Chinese to make upward adjustments in the external value of the yuan renminbi. Occasionally, there was even the threat that Washington would declare China a currency manipulator. Beijing steered a very clever course successfully protecting the national interests.
That China has won the race to the top is of huge significance both for Asia and for the world at large. Beijing knows that diplomatic grandstanding without economic muscle is nothing but empty rhetoric. With a solid economy that is capable of resisting outside pressure goes along the capacity to exert economic influence, both in the neighbourhood and around the globe. Furthermore and most importantly, a solid economic base is essential for a creditable national defence. Not only does it provide the necessary finances to afford the most up-to-date equipment, it also creates the industrial research capabilities that help technical self-reliance. Isn’t it significant that Huawei, already a leader in global information and communications technology, employs more than 50 per cent of its workforce in research and development?
Significantly, when Chinese companies acquire assets overseas, they do not do this to escape an inimical investment climate at home. They do it in order to win top positions on world markets.
(The writer is the Far East correspondent of Swiss daily Neue Zurcher Zeitung)