When China Rules the World

by Martin Jacques

  The emergent Chinese model bears witness to a new kind of capitalism where the state is hyperactive and omnipresent in a range of different ways and forms: in providing assistance to private firms, in a galaxy of state-owned enterprises, in managing the process by which the renminbi slowly evolves towards fully convertible status and, above all, in being the architect of an economic strategy which has driven China’s economic transformation. China ’s success suggests that the Chinese model of the state is destined to exercise a powerful global influence, especially in the developing world, and thereby transform the terms of future economic debate. The collapse of the Anglo-American model in the wake of the credit crunch will make the Chinese model even more pertinent to many countries.

  A MATTER OF SIZE

  The combination of a huge population and an extremely high economic growth rate is providing the world with a completely new kind of experience: China is, quite literally, changing the world before our very eyes, taking it into completely uncharted territory. Such is the enormity of this shift and its impact on the world that one might talk of modern economic history being divided into BC and AC — Before China and After China — with 1978 being the great watershed. In this section I will concentrate on the economic implications of China ’s size.

  When the United States began its take-off in 1870, its population was 40 million. By 1913 it had reached 98 million. Japan ’s population numbered 84 million at the start of its post-war growth in 1950 and 109 million by the end in 1973. In contrast, China ’s population was 963 million in 1978 when its take-off started in earnest: that is, twenty-four times that of the United States in 1870 and 11.5 times that of Japan in 1950. It is estimated that by the projected end of its take-off period in 2020, China ’s population will be at least 1.4 billion: that is, fourteen times that of the United States in 1913 and thirteen times that of Japan in 1973. If we broaden this picture, India had a population of 839 million in 1990 when it started its major take-off, nearly twenty-one times that of the United States in 1870 and ten times that of Japan in 1950. [558]

  Total population is only one aspect of the effect of China ’s scale. The second is the size of its labour force. Although China ’s population presently accounts for 21 per cent of the world’s total, the proportion of the global labour force that it represents is, at 25 per cent, slightly higher. In 1978, when the great majority of its people worked on the land, China only had 118 million non-agricultural labourers. In 2002 that figure had already increased to 369 million, compared with a total of 455 million in the developed world. By 2020 it is estimated that there will be 533 million non-agricultural labourers in China, by which time it will exceed the equivalent figure for the whole of the developed world by no less than 100 million. In other words, China’s growth is leading to a huge increase in the number of people engaged in non-agricultural labour and, as a consequence, is providing a massive — and very rapid — addition to the world’s total non-agricultural labour force.

  The third effect of China ’s rise concerns the impact of its economic scale on the rest of the world. China ’s average annual rate of growth of GDP since 1978 has been 9.4 per cent, over twice the US ’s growth rate of 3.94 per cent between 1870 and 1913. It is projected that the duration of their respective take-offs may be roughly similar: 43 years in the case of the US, 42 years for China, because, although the latter’s growth rate is much faster, its population is also far larger. When the US commenced its take-off in 1870, its GDP accounted for 8.8 per cent of the world’s total, rising to 18.9 per cent by 1913. In contrast, China ’s GDP represented 4.9 per cent of the world’s total in 1978, but is likely to rise to 18–20 per cent by 2020. In both instances, their GDP growth has had a major impact on the expansion of global GDP. In the 1980s, for example, the United States made the biggest single contribution of any country, accounting for 21 per cent of the world’s total increase; in the 1990s, however, China, even at its present limited level of development, surpassed the US, which remained at 21 per cent, while China contributed 27.1 per cent to the growth of global GDP.

  The fourth effect is the impact China will have on world trade. Before the Open Door policy, China was one of the world’s most closed economies. In 1970 its export trade made up only 0.7 per cent of the world’s total: at the end of the seventies, China ’s imports and exports together represented 12 per cent of its GDP, the lowest in the world. China ’s economic impact on the rest of the world was minimal for two reasons: firstly, the country was very poor, and secondly, it was very closed. But since 1978 China has rapidly become one of the world’s most open economies. Its average import tariff rate will decline from 23.7 per cent in 2001 to 5.7 per cent in 2011, with most of that fall having already taken place. [559] Although its trade dependency (the proportion of GDP accounted for by exports and imports) was less than 10 per cent in 1978, by 2004 it had risen to 70 per cent, much higher than that of other large countries. China has now overtaken the United States to become the second largest exporter in the world, while in 2004 it ranked as the world’s third largest importer, accounting for 5.9 per cent of the global total. By 2010 a developing country, in the shape of China, will for the first time become the world’s biggest trader.

  Each of these scale effects — population, labour, economy and trade — clearly has a mainly positive impact on the rest of the world, stimulating overall global growth and the expansion of national economies. But the fifth effect, China’s consumption of resources, has a largely negative global impact: because the country is so poorly endowed with natural resources, its population so enormous and its economic development so intensive, its demand for natural resources has the double effect of raising the price of raw materials and depleting the world’s stock of them, a process that, on the basis of recent trends, is likely to accelerate in the future.

  CHINA’S GLOBAL ECONOMIC IMPACT

  Although China remains a poor country, its per capita GDP only reaching $1,000 in 2003, it is already having a profound impact on the world. Along with the United States it has been the main engine of global economic growth, contributing no less than one-third of the world’s growth in real output between 2002 and 2005. It has been widely credited with having pulled Japan out of its long-running post-bubble recession, having been responsible for two-thirds of the growth in Japan ’s exports and one-quarter of its real GDP growth in 2003 alone. [560] The emergence of China as the world’s cheapest producer of manufactured goods has resulted in a sharp global drop in their prices. The price of clothing and shoes in the US, for example, has fallen by 30 per cent over the last decade. Major gainers from this have been consumers in the developed world, while the rise in commodity prices consequent upon Chinese demand had a beneficial effect on primary producers — many of which are based in the developing world — until the global downturn intervened. Anxious to secure sufficient supplies of raw materials to fuel its booming economy, China has been highly active in Africa, Latin America and the Middle East, concluding major agreements with Iran, Venezuela and the Sudan amongst many others. Another net gainer has been Russia, which is a major producer of many commodities, notably oil and gas; and, though rather less trumpeted, Australia. It is China ’s shortage of raw materials that has driven a major diplomatic offensive with many African and Latin American countries, including the ambitious China- Africa summit in Beijing in November 2006. [561] The main losers have been those developing countries, like Mexico, whose comparative advantage lies in similar labour-intensive production and that find themselves in direct competition with China. [562] They have also lost out to China in terms of foreign direct investment, with many international firms relocating their operations from these countries to China. The other obvious losers are blue-collar workers in the developed world who have found their jobs being outsourced to China.

  By far the greatest impact of China ’s rise has been felt in East Asia. The main gainers have been the developed Asian tigers of North-East Asia — South Korea and Taiwan, together wit
h Japan. They have been the beneficiaries of cheap manufactured goods produced in China while at the same time enjoying growing demand from China for their knowledge and capital-intensive products. [563] Their own companies have relocated many of their operations to China to take advantage of much cheaper labour, as in the case of the Taiwanese computer industry. [564] The losers have been the same as those in the West, namely those workers displaced by operations outsourced to China. Unlike the United States, which has a huge trade deficit with China, all of these countries enjoy large surpluses with China. The nearest example in the region to a grey area is South-East Asia, whose economies are not so dissimilar to that of China, though Singapore and Malaysia, in particular, are rather more developed. Over the last decade, the ASEAN countries have seen a large slice of the foreign direct investment they previously received going to China. They have also lost out to China in the mass assembly of electronic and computer equipment — Singapore and Malaysia being notable examples — and have, as a consequence, been forced to move up the value chain in to order to escape Chinese competition. [565] The country that has suffered the greatest is Indonesia, whose economy most closely resembles that of China. Indonesia has lost out to China in terms of direct investment by foreign multinationals, which have opted for China rather than Indonesia as their preferred production base. On balance, however, China’s growth has greatly benefited the ASEAN countries too, with China now comfortably ensconced as their largest trading partner, one of their biggest markets (if not the biggest), and in many cases their main provider of inward investment. [566]

  A measure of China’s growing impact on the world is the leverage that it enjoys in its relationship with the United States (notwithstanding the fact that the United States still enjoys a much larger GDP than China and an immensely higher GDP per head) as a result of the economic imbalances which lie at the heart of their relationship. China is comfortably the largest exporter to the US, with Americans displaying an enormous appetite for Made in China consumer products. As the United States exports relatively little to China, the latter has enjoyed a large and rising trade surplus which has grown very rapidly since 1999. [567] China has invested this surplus in various forms of US debt, including Treasury bonds, agency bonds and corporate bonds — in effect, a Chinese loan to the US — thereby enabling American interest rates to be kept artificially low to the benefit of American consumers and especially, until the credit crunch, holders of mortgages. Although the US was deeply in debt, China’s continuing large-scale purchase of Treasury bonds (which I will use as shorthand for various forms of US assets held by China) allowed Americans to continue with their spending spree, and then partially helped to cushion the impact of the credit crunch. In September 2008 China ’s foreign currency reserves totalled $1.81 trillion — a sum greater than the annual economic output of all but nine countries. [568] The rapid growth of its foreign exchange reserves has made China a colossus in the financial world. The importance of this has become even more apparent with the Western financial meltdown. While Western financial institutions, many Western companies and even some countries have found themselves starved of liquidity, China, in contrast, is blessed with an abundance of it. Strategically this puts China in a potentially powerful position to enhance its international financial and economic influence during the global recession, for example by buying foreign companies, especially oil and mineral firms.

  How China deploys its reserves remains a matter of great concern, especially to the United States, since most are invested in US dollar-denominated debt. If China transferred significant amounts into other currencies — it is believed that it holds rather more than 60 per cent of its reserves in dollars (with less than 30 per cent in euros), though this is a tightly guarded secret [569] — it would have the immediate effect of depressing the value of the dollar and forcing US interest rates to rise: the larger the sum transferred, the bigger the fall in the dollar and the larger the rise in interest rates. But the government is also faced with something of a dilemma. It would certainly make good economic sense for China to transfer a large slice of its reserves out of US Treasury bonds: the dollar’s value fell steadily in 2006- 8, then recovered somewhat, but there remains the strong possibility that its price might fall even further, perhaps precipitously so. China ’s vast dollar investments in US Treasury bonds furthermore earn miserable rates of return, which makes precious little sense for what is still a poor country. [570] However, if it tries to transfer significant sums of its reserves into other currencies, thereby provoking a further fall in the value of the dollar, then the value of its own dollar reserves will also decline. China is in a catch-22 situation. The two great, but utterly unlike, economic powers of our time find themselves — at least for the time being — in a position of bizarre mutual dependence. [571] This was graphically illustrated in the darkest days of the financial meltdown in September 2008, when it is believed that the Chinese were pressing the US government to rescue Fannie Mae, Freddie Mac and subsequently AIG out of concern for its holdings in them, and the Americans were understandably afraid that China might otherwise sell off some of its dollar reserves, with dire consequences for the value of the dollar and its role as a reserve currency. [572]

  Before these tumultuous events, China had already been exploring other ways of using its vast reserves. In early 2007 the government announced the formation of the China Investment Corporation, a new state agency to oversee investment of $200 billion of China ’s foreign currency reserves — similar to Temasek Holdings, the Singapore government’s successful investment agency, which manages a $108 billion global portfolio of investments. [573] To test the water, the new agency placed $3 billion of its holdings with Blackstone, the US-based private equity group, thereby signalling Beijing ’s intention to switch some of its investments from US Treasury bonds into more risky equity holdings. [574] In fact it has since emerged that the State Administration of Foreign Exchange, which oversees China ’s reserves, has itself been investing rather more widely than was previously believed. [575] These moves herald China ’s rise as a major global financial player. [576] In the second half of 2007, as the credit crunch began to bite, China Development Bank took a significant stake in the UK-based Barclays Bank [577] and Citic Securities formed a strategic alliance with the US investment bank Bear Stearns before the latter went bust. [578] Three Chinese banks were also in talks about acquiring a stake in Standard Chartered, the UK-based emerging markets lender. [579] But most of this came to nought as the Chinese increasingly realized the likely severity of the credit crunch and the potential threat it represented to any stakes in Western financial institutions that it might purchase. When the financial meltdown came in September 2008, the Chinese found themselves relatively little exposed. Nonetheless, the enormous funds enjoyed by Chinese banks, based on the fact that the average household saves more than a quarter of its income and has nowhere else to invest it, mean that Chinese banks will become an increasingly formidable global force.

  The relationship between the United States and China needs to be set in a broader global and historical context. The belated acceptance of China as a member of the WTO in 2001 marked the biggest extension of the world trading system since the beginning of the contemporary phase of globalization in the late 1970s. As the largest recipient of foreign direct investment and soon to be the biggest trading nation, China ’s admission immediately transformed the nature and dynamics of the trading system. By acquiring a low-cost manufacturing base and extremely cheap imports, the developed world has been a major beneficiary of China ’s accession. But China itself has also been a big gainer, achieving wider access to overseas markets for its exports and receiving huge flows of inward investment, thereby helping it to sustain its double-digit growth rate. [580] Thus, so far, China ’s integration into the global economy has been perceived in terms of a win-win situation. Is that likely to continue?