#39 event report: The Global Impact of China’s Reforms

November 18th, 2014 Bridge Cafè (Wudaokou)

Speaker: Dr. WANG Xun 王勋 China Center for Contemporary World Studies (CCCWS), International Department, CPC Central Committee

In the last years, in the aftermath of the global economic crisis, China’s reforms gained new impetus. If the Reform and Opening Up in 1978 is conventionally framed as “first round” of reform, the recent changes could be labeled as a second one. Presenting a report that he had co-authored and disseminated among top level policymakers on the global ramifications of China’s economic reform, Dr. Wang argued that the world should welcome China’s reforms as it will have mostly positive effects on the global economy.

First, as a result of the reform, the economic outlook of China nowadays seems relatively positive. Initially, just like in the rest of the world, the Chinese economy has been affected by global financial crisis that started with the fall of Lehman Brothers; the most notable indicators of this were the declining consumption and aggregate demand. That was the time when the double-digit growth rate started to make downward slope in China, while the developmental agenda of the country suffered as well. Yet, as Dr. Wang argued, the government was in a position to successfully intervene and prevent more detrimental turn into the “wrong direction.” While slower (from double digits to 7.5%), the new growth is more sustainable, and will stabilize in the years to come.

At the core of this “second round” of large-scale reform is the effort to achieve “proper,” balanced relationship between the government and the market. Slowly, the economy is shifting from the hands of government to the market. The comprehensive effets of such shift are yet to be seen. However, the essence of the reform is that the market is becoming the decisive force in terms of the (re)distribution of resources in the economy, whereas the central government will have to face challenges while trying to support the private sector during the process of shifting, and provide adequate public services.

China’s reforms have also strong external component. China is now focusing on cooperation with both developed economies, as well as the developing countries in its neighborhood. Following up the theme of the recent Asia-Pacific Economic Cooperation (APEC) summit, which was concluded in Beijing a week before his talk, Dr. Wang emphasized the issue of connectivity. “China wants to work on the connectivity of Asia, aiming to make it a means of cooperation in the region,” he said. He sees this as grounds for cooperation and one way for China’s neighbors to benefit from its reforms. The issue of Asian Connectivity implying that it will help to achieve the full potential of Asian Century. The connectivity through the road and sea would be useful for all the Asian developing countries to work together, under the leadership of China. Partly, China wants to use the connectivity as its master plan to inject its investment in developing Asian countries including Bangladesh, Pakistan and the countries of ASEAN.

The internal economic indicators are not performing at their best level recently, but this will be solved once the new supply-demand dynamics takes final shape. As Dr. Wang argued, the supply of labor has been declining, as the labor costs have grown. Moreover, the demand for export goods has declined; although the domestic demand has been slowly going up. Yet, as China has indeed developed serious income inequality issues, the government is taking measures to revert this trend. In fact, the Gini has peaked in 2008, but ever since it has been declining due to new policies.

China has made great contribution to the global economic growth in the last several years, and made a particularly significant contribution during the global financial crisis. “China helped the world economy to overcome the wounds of global financial crisis,” he said. While doing that, Chinese market was also greatly affected by it. China hopes to do a lot in the future as well.

The most significant opportunity for the world that comes as an outcome of China’s reforms is the stimulation of the global labor market. As opposed to the mainstream impression that China’s growth shuts down jobs opportunities elsewhere Dr. Wang argued that benefits of China’s growth will be felt all over the world, with China creating more than 7 million new jobs in the global labor market in the period 2014-2020; this is a figure based on analysis of the data provided by the International Labor Organization, Basically, for 1% of its GDP growth over this stretch, China will generate 1.5 million urban employments abroad.

Moreover, China’s growing domestic consumption and industrial upgrading will push up exports by other countries. For now, China’s household consumption ratio has been lower compared to countries with similar growth level and significantly lower than developed countries. But since 2011 household consumption started to pick up. By 2020 it will reach 45% of the GDP, and soon after will peak at 60%. According to a report from McKinsey, the middle-income population will increase from 230 to 630 million from 2012 to 2022, and the Chinese urban middle class (by 2020, urbanization rate in China will reach 60%) will become main consumer of mid- and high-end goods, modern services and intellectual products in the world, with significant part of those being imported from abroad (over the same time span, China will add an additional USD 1.7 trillion of import in total from foreign countries).

Meanwhile, talking about the China’s outward investment flow in the developing countries, Dr. Wang said that the China is opening up more for that and trying to ease the policy hurdles. He described China as a stakeholder and active contributor to the process of urbanization and industrialization of the developing countries. China’s economic policy has been providing host countries with capital and industry transfers. China’s industry transfer will also bring huge opportunity for labor intensive industry and industrialization of neighboring countries. This converges with China’s domestic reforms agenda as well.

On the other hand, as China moves away from cheap exports, this will also affect the economy of developed countries; they will have to upgrade their economies and move up the industrial chain as China starts to make high-end products. However, in general, the global market will have more efficient value chain system and that will be in favor of all countries, while developed countries will maintain comparative advantages in areas in which they have more complementarity than competition with China, such as high-end manufacturing and modern service sector.

China’s going global strategy is based on increasing OFDI, with OFDI being emphasized as equally important to FDI inflows for China’s growth. By 2020, China’s OFDI stock will surpass USD1.2 trillion. Hong Kong, ASEAN countries, EU countries, the US and Russia have been the main recipients, but China’s investment will be also spread elsewhere. The implementation of the New Silk Road strategy at land and sea (“One Belt, One Road”) will facilitate the process of sharing the benefit that come from the new reforms with the world, and in particularly stimulate the cooperation over connectivity in Eurasia.

Finally, China is increasingly embracing the model of mixed ownership businesses, which is opening up more space for foreign investment and opportunities for foreigners to reap benefits from the Chinese domestic market.

However, there are some structural risks of reforms in China, especially in the real estate sector and at local government level, in particular relating to the local government’s debt. Yet, according to Dr. Wang, the risks for China’s economy are within a controllable range; for instance all China’s credits amount to the domestic debt, similar to the case of Japan and the US, meaning that it has a healthy crediting condition. On the other hand, local governments have been pivotal in the economic development, as they mostly spend the loans on infrastructure.

Dr. Wang concluded with brief policy recommendations, which included: encouraging international cooperation on sustainable development; recognition of China’s economic development; promotion of investment facilitation with a more open mentality, and facilitation of cross-border investment; advocating free trade with more rationality.

Q & A session

Addressing the question whether China has made any significant reforms in the stock market, Dr Wang said that the government is taking slow and continuous reform measures in the stock market, mainly in Hong Kong and Shanghai stock exchange. Those are the places where not only domestic investors invest, but also foreign investment pours in at a large scale.

Elaborating in more detail on the policy implications for both Chinese and foreign decision makers, Dr. Wang reiterated some guiding principles of his reasoning. First, to really benefit from China’s growth, the outside world needs to thoroughly embrace the cooperation with China. China’s growth itself is already big contribution to global economy, hence it should be welcomed. China takes measures to promote domestic consumption, which will have profound global ramifications.

Coming to answer on what it would be like the implications of reforms since the politics and economy is so intertwined in China, Dr. Wang argued that the government takes care of such complications, as it wants to meticulously carry out handover the economic activities to the market. One of the ways to achieve this, is to improve the social security market and to take policy measures that would increase the investment from all sources in the domestic market. The difficulty of balancing a mixed economy is that the government has to take care of many issues on regular basis.

He also responded to the question of China’s neo-liberal inclinations and potential “collateral damage” as an outcome of the reforms. He said that the reason of slowly and gradually implementing the reform measures in the country is precisely in order not to not cause any cracks and widen the wealth gap. He also spoke of the challenge of urbanization and disproportions in domestic markets. He emphasized that the main challenge for the Chinese economy is to improve its competitiveness, which in turn will advance its efficiency.

Asked on the issue of what China actually does to promote free trade, Dr. Wang pointed out that China is actively trying to facilitate its trade relations, and so far the main instruments for this have been the different Free Trade Agreements. Most recently, China finalized the FTAs with the Republic of Korea, Australia, and New Zealand.

There are some considerations for the future work of Dr. Wang. For one, he said that he would like to take in account variables such as the energy security, political factors and goodwill abroad, and to deeper analyze the distribution of the newly created jobs by China, in terms of location and sectors.

Reporters: Anastas Vangeli and Bhoj Raj Poudel