Luisa Fernanda Ríos
One of the Australia’s G20 2014 Presidency major concerns is promoting stronger economic growth and making the global economy more resilient to future shocks. In recent years, the Chinese economy has been one of the main engines of the world’s economic expansion. As of 2012, China’s share of global GDP, adjusted for Purchasing Power Parity (PPP), was 15.86 per cent, ranking just after the U.S. economy which represented 16.49 per cent (The World Bank, 2014). Hence, the fact that the Chinese economy is maturing may pose a major challenge to growth and building greater resilience in the global economy.
In 2013, the officially reported Chinese real GDP growth was 7.7 per cent, which has been the slowest since 1999. The 10 per cent annual rate of growth of the previous three decades may not be likely to return. Over the longer-term, China’s average real GDP growth is expected to continue to be moderate as a natural result of past success (Putnam, 2013). That is, China is on a path to industrial economic maturity that will make its increase in the share of global GDP growth much less than in the past. I Internal and external factors are forcing a change in China’s economic model. In the domestic market, rising wages and an ageing workforce, according to some, are pushing China towards the “middle-income trap” (The Economist, 2013). Additionally, the long-lasting effects of the Chinese one child policy need to be acknowledged. Chinese labor force is growing more slowly and the number of retirees for the economy to support is growing rapidly. On the other hand, in foreign markets, rivals are rushing into regional free-trade deals, such as the Trans-Pacific Partnership, that will pry economies open (The Economist, 2013).
Many analysts argue that to be able to keep up, China must liberalize. China needs to open up its currently inefficient services sector, especially the financial services industry. Furthermore, there are powerful incentives for China’s leadership to accelerate the full convertibility of the renminbi. The fact that analysts and economists are pushing for these structural changes does not mean that the Chinese government has not played its part. Several steps have been taken to tackle the latter issues in several detailed reform programs. The best example is the introduction of the Shanghai Free Trade Zone (FTZ).
Despite the lack of details, the Shanghai FTZ guidelines promise to open some important sectors to foreign investment. Officials have outlined six areas where industries will be opened during the next three years. About three dozen firms have been given permission to enter. That is meant to be an early show of confidence. Even though most are domestic firms, some reports already point out the establishment of foreign and joint venture banks’ branches in the FTZ, including HSBC, Standard Chartered and Citibank (Woo & Dogra, 2013; The Economist, 2013).
Most importantly, in terms of the currency liberalization, the significance of the plans to loosen currency controls within the Shanghai FTZ is merely part of an overarching renminbi strategy (Woo & Dogra, 2013). The success of allowing currency convertibility, starting within the Shanghai FTZ, will enable the Chinese government to gradually liberalize the currency at the national level. In addition, a potential reason China might be pushing for renminbi internationalization is the fact that the Chinese government might want to prepare for a phase-in which will allow China to become a net borrower internationally rather than a creditor (García-Herrero, 2012).
The latter fact is in line with the Chinese government’s plans to make the renminbi a global reserve currency. Cross-border use of the renminbi has been increasing as Beijing has taken concerted steps to encourage its use across the globe. For example, in April 2013 Australia announced its intention to introduce the renminbi into its mix of foreign currency reserves, becoming the third country after the US and Japan to establish a direct currency trading link with China (Young, 2013). Furthermore, to make the renminbi more flexible, China’s central bank loosened its tight grip on the currency last year by announcing that it would widen its trading band against the U.S. dollar from 0.5 to 1 per cent (Woo & Dogra, 2013).
However, genuine renminbi internationalization cannot be achieved without the currency convertibility. In this sense, there are two key challenges for China’s capital account liberalization — free exchange of international capital and local money markets. As a result, Zhai Fan, Managing Director of the Department of Asset Allocation and Strategic Research in China Investment Corporation, proposed that the sequence of Chinese reforms should follow the following steps:
According to the Society of Worldwide Interbank Financial Telecommunication (SWIFT), these steps have been in development since 2010, and thus the benefits of the renminbi’s international usage have begun to materialize and should continue apace in the years to come (SWIFT, 2011).
From a productivity and infrastructure growth standpoint, as China has modernized at record speed, it has hit a point of diminishing returns to new capital investments and infrastructure projects. Gains in labor productivity are slowly shrinking, although they currently remain quite positive. Though China will continue to make major infrastructure investments, the share of GDP growth arising from these investments will diminish as the economy matures (Putnam, 2013).
Likewise, China’s labor costs continue to rise by more than 10 per cent a year, land costs are skyrocketing, and the cost of capital has increased, particularly for state-owned enterprises. Basically, all major input costs are growing, while intense competition and overcapacity make it incredibly hard to pass price increases onto customers (Orr, 2014). As a result, China’s solution might be found by pursuing higher productivity through the adoption of best practices from around the world.
In this sense, for over a decade China has benefited from a powerful tide of rural-to-urban migration. This has taken workers from the very low productivity agricultural sector to the higher productivity industrial sector. During the Third Plenary Session of the 18th Central Committee of the Communist Party of China, one of the country’s most important annual plenary sessions, they agreed that one of the major cross-cutting themes for the country was the elimination of the urban-rural divide. The direct consequence is that the government has now identified that the past tendency to treat rural and urban areas as separate economic entities has created several inefficiencies. Given that the ratio of urban to rural incomes is more than three, the highest of any major economy, there is potential for securing productivity gains from a better-managed urbanization process and moderating spatially-driven income differences (Hwang, 2013). Thus the package of reforms aimed at dealing with labor migration is one of the potential sources for ratcheting up productivity-driven growth in China.
On the other hand, productivity nowadays is built through the use of technology in many enterprises: digitizing existing processes, reaching consumers directly through the internet, transforming the supply chain, and reinventing the business model. Consequently, it will be crucial that in the years to come the government continues to work towards shifting the worldwide perspective of China as a low-cost labor economy into one whose major growth driver is its technological development. Solving these issues will allow China to face the challenging reality that the country currently lacks the business-savvy, technology-capable talent to lead this productivity enhancement effort (Orr, 2014).
To conclude, China has a rapidly growing economy that is on track to become one of the largest economies in the world. The Chinese economy appears to be undergoing the profound changes necessary to sustain its growth into the future. This change is being driven partly by economic pressures that are emerging naturally from successful economic development. These economic developments include labor scarcity and rapid increases in real wages changing patterns of resource allocation, income distribution, and rates of economic growth, investment and international capital flows (Garnaut, Fang, & Song, 2013).
Australia’s G20 Presidency in 2014 has as its top priority the strengthening of economic growth and the creation of jobs by taking decisive action to return to a strong, sustainable and balanced growth path. The world’s leaders cannot continue to analyze China under the lens of its past economic success to achieve its growth purpose. Rather, world economies need to understand that China is currently working its way towards becoming a developed country. Therefore, it will become crucial for the G20 Leaders to identify the key advantages of a changing Chinese economy so that the major obstacles are addressed, and the global reforms needed to achieve stronger, more sustainable and balanced growth in the economy are implemented. In the meantime, as the Chinese proverb says, the world needs to let China enjoy crossing the river by feeling the stones.
Fan, Z. (2012, February 8). RMB Internationalization and China’s Financial Liberalization.
García-Herrero, A. (2012, August). RMB-ization. Retrieved from BBVA Research.
Garnaut, R., Fang, C., & Song, L. (2013, July). China: A New Model for Growth and Development. (A. E. Press, Ed.)
Hwang, Y. (2013, December 13). China’s brightened prospects. Retrieved March 14, 2014, from The Financial Times.
Orr, G. (2014, January). What could happen in China 2014? Retrieved from McKinsey& Co.
Putnam, B. (2013, February 11). New Year Dawns With China Moving Further on Path to Economic Maturity. Retrieved from CME Group: http://www.cmegroup.com/education/files/blu-putnam- china-moving-further-along-path-to-maturity.pdf
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