Flag of China.
(photo credit: Wikimedia Commons)
The coming summit of the world’s 20 leading economies (G20), hosted by China for the first time, provides China with a unique opportunity to assume global economic leadership amid the lingering crisis. Still, Chinese leaders would have to muster unusual political will to pursue reforms in times of slowing economic growth at home.
When G20 leaders convene September 4-5 in Hangzhou, eastern China, they will be expected to provide strategic direction for the troubled global economy. As a result of increased uncertainty hanging over the European economy after Brexit, and the political mood in the US, the global focus on the host China will only intensify as the world’s second- largest economy is expected to pick up the slack and demonstrate leadership.
As the world’s largest manufacturing and trading nation, China is uniquely positioned to reverse the spreading economic malaise of trade protectionism and anti-globalization.
At the host of the G20 summit, Chinese leaders will seek to promote macroeconomic and monetary policies to address the global weak economic recovery, advocate the role of multilateral financing institutions in the area of infrastructure, strengthen the stability of the global financial system and strive for a more inclusive free trade agenda, especially in view of the US-led Transpacific Partnership (TPP) that excludes China.
The final point is of particular importance. After WWII, the US led an economic order of free trade and globalization, and over 35 years of its own reform and opening, China perhaps has been the largest beneficiary of global trade. In view of the general protectionism sentiment, especially in the current political campaign in the US (both US presidential candidates oppose the TPP), it is one of history’s greatest ironies that China, nominally a communist nation, is called upon to save global trade.
In a sense, the mantle of free world trade has passed to Asian nations – witness, for instance, the Regional Comprehensive Economic Partnership (RCEP) as a counterweight to the TPP. Since global trade growth has been lagging global GDP growth in recent years, China has a particular interest in opposing protectionism.
But the specific challenge for China’s leadership of the G20 summit is that it must lead by example and push through painful reforms at home. In the past 36 years (from 1979 to 2015) China’s economy registered average GDP growth over eight percent. Now with a much larger and more complex economy, China’s leaders have their hands full forcing the restructuring needed to further boost growth in the world’s second-largest economy.
In addition to several acute problems caused by particular policies, such as aging population as a result of the one-child policy (since reversed) or environmental degradation caused by rapid economic growth, China also needs to address the overcapacity and excess debt resulting from the CNY4 trillion ($600 billion) stimulus package China’s central government implemented in the wake of the global financial crisis.
China is the midst of a long-term transition from a growth model based on investment, capital accumulation and manufacturing and exports to one led by consumption and services. China has demonstrated that with political resolve and the right regulatory environment, it can create world-leading industries. Now Chinese leaders face the daunting tasks of overhauling the taxation system, further reforming the financial system, privatizing or shutting down inefficient state-owned enterprises (SOEs), and opening up its service sectors to foreign trade and investment.
Debt is also an issue. While overall debt rose to 247% of gross domestic product in 2015, from 160% in 2005, according to Bloomberg, household debt in China is far below levels in the US before the subprime crisis and in view of the high savings rate and low leverage, is unlikely to cause a financial crisis. A bigger problem is corporate debt (though average leverage isn’t high), but since all the major banks and many of the large corporations are state-owned, the government can cover or absorb that debt.
Reforming the household registration (hukou) system, thereby encouraging free movement of workers would further stimulate productivity.
According to Bloomberg, over 600 million Chinese – about 44% of the population – are classified as rural residents, with an average nominal yearly income of $1,620. An urban worker earns nearly three times as much and enjoys better schooling and healthcare.
China’s gross domestic product (GDP) has slowed to 6.9% in 2015, the slowest in 25 years, though the slowdown is simply the result of structural transformation. The leadership now needs to find new engines of growth.
The recent US-China Business Council (USCBC) member survey shows nearly 20% of survey respondents expect revenue to decline this year and plan a contraction in staffing. A recent IMF study noted that “China’s economic transition will continue to be complex, challenging, and potentially bumpy, against the backdrop of heightened downside risks and eroding buffers.”
China has a history of using multilateral events to introduce subtle changes to its economy. Despite recent slowdown, China will continue to drive global economic growth.
This is China’s moment – the G20, with China at its head, must demonstrate decisive leadership and develop consensus for a new global economic agenda. The world needs China to succeed.
The author is the founding director of The Chinese Media Center (CMC), at the School of Media Studies of The College of Management Academic Studies, Rishon Lezion.