The global econ­omy’s new rule-maker

China does not ac­tu­ally need to limit ac­cess to its own mar­kets to sus­tain its growth, be­cause it can in­crease its bar­gain­ing power by merely threat­en­ing to do so.

Financial Nigeria Magazine - - Contents - Michael Spence By Michael Spence

In a re­cent com­men­tary for the South China Morn­ing Post, He­len Wong, HSBC's chief ex­ec­u­tive for Greater China, shows that China's ris­ing gen­er­a­tion of 400 mil­lion young con­sumers will soon ac­count for more than half of the coun­try's do­mes­tic con­sump­tion. This gen­er­a­tion, Wong notes, is largely trans­act­ing on­line, through in­no­va­tive, in­te­grated mo­bile plat­forms, in­di­cat­ing that it has al­ready “leapt from the preweb era straight to the mo­bile In­ter­net, skip­ping the per­sonal com­puter al­to­gether.”

Of course, China's ris­ing mid­dle class is not news. But the ex­tent to which dig­i­tally ori­ented younger con­sumers are driv­ing rapid growth in China's ser­vice in­dus­tries has not yet re­ceived am­ple at­ten­tion. Ser­vices, af­ter all, will help drive China's struc­tural tran­si­tion from a mid­dle- to a high-in­come econ­omy.

Not too long ago, many pun­dits doubted that China could make the shift from an econ­omy dom­i­nated by labour-in­ten­sive man­u­fac­tur­ing, ex­ports, in­fra­struc­ture in­vest­ment, and heavy in­dus­try to a ser­vice econ­omy un­der­pinned by do­mes­tic de­mand. But even if China's eco­nomic tran­si­tion is far from com­plete, its progress has been impressive.

In re­cent years, China has been of­fload­ing its labour-in­ten­sive ex­port sec­tors to less-de­vel­oped coun­tries with lower labour costs. And in other sec­tors, it has shifted to more dig­i­tal, cap­i­tal­in­ten­sive forms of pro­duc­tion, ren­der­ing labour-cost dis­ad­van­tages in­signif­i­cant. Th­ese trends im­ply that sup­ply-side growth has be­come less de­pen­dent on ex­ter­nal mar­kets.

As a re­sult of th­ese changes, China's eco­nomic power is rapidly ris­ing. Its do­mes­tic mar­ket is grow­ing fast, and could soon be the largest in the world. And be­cause the Chi­nese govern­ment can con­trol ac­cess to that mar­ket, it can in­creas­ingly ex­ert its in­flu­ence in Asia and beyond. At the same time, China's de­clin­ing de­pen­dence on ex­port-led growth is re­duc­ing its vul­ner­a­bil­ity to the whims of those who con­trol ac­cess to global mar­kets.

But China does not ac­tu­ally need to limit ac­cess to its own mar­kets to sus­tain its growth, be­cause it can in­crease its bar­gain­ing power by merely threat­en­ing to do so. This sug­gests that China's po­si­tion in the global econ­omy is start­ing to re­sem­ble that of the United States dur­ing the post-war pe­riod, when it, along with Europe, was the dom­i­nant eco­nomic power. For decades af­ter World War II, Europe and the US rep­re­sented well over half (and near 70% at one point) of global out­put, and they were not heav­ily de­pen­dent on mar­kets else­where, other than for nat­u­ral re­sources such as oil and min­er­als.

Now, China is rapidly ap­proach­ing a sim­i­lar con­fig­u­ra­tion. It has a very large do­mes­tic mar­ket – to which it can con­trol ac­cess – ris­ing in­comes, and high ag­gre­gate de­mand; and its growth model is in­creas­ingly based on do­mes­tic con­sump­tion and in­vest­ment, and less on ex­ports.

But how will China wield its in­creas­ing eco­nomic power? In the post-war pe­riod, the ad­vanced economies used their po­si­tion to set the rules for global eco­nomic ac­tiv­ity. They did so in such a way as to ben­e­fit them­selves, of course; but they also tried to be as in­clu­sive as pos­si­ble for de­vel­op­ing coun­tries.

The post-war pow­ers cer­tainly did not have to take that ap­proach. It was within their power to fo­cus far more nar­rowly on their own in­ter­ests. But that might not have been wise. It is worth re­mem­ber­ing that in the twen­ti­eth cen­tury, fol­low­ing two world wars, peace was the top pri­or­ity, along with – or even be­fore – pros­per­ity.

China shows ev­ery sign of mov­ing in the same di­rec­tion. It most likely will not pur­sue a nar­rowly self-in­ter­ested ap­proach, mainly be­cause to do so would di­min­ish its global stature and clout. China has shown that it wants to be in­flu­en­tial in the de­vel­op­ing world – and cer­tainly in Asia – by play­ing the role of a sup­port­ive part­ner, at least in the eco­nomic realm.

Whether China can achieve that goal will de­pend on what it does in two key pol­icy ar­eas. The first is in­vest­ment, where China has moved ag­gres­sively by in­tro­duc­ing a va­ri­ety of mul­ti­lat­eral and bi­lat­eral ini­tia­tives. For ex­am­ple, in ad­di­tion to in­vest­ing heav­ily in African coun­tries, it cre­ated the Asian In­fra­struc­ture In­vest­ment Bank in 2015, and, in 2013, an­nounced the “Belt and Road Ini­tia­tive,” meant to in­te­grate Eura­sia through mas­sive in­vest­ments in high­ways, ports, and rail trans­port.

Sec­ond, how China man­ages ac­cess to its vast in­ter­nal mar­ket, in terms of trade and in­vest­ment, will have far-reach­ing con­se­quences for all of China's ex­ter­nal eco­nomic part­ners, not just de­vel­op­ing coun­tries. China's do­mes­tic mar­ket is now the source of its power, which means that the choices it makes in this area in the near term will largely de­ter­mine its global stand­ing for decades to come.

To be sure, China's cur­rent po­si­tion on do­mes­tic-mar­ket ac­cess is less clear than its eco­nomic am­bi­tions abroad. But China will most likely move to­ward an open, largely rules-based mul­ti­lat­eral frame­work. The les­son from the post-war pe­riod is that this ap­proach will do the most good ex­ter­nally, and will thus en­hance China's in­ter­na­tional in­flu­ence. At this stage of China's de­vel­op­ment, such an ap­proach will have few if any costs, while most likely con­fer­ring many ben­e­fits.

What re­mains to be seen is how China's re­la­tion­ship with the US fares. The US is suf­fer­ing from non-in­clu­sive growth pat­terns and re­lated po­lit­i­cal and so­cial up­heavals. And it now seems to be de­part­ing from its his­tor­i­cal post-war ap­proach to in­ter­na­tional eco­nomic pol­icy. But even if the US is iso­lat­ing it­self un­der Pres­i­dent Don­ald Trump, it is still too big sim­ply to ig­nore. If the Trump ad­min­is­tra­tion en­acts ag­gres­sive poli­cies di­rected at China, the Chi­nese will have no choice but to re­spond.

Still, in the mean­time, China can con­tinue to pur­sue a rules-based mul­ti­lat­eral ap­proach, and it can ex­pect broad sup­port from other ad­vanced and de­vel­op­ing coun­tries. The key is not to be dis­tracted by Amer­ica's de­scent into na­tion­al­ism. Af­ter all, it is any­one's guess how long that will last.

China's cur­rent po­si­tion on do­mes­tic-mar­ket ac­cess is less clear than its eco­nomic am­bi­tions abroad.

Chi­nese Pres­i­dent Xi Jin­ping

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