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China’s role in GlobalisationMartin Wolf, Associate Editor & Chief Economics Commentator, Financial Times
Leverhulme Centre for Research on Globalisation and Economic Policy, School of Economics, Nottingham University
February 19th, 2004
2
China’s role in Globalisation
“Let China sleep, for when she wakes, she will shake the world.” Napoleon Bonaparte
3
China’s role in Globalisation
• China’s rising economy
• China’s growing role in the world economy
• Challenges in trade policy
• Challenges in international monetary policy
• Conclusions
4
China’s role in Globalisation
• My thesis
– China is already a big force in globalisation
– China will become an ever more important player in the years ahead
– The future of our world economy will depend, in large measure, on how China plays its role and on how the rest of the world, particularly the developed countries, respond to China
5
1. China’s rising economy
• Asia’s rise is the fourth big transformation in relative economic power since the industrial revolution
– Early 19th century: rise of the UK
– Late 19th and early 20th centuries: rise of US and Germany
– Post-second world war: Japanese miracle
– 1970 onwards: rise of the rest of Asia, including China and India
6
1. China’s rising economy
• Over the last hundred years, the world’s leading economies have been much the same group of countries.
• The US has been the biggest economy. Japan has gone up, while the UK has declined. Russia was never a big player in the world economy.
• China’s rise transforms this picture. It is a revolutionary upheaval in global economic power, comparable to the rise of the US between 1860 and 1910.
7
1. China’s rising economy
Source: Angus Maddison
ASIA'S SHARE IN WORLD GDP(at PPP)
33
179
5 512
0
10
20
30
40
50
60
70
1820 1870 1913 1950 1973 2001
China India Japan Other AsiaSource: Maddison
8
1. China’s rising economy
SHARES IN WORLD POPULATION, 2002
20.7%
16.9%
3.4%
2.3%
2.2%6.7%3.4%
11.1%
4.9%
8.5%
7.7%
12.2%
China
India
Indonesia
Pakistan
Bangladesh
Other Asian developing countries
Asian developed countries
Sub-Saharan Africa
Middle-East and North Africa
Latin America
Europe and Central Asia
Other high income
9
1. China’s rising economy
GROWTH OF REAL GDP PER HEAD (per cent a year)
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
China
Asian d
evel
opin
g co
untri
esIn
dia
Indo
nesia US
Euro
area
Latin
Am
erica
Japa
n
Sub-S
ahar
an A
frica
Mid
dle E
ast
Europ
e and
Cen
tral A
sia
World
1971-80 1981-90 1991-2000
Source: World Bank
10
1. China’s rising economy
SAVINGS AND INVESTMENT 2001 (share of GDP)
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
China
East Asia & Pacific
Middle East & North Africa
Japan
Europe and Central Asia
Eurozone
India
South Asia
Latin America
US
Gross domestic savings rate Gross capital formation
11
1. China’s rising economy
CATCH UP IN EAST ASIA(per cent of US GDP per head at PPP)
1.0%
10.0%
100.0%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55China 1978-2004 Japan 1950-2004 South Korea 1962-2004 Taiwan 1958-2004
12
1. China’s rising economy
GDP AT MARKET PRICES ($bns)
$100
$1,000
$10,000
$100,000
2000 2010 2020 2030 2040 2050
China India Germany Japan UK US
Source: Goldman Sachs
13
1. China’s rising economy
GDP PER HEAD AT MARKET PRICES ($s)
$100.0
$1,000.0
$10,000.0
$100,000.0
2000 2010 2020 2030 2040 2050
China India Germany Japan UK US
Source: Goldman Sachs
14
1. China’s rising economy
GROWTH OF THE TWO GIANTS - 2000-2050(per cent a year)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
China India
2000-2005 2005-2010 2010-2015 2015-2020 2020-2025 2025-2030 2030-2035 2035-2040
2040-2045 2045-2050
Source: Goldman Sachs
15
2. China’s growing role in the world economy
• China’s share in global exports has risen from 1.2 per cent in 1982 to 5.2 per cent in 2002.
• Over the ten years 1993-2002, the volume of China’s exports grew at 17 per cent a year, twice the rate of growth of the economy
• Between 1979 and 2001, China’s terms of trade deteriorated by 30 per cent,while her export volume increased 17-fold
16
2. China’s growing role in the world economy
• China’s rapidly growing imports raise the prices of commodities, including oil, and her exports drive down the prices of manufactures, especially labour-intensive manufactures
• Already, China is the world’s fourth largest exporter (after US, Germany and Japan) and third equal importer in the world (with Japan, UK and France).
• China will be the third largest exporter and importer, within a few years
17
2. China’s growing role in the world economy
• China now contains the world’s third largest stock of inward foreign direct investment
• China holds the world’s second largest foreign currency reserves – over $400bn in November 2003
• China is a big player in the world economy already, but can only become bigger in the years ahead, as its growth outpaces that of the rest of the world
18
2. China’s growing role in the world economy
INWARD FDI STOCK 2002 ($bn)
$1,351
$637
$452 $448 $433 $401
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
US UK Germany China Hong Kong France
Source: UN World Investment Report
19
2. China’s growing role in the world economy
OFFICIAL FOREIGN CURRENCY RESERVES, AUGUST 2003 ($bn)
$535.5
$364.7
$185.7
$135.4$111.8
$86.7
$82.6
$130.5
$1,049.9
Japan
China
Taiwan
Korea
Hong Kong
Singapore
India
Rest of Asia
Rest of world
20
2. China’s growing role in the world economy
ASIA'S SHARE IN WORLD MERCHANDISE EXPORTS (per cent)
0.0
5.0
10.0
15.0
20.0
25.0
30.0
1948 1953 1963 1973 1983 1993 2001
Japan China India other AsiaSource: WTO
21
2. China’s growing role in the world economy
RISE OF CHINESE EXPORTS(rolling 12 months, $bn)
$0.0
$100.0
$200.0
$300.0
$400.0
$500.0
$600.0
$700.0
$800.0
$900.0
Jan-
90
Jul-9
0
Jan-
91
Jul-9
1
Jan-
92
Jul-9
2
Jan-
93
Jul-9
3
Jan-
94
Jul-9
4
Jan-
95
Jul-9
5
Jan-
96
Jul-9
6
Jan-
97
Jul-9
7
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
US Japan Germany France UK China Canada
22
2. China’s growing role in the world economy
RISE OF CHINESE IMPORTS(rolling 12-months, $bn)
$0.0
$200.0
$400.0
$600.0
$800.0
$1,000.0
$1,200.0
$1,400.0
Jan-
90
Jul-9
0
Jan-
91
Jul-9
1
Jan-
92
Jul-9
2
Jan-
93
Jul-9
3
Jan-
94
Jul-9
4
Jan-
95
Jul-9
5
Jan-
96
Jul-9
6
Jan-
97
Jul-9
7
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
US Germany Japan UK Canada China France
23
2. China’s growing role in the world economy
US BILATERAL TRADE BALANCES ($bn)
-600000
-500000
-400000
-300000
-200000
-100000
0
Jan
-85
Jan
-86
Jan
-87
Jan
-88
Jan
-89
Jan
-90
Jan
-91
Jan
-92
Jan
-93
Jan
-94
Jan
-95
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Japan China other Asia other areas
24
2. China’s growing role in the world economy
RATIO OF TRADE IN GOODS TO GOODS GDP(per cent)
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
Germany France UK Indonesia US China Japan
1990 2001Source: World Bank
25
2. China’s growing role in the world economy
SHARES OF CHINA IN WORLD EXPORTS OF MERCHANDISE(Under alternative growth assumptions, with rest of world exports growing
at 6 per cent a year)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
8 per cent growth 12 per cent growth 17 per cent growth
26
3. Challenges in trade policy
• China has liberalised trade policies dramatically:– average tariffs on manufactures are down from 46.5 per cent
in 1992 to 6.9 per cent after accession;
– average tariffs on primary commodities are down from 22.3 per cent to 3.6 per cent
– Non-tariff barrier coverage is down from 32.5 per cent to 21.6 per cent between 1996 and 2001
– Extensive liberalisation commitments in telecommunications, banking and insurance
– China has moved extensively towards a market economy
– The WTO accession will accelerate this trend dramatically
27
3. Challenges in trade policy
• China has accepted numerous obligations and restrictions, in return for its “renewed” membership of the World Trade Organisation in 2001
– a transitional product-specific safeguard mechanism against China, lasting 12 years
– a transitional textile safeguard mechanism against China, lasting until 2008
– immediate implementation of the agreement on trade-related intellectual property rights (TRIPS) by China
– a limit of 8.5 per cent on domestic subsidies to agriculture by China (which is well above budgetary outlays)
– no across-the-board preferences as a developing country
28
3. Challenges in trade policy
• China was right to accept these obligations:
– This is partly because WTO membership strengthen China’s reforms, not least by introducing the rule of law
– Also China’s overriding interest is in maintaining a liberal global trading regime trade
• The following facts are helpful to China’s cause:
– 50 per cent of China’s exports are generated by FDI; and
– and its production is vertically integrated, with a heavy reliance on imported components.
– So outsiders have a strong interest in China’s success and in resisting protectionism against her
29
3. Challenges in trade policy
• But the speed of China’s growth will still have a big impact on the rest of the world, creating resistance to China’s exports
• China should probably assume that exports will be unable to grow very much faster than GDP in the decades ahead
• Also China needs to do everything she can to keep the liberal trading system working, by opening up her own economy
30
4. Challenges in international monetary policy
• China does not run a huge current account surplus, but it recycles its capital inflow into a capital outflow
• This gives it a huge surplus in its basic balance of payments: the sum of the current account and autonomous private sector net flows
• And remember that even Japan ran current account deficits at these levels of income per head
31
4. Challenges in international monetary policy
CHINA'S BALANCE OF PAYMENTS
-$140,000
-$120,000
-$100,000
-$80,000
-$60,000
-$40,000
-$20,000
$0
$20,000
$40,000
$60,000
$80,000
1996 1997 1998 1999 2000 2001 2002 2003 at anannual
rate
Current Account Net inward direct investment Other net capital inflow Reserve accumulation
Source: IMF and Chinese official statistics
32
4. Challenges in international monetary policy
CHINA'S FOREIGN EXCHANGE RESERVES ($bn)
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
Jan-
97
Apr-9
7Ju
l-97
Oct-
97
Jan-
98
Apr-9
8Ju
l-98
Oct-
98
Jan-
99
Apr-9
9Ju
l-99
Oct-
99
Jan-
00
Apr-0
0Ju
l-00
Oct-
00
Jan-
01
Apr-0
1Ju
l-01
Oct-
01
Jan-
02
Apr-0
2Ju
l-02
Oct-
02
Jan-
03
Apr-0
3Ju
l-03
Oct-
03
33
4. Challenges in international monetary policy
GROWTH OF MONEY SUPPLY(per cent, year-on-year)
0.0
5.0
10.0
15.0
20.0
25.0
Jan-
99
Apr-9
9
Jul-9
9
Oct-99
Jan-
00
Apr-0
0
Jul-0
0
Oct-00
Jan-
01
Apr-0
1
Jul-0
1
Oct-01
Jan-
02
Apr-0
2
Jul-0
2
Oct-02
Jan-
03
Apr-0
3
Jul-0
3
Oct-03
34
4. Challenges in international monetary policy
• It would be helpful for global payments adjustment if China could move into a modest current account deficit. It would also help Chinese monetary control.
• This would require currency adjustment and expanded demand, in relation to output
• Free floating is impossible, without radical financial reform. But a wider band, with a managed exchange rate, would be possible.
• Alternatively (or in addition), China could accelerate import liberalisation.
35
5. Issues ahead
• As a competitive and dynamic new economic power, it is in China’s interest to promote a rule-governed open world trading system based on non-discrimination: it needs the markets and the stability
• It is in China’s interest to defuse US protectionism, by accommodating the needed depreciation of the US dollar
• Global payments adjustment is difficult without China, since other countries do not want a big appreciation of their currencies against the renminbi
36
5. Issues ahead
• China should move towards convertibility and a floating exchange rate, with an inflation-targeting central bank
• China should be invited to become a full member of the group of seven finance ministers