Chinas role in Globalisation Martin Wolf, Associate Editor & Chief Economics Commentator, Financial...

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 rising economy

• China’s growing role in the world economy

• Challenges in trade policy

• Challenges in international monetary policy

• Conclusions

4


• 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


• 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


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


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


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

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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


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


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


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


14


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


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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


• 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

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• 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

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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

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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

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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


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


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

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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

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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

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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

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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

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• 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

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• 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

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• 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

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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

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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


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


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

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• 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.

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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

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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

Chinas role in Globalisation Martin Wolf, Associate Editor & Chief Economics Commentator, Financial...

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