Yves Tiberghien, Harvard University

China and Globalization: Toward a Mutual Transformation

Presentation at the CÉRIUM’s Summer SchoolChina Risen

How it changes and change us

China and Globalization:

Toward a Mutual Transformation

Yves Tiberghien

Harvard Academy Scholar

ytiberghien@wcfia.harvard.edu

CERIUM-Summer School,

July 5, 2006

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Preliminary Test - Who are they?

Who is this cow-boy?

What about this event?

And this event?

Presentation Outline:

1. Stakes and Big Picture 2. Impact of Globalization on China 3. Some Chinese Vulnerabilities in the

Process 4. Impact of China on Globalization 5. Some Essential Milestones

1. Stakes:

1) The process of Chinese modernization has entered a new phase of intense internationalization since 1997. Does it destabilize China? Can the Chinese state maintain control over the process? Is the balance between a communist regime and a market economy sustainable?

2) Can the global economic system absorb China without getting destabilized? Will levels of national political support last?

3) Will China’s integration into the international system force a global power transition? Can the transition be managed peacefully?

Key Points:

1. Until Now, China has kept an astonishing degree of control over the process of globalization and has managed to influence the sharing of benefits.

2. The current path leads to new milestones that may be harder to manage.

3. The continuation of mutual gains depends on political factors in the US, the EU, and Japan, as well as a wise management of relations with the US.

2. Globalization and China: Many Benefits

A/ FDI Flows and Technology Transfers

Key Points on FDI flows

Cumulated Total in 2004: $600 billion, much beyond other developing countries

Concentration in a few regions: Pear River Delta, Fujian, Shanghai area, a few cities.

22% of FDI = M&A Impact on SOEs: competitive pressures,

some crowding out, discipline effects Impact on the generation of laws and rules Rise of a transnational elite

Wuhan: Citroen Factory

B/ Trading Boom

A few Key Figures in 2005

Trade Surplus with the US (=total with world) reached $200 Billion.

2004: China became Japan’s first trade partner: $200 billion total trade (surplus of $15 bn for Japan)

Enormous production: 85% of world’s tractor production, 75% of world watches, 70% of world toys, 50% of world PCs.

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C/ Growing Financial Weight

Jan 2006: China’s foreign reserves reached $816 Billion, #2 of world, just behind Japan. Key for stability of US$.

China can influence the world forex markets, just by changing the mix of its foreign reserve holdings.

Growing % of US Treasury Bonds held by China (cf related debates during Katrina last summer).

New Fact: Explosion in Chinese Outward FDI

2004: 8000 Chinese companies present in 160 countries

Lenovo purchases IBM’s PC division Oil Companies very Active (cf Battle

CNOOC- UNOCAL in the US) Well-Known Names: Huawei (telecom),

Ningbo, Haier (electric appliances)

Summary of Economic Picture in Context of Globalization

Economic Growth: 10% per Year GDP (just revalued in 2005) now superior to FR, probably

passing UK this year. Will pass Japan in 2020 and the US in 2040.

Chinese growth = 18% of world growth in 2004. Technological rise Trade explosion since 1995: #3 world exporter in 2004, 8% of

world exports. Huge impact on world oil market Large role in all global issues, soon likely in G8 (G9) Rapid military modernization

Economic By-Product: Growing Military Budget

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3. Some Chinese Vulnerabilities

Is the hands-on approach to globalization sustainable?

Is the trajectory domestically stable and sustainable?: precarious banks, rising tensions in the countryside, iron rice bowl now broken (xiagang gongren)

Can the regime retain its political legitimacy in the context of SOE restructuring and a social contract in tatters?

Politically, is the regime stable over time? Risks related to national unity (growing inequalities)

Key Point: SOE Restructuring

Since 1997, SOE restructuring has become a key bottleneck for China’s integration in the world economy (development of competitive companies).

Recent acceleration of the process: 58% of SOEs disappeared between 1997 and 2002, 92% of collective enterprises.

Several pathways followed: identification of 1000 national champions, mergers, bankruptcies, or privatization for smaller SOEs.

Use of WTO as Troyan horse?

Social Impact

50 Million workers laid-off between 1997 and 2003 in SOEs

Collapse of living conditions Concentration in North-East: 27 M workers

laid-off, 16% of entire population in Fushun, 7.5% in Shenyang

Many protests, riots, and petitions Pressure to build a welfare system

The Mingong - migrant workers

140 Million migrant workers with limited legal identity and protection

Still attached to their rural hometowns Comparative advantage for China or

exploitation?

Another weak point: the stock market

Created in 1991 in the midst of euphoria Aim: raising funds for SOEs Only a third of shares are sold, other 2/3

remain controlled by state directly or indirectly

Weak corporate governance, question marks about quality of regulators, weak minority shareholder protection

4. Impact of China on Globalization

Key lessons: gradualism works, the state has a key role in managing the process, power matters.

Convergence? No! A socialist market economy is compatible with the globalization

Trade: theories of comparative advantage and free trade pushed to the limit, due to size and speed of China’s entry into the trading system. Adjustment takes time and has human costs.

Flying Geese Theory also pushed to the limits On the interaction between development and

democracy, was Lipsett wrong? The Unknown: how stable is the process?

5. Five Key Debates in Recent Years

A/ The Asian Crisis: salutary role played by China in stopping the domino reaction

Chinese choices come out reinforced Another lesson: any financial vulnerability

can be exploited by other economic powers

B/ Hong Kong’s peculiar role during the Asian crisis

Other Debates:

C/ Global Exchange Rates: the Chinese Debate

D/ Energy, oil, raw materials: the role of diplomacy is rediscovered

E/ WTO: rise role played by China within the G 22 group

F/ Global Environment Treaties G/ GMOs: Pivotal Role played by China

A Striking Example: Airbus, dec05

Conclusion:

Rediscovery of the role of politics in managing global economic flows.

China is able to benefit from globalization, due to its political and economic power and to its political stability - a state able to manage transition

Challenging some of the key debates on globalization (convergence, loss of maneuvering space)

At the same time, the sustainability of the current equilibrium hangs on international political relations and on the capacity of the current regime to manage a painful social transition (and rising inequalities).