First of Two Parts
Today, global geopolitics fundamentals are being altered. The pre-war era of European colonialism in Asia that started in the 16th and 17th centuries ended half a century ago. This gave rise to a resurgent Asian nationalism as former colonies gained independence.
The political void left by the colonialists was filled by a fast growing economic colossus – China, the sleeping giant who, after surviving a “century of humiliation,” was now ready to take her place in the world scene.
Emerging as a super economic power, China has adapted to increase foreign direct investment by making Chinese companies become more multinational. The objective is to improve resource security by acquiring access to foreign resources, as well as to acquire leading-edge technology to boost the competitiveness of Chinese industries.
The implementation of the trade-strategy above will be facilitated by the very rapid growth in Chinese foreign exchange reserves over the last decade due to sustained large trade surpluses, as well as large capital inflows from foreign direct investment. This has provided a large fund of foreign exchange to support China’s foreign trade policy, which, in turn, increased Chinese role in global trade and investment – a development that has created rising political fears among governments about China’s increasing dominant control over their resources; its huge investments in their natural resources; and its huge export market for their products which could lead to a situation where flag follows trade.
It is assumed that technology, research and development, as well as innovation, will become increasingly important drivers of comparative advantage of economies in coming decades in a wide range of key manufacturing and service industries not just in China but also in the rest of the world. Parenthetically, the last five decades, technological leadership has continued to be an important driver of competitive advantage for the US and European multinationals.
One key structural change that will be a game changer for countries like China and India is their significantly improved educational infrastructure. With large numbers of their graduates in science and engineering each year, developed economies are now shifting the location of their global R&D facilities into China and India, where a large pool of highly qualified scientists and engineers is readily available.
In December 2003, Chinese Premier Wen Jiabao in a speech at Harvard said that, “China has laid down her three-step strategy toward modernization. From now to 2020, China will complete the building of a comfortable society in an all-round way. By 2049, the year the People’s Republic will celebrate its centenary, we will have reached the level of a medium-developed country. We have no illusions but believe that on our way forward, we shall encounter many difficulties foreseeable and unpredictable and face all kinds of tough challenges. We cannot afford to lose such a sense of crisis.”
Today, China is being recast from a socialist industrial society in the early 1990s to a semi-capitalistic global economic leader. It is a host to a number of FDIs and a large number of foreign workers from the OECD countries who have flocked to China to find their fortune, or to at least gain experience in the world’s rising economic power.
China’s role as a trade and investment partner has also risen very considerably during the last couple of decades, particularly in the Asia-Pacific region, which sees China as the largest export market for a number of its countries.
Challenges to China
An emerging problem facing the Chinese economy over the next 15 years, however, is the impact of rising labor costs in coastal China. This was brought about, in the first place, by rapid growth in Western Chinese provinces, which has driven up wages as supply of migrant workers for coastal Chinese factories tightened.
Another challenge is flawed demographics, partly a reflection of China’s one-child policy, which has progressively reduced the number of workers entering the labor force each year.
Finally, the marginal productivity of capital is gradually declining, with China having invested heavily in modern infrastructure and equipment, making it progressively more difficult to deliver rapid productivity growth on additional capital investment. This means that strong wages growth, which has the effect of pushing up the annual average rate of unit labor cost rises. In economic terms the incremental-capital to output and employment ratios are rapidly declining.
With wages rising, pushing up the average rate of unit labor cost, the net result is the loss of cost-competitiveness (its comparative advantage) for coastal Chinese provinces – the factory of the world for low-cost manufacturing, such as textiles and clothing, as well as consumer electrical and electronic goods over the next 15 to 20 years.
This is the same ‘hollowing out’ experience of manufacturing industries in Japan, South Korea, Hong Kong, Singapore and Taiwan in the past.
China as a rising superpower
Despite this downside in Chinese economic prospects, China is still expected to become the world’s largest economy by 2030 as the total size of its GDP surpasses the US and the EU. This will have significant geopolitical and economic implications.
As time marches on China will become the key trade and investment partner for Asia-Pacific nations. As we write, it is now the largest export market for almost all Asia-Pacific economies, and for some nations, even as it becomes increasingly important as a source of both foreign direct investment and portfolio capital flows for most Asia-Pacific countries, as its economy becomes the world’s largest.
Expectedly, the role of Chinese corporations in the global economy will continue to increase, supported by the Chinese government’s own policy of encouraging large Chinese multinationals to internationalize. Chinese multinationals will, thereby, become more significant global competitors in international markets.
Growth will increase the purchasing power of an enlarged middle class and boost consumer demand, which in turn, will become the new engine for global consumer spending growth. The multiplier effect of these developments will be wide-ranging. For commodities, the implications are for continued strong growth in demand for energy sources, such as solar and wind energy. That will be accompanied by equally robust demand for agricultural commodities, including grains and soya beans, as well as meat, dairy products and fisheries products. This could be a very positive long-term trend for agricultural exporting nations, such as the US, Australia, New Zealand, Brazil and some sub-Saharan agricultural exporters.
Tourism is an important tool of Chinese trade policy, which nations should take advantage of. The contributions of Chinese tourists’ spending to the balance of payments of emerging economies cannot be understated.
Underlying these developments will be China’s need for energy security, which will be a central focus of Chinese strategic policy, with heavy implications for its political and defense policy initiatives.
With its outward push strategy, Chinese financial institutions will become increasingly international, with banks expanding their international operations both to support their corporate sector and also to play a bigger role in global finance. This will be facilitated by the establishment of the Chinese initiative – the Asian Infrastructure and Investment Bank (AIIB).
(To be continued on Monday)