Global dynamics of a Rising China in a Multi-polar World
Abstract
China is changing rapidly as she has just unveiled a watershed in her development model, promoting more balanced, sustainable and inclusive growth with more social justice. Yet, in face of many domestic and international challenges, the trajectory of China’s Rise should belie any illusions of grandeur. Set to become at best a middle-income economy in per-capita terms by the middle of the first half of this century, she is in no position and does not wish to challenge the United States militarily or economically. Nevertheless, in an increasingly inter-connected, inter-dependent, and multi-polar world, as the second largest economy, China is as often perceived as a threat as she is called upon to take on a more proactive role in a range of global issues including currency stability, climate change and economic imbalance. China has benefitted hugely from an existing order dominated by the United States. She is thus cautious not to take the lead and tries to maintain good relations with as many countries as possible. Yet, while converging with the West economically, China is finding herself at odds with how the West approaches such universal values as human rights, freedom and democracy. On the one hand, China’s engagement with developing countries especially in South East Asia and Africa has brought them much welcomed economic development. On the other hand, to ensure the security of her energy and other resources, China maintains a friendly-to-all posture with a number of countries such as Iran and Sudan which the West regards as rogue states. What is more, with mounting unemployment in the run-up to the mid-term elections, China-bashing has become a favourite sport in the United State, where, as the only status quo world superpower, China’s Rise has already been causing a great deal of concern. Yet, in a transformed multi-polar world, a weakened United States is obliged to lead within her limits and has to work more with a range of stakeholders outside her traditional allies, particularly a Rising China, in tackling a host of global issues, if the world is to embrace a better tomorrow.
Key Words
Funds Flows, Monetarism, Money, Money Stock (JEL E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit); Export Driven, Export Led (JEL F4 - Macroeconomic Aspects of International Trade and Finance); Financial Crisis, Globalization (JEL G – Financial Crisis, Globalization); Developing Countries, Development, Modernization (JEL O1 – Economic Development); Sub-Sahara Africa (JEL 055 – Africa); Capitalism (JEL P1 –Capitalist Systems); Communism, Communist System, Formerly Centrally Planned Economies, Transition Economies, Transitional Economies (JEL P2 - Socialist Systems and Transitional Economies); Ag Econ, Natural Resource (JEL Q – Agricultural and Natural Resource Economics; Environmental and Ecological Economics).
Perspectives on China’s Rise
Visions of a China Renaissance?
At about 6.59 p.m. Beijing time, on a fireworks-festooned National Day, China’s second moon probe, Chang’e 2, blasted off to a cloudy sky, exactly on schedule. Rather than orbiting the earth first, the rocket propelled the satellite directly into the Earth-Moon trajectory, to be manoeuvred into a circumlunar orbit just 15 km from the moon’s surface. The satellite will be taking high-resolution photos of the Bay of Rainbows where Chang'e 3 is planned to land in 2013. Though it is still more than forty years behind Apollo 11, the first human moon-landing, this Chang’e mission is a step closer to China’s lunar dreams.
Against the backdrop of the West amidst a lurking sovereign debt crisis, persistently high unemployment rates and at best anaemic economic revival, China continues to pose enviable growth rates: 10.5% in 2010 and 9.6% next year, according to the IMF World Economic Outlook just published. Her Foreign Currency Reserve has surged to $2.65 trillion as she is on track to overtake Japan as the second largest economy in the world. According to Goldman Sachs, China’s economy, now slightly less than a third of that of the US, may exceed the US by 2027/8. With a spectacularly successful Beijing Olympics, a much acclaimed Shanghai Expo, and playing host to the Asian Games, China has much to celebrate.
China has been proactively embracing the world, regardless of colour, creed, ideology, religion and political affiliations. From South East Asia to Africa, and from Central Asia to Latin America, China’s increasing geo-economic and geo-political influence leaves little doubt that a resurgent and increasingly confident China is very much on the world stage as a Great Power. This has fed into a groundswell of triumphant nationalism, especially amongst the younger generation of the so-called post 80s and 90s. China’s effervescent blogosphere is abuzz with chauvinistic sentiments. Even advertising copies for luxury products in China commonly deploy such evocative phrases as ‘sheng shi’, a flourishing age’ or ‘renaissance’, reminiscent of the heyday of the Tang Dynasty.
Geopolitcal realities
So the recent high-profile US return to the Asia-Pacific theatre, including arms sale to Taiwan, joint military exercises with Korea in the Yellow Sea, formal declaration of US interest in Asian countries’ territorial disputes with China in the South China Sea, reaffirmation of the coverage of the US-Japan Mutual Security Treaty to encompass the disputed Diaoyu Islands (or Senkaku in Japanese), let alone active courtship with India, is a sobering shot across China’s bows.
However much natural gas reserve these disputed small islands in the South China Sea may hold, they are a key part of the multi-polar dynamics emerging with the Rise of China over the past decade.
The ASEAN-China Free Trade Agreement has come into force since 1 January 2010, creating the world’s largest free trade area in terms of population size (1.9 billion). Economically, it ranks as the world’s third largest with a combined GDP of $6 trillion with estimated intra-regional trade of $1.23 trillion. China is the very heart of this closely-connected economic dynamo. Nevertheless, notwithstanding China’s close cooperation in such areas as the Ching Mai Initiative (currency swaps) and signing the Treaty of Amity, ASEAN countries are wary of the 800-pound gorilla (or panda) in their midst, not just because of China’s territorial claims in the South China Sea. So it is no surprise that ASEAN countries warm to the US recent comeback to this region after a long period of neglect whilst being bogged down in the Middle East. It goes without saying that China’s rise or development, however ‘peaceful’ it may be proclaimed, is not happening without causing some anxiety in the region. As China remains the region’s main economic linchpin, this doesn’t mean that ASEAN needs to form an anti-China bloc with the US. This nevertheless suggests that Asia cannot afford to be ‘alone’, calling for a game of balance leveraging ‘The Power of AND’ according to Simon Tay (1).
Defense realism
Even after years of defense modernization and build-up, China’s military capabilities, especially in air and naval power, lag way behind those of the US in terms of total expenditure, technological sophistication, anti-missile defense, advanced surveillance, speed of response and global outreach. China, for example, has yet to possess a single aircraft carrier. In comparison, the US Navy is by far the largest in the world with a total tonnage greater than the next thirteen largest combined. The US has eleven aircraft carriers in service including nine nuclear-powered Nimitz-class carriers in six battle fleets. These are deployed around the world, supported by a global network of naval bases. So even if China wants to, which she certainly doesn’t, she is in no position to challenge the US militarily for a long time to come. Indeed, China has benefited enormously from the existing relatively stable global order dominated by the United States.
China, however, is more than capable of defending herself, especially on such sensitive ‘core interests’ as territorial sovereignty. After all, she is a nuclear power with many deterrent tools in her arsenal, including intercontinental missiles, nuclear submarines, anti-aircraft-carrier and anti-satellite killer-missiles, as well as expertise in cyber and other forms of asymmetric warfare. A host of China’s strategic partners such as Russia, Iran, North Korea, Pakistan, not to mention the vast majority of the developing world from Africa to Latin America, are likely to come on China’s side, at least diplomatically, especially where China is not seen to be the aggressor. What is more, most of the world’s economies are now linked to China’s market or her production and supply chains. In addition, by investing over $1 trillion of her surpluses or about half of her GDP in US Treasuries, China has become the largest creditor to the US, underwriting low interest rates and easy credit that prop up the US economy as well as underpinning the stability of the US Dollar.
New ‘Inclusive Growth’ development
Despite her growing economic size, China is still a relatively poor country. Her current GDP per capita is less than a tenth of that of the United States, ranking below 100 amongst the world’s poorest countries. Even by 2027/8, when her economy is slated to overtake that of the United States, her GDP per capita will at best be comparable to that of Turkey. What is more, there is a general realization that China’s impressive economic growth has been at the expense of a widening rich-poor divide. In many areas in China, the Gini coefficient has jumped from 0.21- 0.27 three decades ago to 0.47 in 2009, well past the red-line of 0.4. There is hardly adequate social provision such as healthcare, affordable housing, education and old-age pension to alleviate the rising economic inequalities. The problems will be compounded as China is expected to witness a dwindling pool of young workers as early as 2015 as the population is entering into an aging phase in the coming decades. In addition, the national development is highly unbalanced as many inner provinces are still lagging behind. Added to these challenges are the plight of an army of 200 million-strong migrant workers, many of whom have to leave their wives or children behind; the pressing environmental degradation, water and energy constraints; and the pockets of bubbling ethnic unrest and separatism.
It is therefore no wonder that a national development watershed was unveiled at the Chinese Communist Party Central Committee Plenum on 9- 11 October, in preparation for the next Five Year Plan (2011-15). This calls for new, more balanced, sustainable, and ‘Inclusive Growth’ in a higher-quality development model with more social justice, more income redistribution (both between the rich and the poor and between earnings in state monopolies and counterparts in the private sector), more balanced regional development, more domestic consumption, higher levels of technology, innovation, and resource conservation. With the support of new government funds to the tune of 4 trillion yuan, a range of targeted energy and resource-efficient technologies are expected to be promoted, including new energies, new materials, information technology, bio-technology, new medicine, energy efficiency, environmental protection, aerospace, marine sciences, advanced manufacturing and hi-tech services. Some trade-off is likely to result in a less heady growth rate. GDP growth targets are expected to be revised downwards from an average of 7.5% p.a. in the last Five Year Plan (2006 -2010) to 7% for the next (2011 -2015), even though actual growth rates, as evident in recent years, may remain higher.
China treading carefully to manage her Rise
China’s leadership knows too well that the country is likely to grow old before she grows rich. She therefore needs a relatively stable and benign domestic and international environment over the coming decades to consolidate her trajectory to a ‘moderately well-off nation’. Moreover, there is a realization that Malthus is ultimately right as one world is not enough if the teeming populations in the developing world, including China and India, were to replicate the profligate resource, energy and consumption-driven model of the American Dream (2).
In a world a little scared about her Rise, China is adopting a strategy of what Tang Shiping calls ‘Neoliberal Defensive Realism’ in China’s Ascent (3). In particular, the upsurge of nationalism, while conducive to the Communist Party’s popularity, can be problematic if allowed to veer out of control. Hence, in the wake of a rising tide of anti-Japanese protests against what many Chinese people see as a revival of Japanese aggression over the Diaoyu Islands, China has been anxious in dampening the bubbling national anger and hubris and in mending fences with Japan. A quick, unscheduled ‘corridor diplomacy’ meeting between the two prime ministers in the margin of the Asia-Europe Summit in Brussels on 4 October speaks volumes. However, multi-polar dynamics dictate that China and Japan are likely to remain for some time strange bedfellows at best.
Multi-polar Realities
China, of course, needs no reminder of the validity of the popular Chinese saying ‘qiang da chu tou niao’ (the bird that raises its head over the parapet gets shot first). Nor of the wisdom of strategies in Sun Tzu’s Art of War: ‘yin shi er dong’ (binding time before action), or ‘dong jing bu shi qi shi’ (there is a time for action and a time for inaction). Some say that China has so far been following almost to the letter the late Deng Xiaoping’s famous 28-word caution: ‘leng jing guan cha’ (Be calmly observant), ‘wen zhu shen jiao’ (Holding your ground), ‘chen zhuo ying fu’ (Responding with care), ‘tao guang yang hui’ (Biding your time), ‘jue bu dang tou’ (Never taking the lead), and ‘you suo zuo wei’ (Be constructive).
Nevertheless, in an increasingly open and interdependent multi-polar world, China cannot always hide her light under a bushel, nor avoid sticking her neck out over the parapet. As the world’s second largest oil importer, China’s oil import dependence is expected to grow from 50% to over 70% by 2020 (4). To drive her breakneck industrialization and urbanization, her demand for natural resources and minerals from Africa, Latin America and Australia is vociferous. Moreover, China’s economy is now fully embedded in the world. Her supply chains for both imports and exports reach out far and wide. Her accumulated capital is ‘going-out’, buying up or into ‘strategic’ companies such as Volvo, ADDAX Petroleum (with drilling rights in Iraq and West Africa) and Repsol-YPF with oil block stakes in Brazil’s Santos and Espirito Santo basins. On the global front, from combating Climate Change to maritime piracy, from promoting international trade to maintaining international financial and currency stability, China has been playing and is expected to play an ever-increasingly proactive role, on a variety of broad issues with multi-polar dimensions.
Africa
Africa holds a quarter of the world’s arable land and a vast quantity of the world’s most-wanted metals and minerals. By 2050, 20% of the world’s population will live in sub-Sahara Africa, of whom one in five will be in the dynamic age group of 15 – 25 years, many forming part of the emerging 200 million ‘basic-needs’ consumers. Other than mining, oil and gas, the African economy is set to continue registering high rates of growth, in areas including infrastructure, agriculture, banking, retail, and telecommunications (including over 400 million mobile phone subscribers) (5). With a rising African identity, continuing tribal conflicts and humanitarian disasters, not to mention ecological challenges, Africa is set to become one of the world’s major geo-economic and geo-political theatres in the coming decades
One-third of China’s oil imports comes from Africa with Angola overtaking Saudi Arabia as China’s largest oil supplier (6). In recent years, China-Africa trade and economic ties have been growing by leaps and bounds. Bilateral trade has jumped from $18.6 billion in 2003 to $100 billion in 2010. What is more, China is set to be managing ‘Special Economic Zones’ on behalf of a strategic network of African nations: Zambia (for a copper-mining hub), Tanzania (for an East Africa logistics hub), Mauritius (for an Indian Ocean trading hub), Nigeria (for a West Africa manufacturing hub), and Egypt (near the Suez Canal, for a Middle East North Africa (MENA) export hub) (7).
China’s unique if controversial model of no-questions-asked engagement with Africa has succeeded in delivering much-needed infrastructure, trade and investment, laying the physical groundwork for economic, social and political development. It has nevertheless stirred up heated debate on whether such model is undermining the West’s strategy of putting pressure on rouge states to turn over a new leaf, or whether there are lessons to be learnt in comparison with the many failures of the accumulated $1 trillion African Aid meted out by the West over the past 60 years (8).
Iran
Since March this year, the China National Petroleum Company (CNPC) has started drilling in Iran’s South Pars natural gas field, the world’s largest. In barrel-of-oil equivalents, this field would dwarf the reserves of the world’s largest oilfield in Ghawar, Saudi Arabia. Moreover, there is a 1,865-kilometre pipeline that supplies natural gas from Turkmenistan through Uzbekistan and Kazakhstan into China, which will reach full capacity by 2012. Turkmenistan shares a 300-kilometre border with Iran to its south and already has a gas export deal with Tehran. If the Iranian-Chinese South Pars gas field development could network with this transnational pipeline, it would confirm Iran as the beating heart for China’s life-blood which fuels the Factory of the World and the world’s second largest economy. According to the US-based Energy Information Administration (EIA), China is likely to import over a third of her natural gas consumption by 2030. Natural gas is 30% greener than oil and 45% than coal. Global natural gas consumption is expected to treble between 1980 and 2030. By then, it is set to become the world’s primary energy of choice for industrial and public needs (9). These developments are set to change the geo-politics and geo-economics in the Middle East and beyond.
Climate Change and Green Cars
China’s per capita energy consumption is only one-tenth of that of the United States. However, burdened with a population the size of a fifth of mankind, China’s restless development and long-term sustainability have to grapple with a host of pressing environmental and resource constraints. Responses to Climate Change for China are thus more a matter of ecological survival and energy security rather than tree-and-polar-bear hugging for future generations. So, it is no surprise to see that as the world’s largest polluter, China is amongst the world’s top leaders in a host of green energies including hydroelectric, wind, and solar power. According to the International Energy Agency, China is expected to increase the reliance on renewable energies from 8.3% to 15% of primary energy consumption by 2020. Energy and resources are the absolute essentials for China and other newly industrializing countries at their stages of development. How to reach a multi-polar consensus between developing and developed countries on emission reduction targets, mandatory or otherwise, and on how much technology and funding the developed nations should offer remain to tax the ingenuity, wisdom and vision of world leaders. It is by no means certain that meaningful accommodation, let alone a breakthrough in the deadlock, can be reached at the World Summit on Sustainable Development in Cancun from 29 November to 10 December this year or in South Africa in 2011.
While Climate Change may still be deemed by some as a lot of hot air, the ‘Great Battery Race’ has begun, particularly between China and the United States, to develop the green cars of tomorrow that may spell the demise of the internal combustion engine and transform the world’s car industries for good. The consequential geo-economic and geo-political implications across the world would be mind-boggling (10). It is no coincidence that in 2008 Warren Buffet took a 10% stake ($230 million) in BYD, China’s leading battery and electric car manufacturer, which earlier jumped seven times in value (11) while China overtook the US as the world’ s largest car market.
International currency stability
Perhaps nothing illustrates multi-polarity better than the looming ‘global currency war’ in the aftermath of the financial crisis.
Well before the global financial meltdown, the world was already in a huge imbalance. Asian exporting countries’ mounting surpluses were sterilized and fed into the West’s financial system through investment in US Treasuries making for perennially low interest rates and easy credit. Financial wizardry driven by heady market fundamentalism and the ‘fool’s gold’ of inflated property wealth built up a huge exotic mountain of highly-leveraged debt feeding unbridled consumerism, which in turn pushed up Asian countries’ exports and surpluses. When the whole pack of cards collapsed, Western countries, especially the key reserve currency nations (the US, the EU, and Japan), resorted to Keynesianism to revive their struggling economies, substituting the term ‘Quantitative Easing’ for turning on the money printing press. This has the effect of depressing the exchange rates of the key currencies, which are expected to boost these countries’ export earnings. The tsunami of excess liquidity finds its way into emerging markets, particularly the surplus countries, seeking higher yields. To safeguard their currency competitiveness and to prevent asset bubbles, these countries have to intervene by buying foreign currencies to keep their own from rising and by increasing taxes on foreign investments (such as for bonds in Brazil and Thailand). Now every country, from .Japan, South Korea to Australia, is looking after its own interests and ‘Beggar thy neighbour’ is the name of the game.
In the run-up towards the US mid-term elections, China has been singled out as the main culprit (or a convenient scapegoat), accused of manipulating the yuan to gain unfair advantage at the expense of US exports and jobs. The House of Representatives has passed a currency bill with a large majority, strengthening protectionist sentiments all around. The irony is that even if Chinese products were priced out of the world market, consumers in the US and elsewhere are likely to buy similarly competitively-priced substitutes produced by other developing countries. This is unlikely to succeed in turning around the prospects for US exports and jobs. Moreover, as Premier Wen has pointed out, the yuan has appreciated by some 55% since China’s first currency reform in 1994 without helping US exports or diminishing Chinese imports. The same can perhaps be said of the substantial appreciation of the Japanese yen since the Plaza Accord of 1985. What is more, most of Chinese exports are trading at very thin margins, often below 5%. A substantial appreciation, as Premier Wen has warned, will drive many manufacturers out of business, resulting in massive unemployment and social instability in China. This will be a disaster not only for China, but also for the world where China’s economy is fully integrated. Indeed, as Fareed Zakaria has pointed out, the real challenge from China is not her currency but the huge army of her well-educated college graduates who are increasingly becoming more capable of the kind of jobs that were until recently considered the prerogative of the Western world (12).
So what is at stake is not only the value of the yuan, but the stability of the global currency system. Indeed, the need for a more stable international currency system was earlier highlighted by Zhou Xiaochuan, the Governor of the People’s Bank of China. Referring to the so-called Triffen Dilemma (13) he proposed using Special Drawing Rights to replace the US Dollar as a primary reserve currency. While this may not be the ideal solution and is unlikely to gain international consensus, there is every indication that the momentum for the international acceptability of the yuan, if not its full and free convertibility, is gathering pace. Already, Hong Kong, as a leading financial centre, is being used as an international plaftorm for yuan-based banking settlements and yuan-denominated financial products. The days when the yuan emerging as one of the world’s reserve currencies no longer seem too far away.
Global imbalance between saving and consumption
Learning from the external vulnerability in a global financial crisis, China has been putting more and more emphasis on boosting domestic consumption in order to achieve a more balanced economy. Studies by Credit Suisse and Mckinsey have highlighted the burgeoning consumer market in China and how it will account for a lion’s share of global consumer growth in the coming decades (14). As outlined earlier, the shift towards higher domestic consumption is expected to be incorporated into China’s next 12th Five Year Plan (2011 -2015). Indeed, a rebalancing between an Asia spending too little and an America spending too much is already taking shape, according to Stephen Roach (15). But don't expect China's reliance to switch entirely from exports to domestic consumption overnight. Consumption accounts for 70% of most economies in the West, predicated on an average 70% urbanization rate. Though China is already urbanizing at break-neck speed and is set to achieve the 70% urbanization rate by 2030 (16), with the population the size of a fifth of mankind, China is only about 50% urbanized right now. Nevertheless, this also means that most of the global incremental growth in consumer demand is likely to come from China in the coming decades (17).
'Capitalist Fundamentalism’ and the Role of the State
Following the collapse of the former USSR, the continuous rise of Western capitalism gradually spawned a creed of market fundamentalism with its holy tabernacle in Wall Street. This eventually led to the repeal of the Glass-Steagall Act in 1999 and the gradual erosion of the role of the state. The worship of financial innovation and ever-rising property values became a hotbed for an exotic concoction of highly-leveraged tradable debt feeding an insatiable consumerism. The subsequent financial implosion with repercussions to this very day has been a clarion call for a re-examination of how Capitalism should work. Indeed, it was ironic that it took Premier Wen to point out to the West that Adam Smith’s ‘invincible hand’ needed to be moderated by The Theory of Moral Sentiments, Adam Smith’s other oft-forgotten work, including the role of the state to safeguard the greater public good. These words of caution are now echoed in Joseph Stiglitz’s latest book, Freefall: Free Markets and the Sinking of the Global Economy, explaining why Capitalism needed to be changed, including how to manage banks deemed too big to fail (18).
Alternative approach to universal values and conflict resolution
One of the reasons why China-bashing has become such a favourite sport in the West is that while China is converging with the world economically, there remains much divergence in approach to such universally-held values as human rights, freedom and democracy. This is notwithstanding the impressive strides China has made in lifting over 400 million of her people from poverty, raising the living standards of the whole country, and developing a civil society much more open and inclusive than say three decades ago. The recent decision of the Nobel Committee to award the Peace Prize to Liu Xiaobo, an imprisoned Chinese dissident activist, has been regarded by China as a Western affront. It nevertheless serves to remind China that economic excellence is not enough to gain international respectability as a Great Power. Indeed, on a visit to Shenzhen in September, Premier Wen said that "Without the safeguard of political reform, the fruits of economic reform would be lost and the goal of modernisation would not materialise" (19). In a CNN interview on 4 October 2010, Premier Wen reaffirmed that "The people's wishes for, and needs for, democracy and freedom are irresistible." Taking these words at face value risks jumping to the wrong conclusions. If political reform is to be put on a firmer footing, China is unlikely to copy the Western model outright. She is more prone to proceeding at a pace and in a manner best suited to her national interests and stage of development. Indeed, China is still very much ingrained into Deng Xioping’s view of political reform predicated on the three key imperatives of political stability, national unity, and economic productivity.
Such divergence of approach is not limited to universal values but extend to how China engages problematic states. The collapse of the former USSR, the attempt of the West to impose democracy in the Middle East, and the evolution of modern Vietnam have convinced China that coercion and regime change to adopt a Western model of democracy are not always the best solution to a country’s development. Moreover, studies such as those by Randall Peerenboom (20) have show that according to United Nations Development Indices, there is at least no correlation to support the contention that democracy is a pred-condition to economic development. As Dambisa Moyo points out in Dead Aid (21), ‘any improvements in Africa’s economic profile have been largely achieved in spite of (nominal) democracy, not because of it.’ 'What poor countries at the lowest rungs of economic development need is not a multi-party democracy, but …. reforms required to get the economy going’. Indeed, ‘democracy is not the prerequisite for economic growth.’ ‘On the contrary, it is economic growth that is a prerequisite for democracy.’
A Transformed World - National Intellingence Council Report: Project 2025
The world has become much more inter-connected, inter-dependent, and more multi-polar with power becoming more diffused by globalization and the emergence of mobile technologies and asymmetric fundamentalist forces. The future scenario is well captured in the National Intelligence Report, Project 2025, published on the eve of the Obama Presidency (22). The Report , entitled A Tranformed World, captures the following dynamic trends and undercurrents:
(a) Weakened militarily and morally in the Middle East and by the financial crisis, hitherto-unchallenged US dominance is clearly on the decline in a world becoming multi-polar. The EU remains a ‘hobbled giant’ with its many internal squabbles and an inability to act as a single sovereign state. The so-called BRIC countries, the Gulf oil-exporting nations, as well as some other large developing countries, are on the ascent;
(b) The unprecedented industrialization and urbanization of several continent-sized countries all at once have pitted energy, minerals, water, food and other natural resources in the centre of global, regional, and local competition and rivalry. The concentration of oil and gas in a few relatively less stable countries are empowering them with new-found confidence and aspirations. In the case of Iran and Russia, it has given rise to increasing national, regional if not global assertiveness. Such dynamics are rendering outcomes less predicable;
(c) The limitation of natural resources to keep pace with rising demand, the likelihood of regional or international conflicts to disrupt supply and its transportation through geopolitical choke points such as the Strait of Hormuz and the Strait of Malacca, and the clear and present danger of climate change threatening a number of unstable countries, underline the growing international concern for energy, food, water and climate security;
(d) Struggles for development with bulging young populations in weak or failed states have created an ‘Arc of Instability’ from Sub-Sahara Africa to the Middle East, the Balkans, the Caucasus, Central and South Asia and certain areas in south East Asia. Climate or economic migration are expected to add to the severity of any chaos;
(e) Increasing diffusion of technology and actors of influence have created a variety of asymmetric risks both military and non-military, including small nuclear weapons, portable precision missiles, chemical, biological and pathogenic weapons, cyber and media warfare, and indiscriminate terrorism. Traditional warfare concepts are no longer effective;
(f) Religious fundamentalism, coupled with growing multi-cultural communities such as Muslims in Western Europe and Arabs in Israel, is compounding rising concerns about ethnic, religious, and ideological identities;
(g) A diversity of non-state actors, including NGO networks, international forums, religious bodies and influential individuals, is exerting increasing influence on issues or topics across national or organizational boundaries;
(h) The rise of emerging economies with common developmental concerns, burgeoning intra-regional trade, and growing investments in other developing countries have resulted in a host of new regional alliances such as the Shanghai Cooperation Organization and ASEAN+3. The former with Russian participation may balance the influence of NATO and the latter may lead to the birth of an Asian Community and even an Asian Dollar;
(i) In a world changing beyond recognition, the original Bretton Woods international institutions such as the United Nations, the World Bank and the International Monetary Fund (IMF) are straining to maintain their credibility and relevance. They have remained largely constituted as they were first established at the time of the Second World War. How to embrace and leverage the newly rising emerging powers including China and India in maintaining international order is becoming a pressing challenge, particularly in the midst of the global financial crisis;
(j) Contrasting with the plight of the majority of developing ‘democracies’ in Sub-Sahara Africa and democratic republics’ like the Congo and North Korea, dramatic economic success in ‘non-democratic’ China for three decades begs the question whether state capitalism or the so-called ‘Beijing Consensus’ (23) can be viewed as an alternative model to the ‘Washington Consensus’, at least for countries with different historical, cultural, social and economic backgrounds. In other words, it begs the question whether there should be a one-size-fits-all development formula, and how effective such formula has proved to be if imposed from the outside regardless of the lack or readiness of local institutions.
The Report concludes that in the light of these global undercurrents, trends and challenges in a transformed world, a financially and morally weakened US may continue to lead but her capacity to do so has shrunk. This may come as a shock to the traditional US national psyche of ‘Frontier’, America Plenty’, and ‘US Exceptionalism’. But as Simon Schama hints in The America’s Future: A History (24), the US has to lead within her ‘Limits’. For the first time in over a century, the West’s share of global GDP has dropped to about 50% and is expected to decline to below 40% within a decade, given the ‘mature’ growth rates in rich countries compared with those in emerging markets. The tide has indeed turned towards a multi-polar world.
Conclusion
To address global issues of the 21st century, including international terrorism, proliferation of nuclear and small arms, regional instability, world trade imbalances, natural resource constraints and Climate Change (25), the rigidity of an out-moded, uni-polar or bi-polar mindset has to be discarded in favour of a more inclusive and multi-polar approach, working more closely and cooperatively (albeit preserving certain disagreements) with other stakeholders, not just with traditional allies. It is a sign of the times that ‘the G8 is dead’, effectively replaced by the G20 (26).
The rise of the emerging powers during the past two decades may have belied the Western triumphalism as in Francis Fukuyama’s The End of History (27). 9/11 and China’s Rise may have revived the fears of a Clash of Civilizations as expounded by Samuel Huntington (28). But in a world becoming truly inter-connected and inter-dependent, Clash is not pre-ordained, although squabbles and conflicts are inevitable. In particular, the relationship between the United States, as the only status quo superpower and China as a rising world power in a multi-polar world calls for more mutual understanding, accommodation and cooperation if the world is to recover more quickly from the financial and economic crisis, let alone to succeed in grappling with the many global challenges of the coming decades.
Andrew
http://www.andrewleunginternationalconsultants.com/
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(1) Simon S C Tay, Asia Alone: The Dangerous Post-Crisis Divide from America, John Wiley & Sons, 6 July, 2010, pp. 133 -141.
(2) See, for example, Jonathan Watts, When a Billion Chinese Jump: How Will China Save Mankind – or Destroy It, Scribner, October 2010.
(3) Tang Shiping, China’s Ascent, Cornell University Press, 2008.
(4) “China's crude oil import dependence exceeds 50%, raises security concerns”, in Global Times, 29 March 2010, at http://business.globaltimes.cn/china-economy/2010-03/517059.html (accessed on 8 October, 2010).
(5) See, for example, McKinsey Quarterly, Fulfilling the Promise of Sub-Sahara Africa, June 2010 and Africa’s Paths to Growth: Sector by Sector, July, 2010.
(6) “Angola Overtakes Saudi Arabia as Biggest Oil Supplier to China” reported in Bloomberg on 28 April, 2008 at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aqJ3Wjxs.OWs (accessed on 8 October, 2010).
(7) Martyn Davies, Special Economic Zones: China’s Developmental Model Comes to Africa, in China into Africa, Trade, Aid and Influence, Robert Rotberg (Editor), Brookings Institution Press, Washington D.C., 2008, pp. 137 – 154.
(8) See Dambisa Moyo, Dead Aid, Allen Lane, Penguin Books, 2009; Deborah Brautigam, The Dragon’s Gift, The Real Story of China in Africa (New York:
Oxford University Press, 2009); and my Paper A New China-Africa Financial, Investment & Business Partnership: Lessons for the international aid, investment and trade architecture, which is accessible at http://www.andrewleunginternationalconsultants.com/files/paper-on-a-new-china-africa-financial-investment-business-partnership-4.pdf
(9) Finian Cunningham, “Iran’s Natural Gas Riches: US Knife to the Heart of World Future Energy” in Global Research, Centre for Research on Globalization, 18 March 2010 at http://www.globalresearch.ca/index.php?context=va&aid=18176 (accessed on 8 October, 2010).
(10) Steve Levine, The Great Battery Race, Foreign Policy, November 2010.
(11) In late October 2010, BYD posted a 99% drop in Third Quarter (Q3) earnings, following an accumulated loss of more than a quarter of its value in the same year, as its sales strategy and over-expansion backfired (see http://www.reuters.com/article/idUSTRE69P0ST20101026 accessed on 29 October, 2010).
(12) Fareed Zakaria, The Real Challenge from China: Its People, Not Its Currency, Time Magazine, 6 October, 2010. See http://www.time.com/time/world/article/0,8599,2024090,00.html (accessed on 29 October, 2010).
(13) Identified by Belgian-American economist Robert Triffin in the 1960s, the Dilemma postulates that a deficit is necessary for the United States to supply world demand for its Dollars but such a deficit will, in time, lessen the value of the Dollar and endanger the entire global currency system.
(14) For example: J f. Garner, The Rise of the Chinese Consumer:
Theory and Evidence, John Wiley & Sons, 2005 and The Value of China's Emerging Middle Class in McKinsey Quarterly, 2006.
(15) Stephen Roach, Next Asia: Opportunities and Challenges for a New Globalization, Wiley, 2010.
(16) Jonathan Woetzel et al, Preparing for China's Urban Billion, McKinsey Global Institute, March 2008.
(17) Jonathan Garner, The Rise of the Chinese Consumer, Theory and Evidence, John Wiley and Sons, 2005.
(18) Joseph Stiglitz, Freefall: Free Markets and the Sinking of the Global Economy, Penguin, October, 2010.
(19) Article in The Telegraph at
http://www.telegraph.co.uk/news/worldnews/asia/china/8040534/Wen-Jiabao-promises-political-reform-for-China.html (accessed on 10 October 2010).
(20) Randall Peerenboom, China Modernizes: Threat to the West or Model for the Rest, Oxford University Press, April, 2008.
(21) Dambisa Moyo, Dead Aid, Allen Lane, Penguin Books, 2009.
(22) Global Trends 2025: A Transformed World, National Intelligence Council, Washington D.C, November 2008.
(23) The term ‘Beijing Consensus’ was coined by its author, Joshua Cooper Ramo, in his eponymous work, published by the Foreign Policy Centre on 18 June 2004. A recent critique is Stefan Halpher’s The Beijing Consensus, Basic, 22 April, 2010
(24) Simon Schama, The American Future: A History, Bodley Head, January, 2008, pp. 303 – 312.
(25) Some of these global undercurrents, trends and challenges are studied in Chris Patten’s 528-page What Next?: Surving the 21st Century, Penguin, July 2009.
(26) See Adelina Marini’s article ‘There no longer be G8 - the G20 is the new global economic format’, published in EUINSIDE on 26 September, 2009 at http://www.euinside.eu/en/news/g20-is-the-new-global-forum (accessed on 29 October, 2010).
(27) Francis Fukuyama, The End of History and the Last Man, Penguin, 28 January, 2003.
(28) Samuel Hungtingon, The Clash of Civilizations: And the Remaking of World Order, Free Press, 5 June, 2002.
China is changing rapidly as she has just unveiled a watershed in her development model, promoting more balanced, sustainable and inclusive growth with more social justice. Yet, in face of many domestic and international challenges, the trajectory of China’s Rise should belie any illusions of grandeur. Set to become at best a middle-income economy in per-capita terms by the middle of the first half of this century, she is in no position and does not wish to challenge the United States militarily or economically. Nevertheless, in an increasingly inter-connected, inter-dependent, and multi-polar world, as the second largest economy, China is as often perceived as a threat as she is called upon to take on a more proactive role in a range of global issues including currency stability, climate change and economic imbalance. China has benefitted hugely from an existing order dominated by the United States. She is thus cautious not to take the lead and tries to maintain good relations with as many countries as possible. Yet, while converging with the West economically, China is finding herself at odds with how the West approaches such universal values as human rights, freedom and democracy. On the one hand, China’s engagement with developing countries especially in South East Asia and Africa has brought them much welcomed economic development. On the other hand, to ensure the security of her energy and other resources, China maintains a friendly-to-all posture with a number of countries such as Iran and Sudan which the West regards as rogue states. What is more, with mounting unemployment in the run-up to the mid-term elections, China-bashing has become a favourite sport in the United State, where, as the only status quo world superpower, China’s Rise has already been causing a great deal of concern. Yet, in a transformed multi-polar world, a weakened United States is obliged to lead within her limits and has to work more with a range of stakeholders outside her traditional allies, particularly a Rising China, in tackling a host of global issues, if the world is to embrace a better tomorrow.
Key Words
Funds Flows, Monetarism, Money, Money Stock (JEL E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit); Export Driven, Export Led (JEL F4 - Macroeconomic Aspects of International Trade and Finance); Financial Crisis, Globalization (JEL G – Financial Crisis, Globalization); Developing Countries, Development, Modernization (JEL O1 – Economic Development); Sub-Sahara Africa (JEL 055 – Africa); Capitalism (JEL P1 –Capitalist Systems); Communism, Communist System, Formerly Centrally Planned Economies, Transition Economies, Transitional Economies (JEL P2 - Socialist Systems and Transitional Economies); Ag Econ, Natural Resource (JEL Q – Agricultural and Natural Resource Economics; Environmental and Ecological Economics).
Perspectives on China’s Rise
Visions of a China Renaissance?
At about 6.59 p.m. Beijing time, on a fireworks-festooned National Day, China’s second moon probe, Chang’e 2, blasted off to a cloudy sky, exactly on schedule. Rather than orbiting the earth first, the rocket propelled the satellite directly into the Earth-Moon trajectory, to be manoeuvred into a circumlunar orbit just 15 km from the moon’s surface. The satellite will be taking high-resolution photos of the Bay of Rainbows where Chang'e 3 is planned to land in 2013. Though it is still more than forty years behind Apollo 11, the first human moon-landing, this Chang’e mission is a step closer to China’s lunar dreams.
Against the backdrop of the West amidst a lurking sovereign debt crisis, persistently high unemployment rates and at best anaemic economic revival, China continues to pose enviable growth rates: 10.5% in 2010 and 9.6% next year, according to the IMF World Economic Outlook just published. Her Foreign Currency Reserve has surged to $2.65 trillion as she is on track to overtake Japan as the second largest economy in the world. According to Goldman Sachs, China’s economy, now slightly less than a third of that of the US, may exceed the US by 2027/8. With a spectacularly successful Beijing Olympics, a much acclaimed Shanghai Expo, and playing host to the Asian Games, China has much to celebrate.
China has been proactively embracing the world, regardless of colour, creed, ideology, religion and political affiliations. From South East Asia to Africa, and from Central Asia to Latin America, China’s increasing geo-economic and geo-political influence leaves little doubt that a resurgent and increasingly confident China is very much on the world stage as a Great Power. This has fed into a groundswell of triumphant nationalism, especially amongst the younger generation of the so-called post 80s and 90s. China’s effervescent blogosphere is abuzz with chauvinistic sentiments. Even advertising copies for luxury products in China commonly deploy such evocative phrases as ‘sheng shi’, a flourishing age’ or ‘renaissance’, reminiscent of the heyday of the Tang Dynasty.
Geopolitcal realities
So the recent high-profile US return to the Asia-Pacific theatre, including arms sale to Taiwan, joint military exercises with Korea in the Yellow Sea, formal declaration of US interest in Asian countries’ territorial disputes with China in the South China Sea, reaffirmation of the coverage of the US-Japan Mutual Security Treaty to encompass the disputed Diaoyu Islands (or Senkaku in Japanese), let alone active courtship with India, is a sobering shot across China’s bows.
However much natural gas reserve these disputed small islands in the South China Sea may hold, they are a key part of the multi-polar dynamics emerging with the Rise of China over the past decade.
The ASEAN-China Free Trade Agreement has come into force since 1 January 2010, creating the world’s largest free trade area in terms of population size (1.9 billion). Economically, it ranks as the world’s third largest with a combined GDP of $6 trillion with estimated intra-regional trade of $1.23 trillion. China is the very heart of this closely-connected economic dynamo. Nevertheless, notwithstanding China’s close cooperation in such areas as the Ching Mai Initiative (currency swaps) and signing the Treaty of Amity, ASEAN countries are wary of the 800-pound gorilla (or panda) in their midst, not just because of China’s territorial claims in the South China Sea. So it is no surprise that ASEAN countries warm to the US recent comeback to this region after a long period of neglect whilst being bogged down in the Middle East. It goes without saying that China’s rise or development, however ‘peaceful’ it may be proclaimed, is not happening without causing some anxiety in the region. As China remains the region’s main economic linchpin, this doesn’t mean that ASEAN needs to form an anti-China bloc with the US. This nevertheless suggests that Asia cannot afford to be ‘alone’, calling for a game of balance leveraging ‘The Power of AND’ according to Simon Tay (1).
Defense realism
Even after years of defense modernization and build-up, China’s military capabilities, especially in air and naval power, lag way behind those of the US in terms of total expenditure, technological sophistication, anti-missile defense, advanced surveillance, speed of response and global outreach. China, for example, has yet to possess a single aircraft carrier. In comparison, the US Navy is by far the largest in the world with a total tonnage greater than the next thirteen largest combined. The US has eleven aircraft carriers in service including nine nuclear-powered Nimitz-class carriers in six battle fleets. These are deployed around the world, supported by a global network of naval bases. So even if China wants to, which she certainly doesn’t, she is in no position to challenge the US militarily for a long time to come. Indeed, China has benefited enormously from the existing relatively stable global order dominated by the United States.
China, however, is more than capable of defending herself, especially on such sensitive ‘core interests’ as territorial sovereignty. After all, she is a nuclear power with many deterrent tools in her arsenal, including intercontinental missiles, nuclear submarines, anti-aircraft-carrier and anti-satellite killer-missiles, as well as expertise in cyber and other forms of asymmetric warfare. A host of China’s strategic partners such as Russia, Iran, North Korea, Pakistan, not to mention the vast majority of the developing world from Africa to Latin America, are likely to come on China’s side, at least diplomatically, especially where China is not seen to be the aggressor. What is more, most of the world’s economies are now linked to China’s market or her production and supply chains. In addition, by investing over $1 trillion of her surpluses or about half of her GDP in US Treasuries, China has become the largest creditor to the US, underwriting low interest rates and easy credit that prop up the US economy as well as underpinning the stability of the US Dollar.
New ‘Inclusive Growth’ development
Despite her growing economic size, China is still a relatively poor country. Her current GDP per capita is less than a tenth of that of the United States, ranking below 100 amongst the world’s poorest countries. Even by 2027/8, when her economy is slated to overtake that of the United States, her GDP per capita will at best be comparable to that of Turkey. What is more, there is a general realization that China’s impressive economic growth has been at the expense of a widening rich-poor divide. In many areas in China, the Gini coefficient has jumped from 0.21- 0.27 three decades ago to 0.47 in 2009, well past the red-line of 0.4. There is hardly adequate social provision such as healthcare, affordable housing, education and old-age pension to alleviate the rising economic inequalities. The problems will be compounded as China is expected to witness a dwindling pool of young workers as early as 2015 as the population is entering into an aging phase in the coming decades. In addition, the national development is highly unbalanced as many inner provinces are still lagging behind. Added to these challenges are the plight of an army of 200 million-strong migrant workers, many of whom have to leave their wives or children behind; the pressing environmental degradation, water and energy constraints; and the pockets of bubbling ethnic unrest and separatism.
It is therefore no wonder that a national development watershed was unveiled at the Chinese Communist Party Central Committee Plenum on 9- 11 October, in preparation for the next Five Year Plan (2011-15). This calls for new, more balanced, sustainable, and ‘Inclusive Growth’ in a higher-quality development model with more social justice, more income redistribution (both between the rich and the poor and between earnings in state monopolies and counterparts in the private sector), more balanced regional development, more domestic consumption, higher levels of technology, innovation, and resource conservation. With the support of new government funds to the tune of 4 trillion yuan, a range of targeted energy and resource-efficient technologies are expected to be promoted, including new energies, new materials, information technology, bio-technology, new medicine, energy efficiency, environmental protection, aerospace, marine sciences, advanced manufacturing and hi-tech services. Some trade-off is likely to result in a less heady growth rate. GDP growth targets are expected to be revised downwards from an average of 7.5% p.a. in the last Five Year Plan (2006 -2010) to 7% for the next (2011 -2015), even though actual growth rates, as evident in recent years, may remain higher.
China treading carefully to manage her Rise
China’s leadership knows too well that the country is likely to grow old before she grows rich. She therefore needs a relatively stable and benign domestic and international environment over the coming decades to consolidate her trajectory to a ‘moderately well-off nation’. Moreover, there is a realization that Malthus is ultimately right as one world is not enough if the teeming populations in the developing world, including China and India, were to replicate the profligate resource, energy and consumption-driven model of the American Dream (2).
In a world a little scared about her Rise, China is adopting a strategy of what Tang Shiping calls ‘Neoliberal Defensive Realism’ in China’s Ascent (3). In particular, the upsurge of nationalism, while conducive to the Communist Party’s popularity, can be problematic if allowed to veer out of control. Hence, in the wake of a rising tide of anti-Japanese protests against what many Chinese people see as a revival of Japanese aggression over the Diaoyu Islands, China has been anxious in dampening the bubbling national anger and hubris and in mending fences with Japan. A quick, unscheduled ‘corridor diplomacy’ meeting between the two prime ministers in the margin of the Asia-Europe Summit in Brussels on 4 October speaks volumes. However, multi-polar dynamics dictate that China and Japan are likely to remain for some time strange bedfellows at best.
Multi-polar Realities
China, of course, needs no reminder of the validity of the popular Chinese saying ‘qiang da chu tou niao’ (the bird that raises its head over the parapet gets shot first). Nor of the wisdom of strategies in Sun Tzu’s Art of War: ‘yin shi er dong’ (binding time before action), or ‘dong jing bu shi qi shi’ (there is a time for action and a time for inaction). Some say that China has so far been following almost to the letter the late Deng Xiaoping’s famous 28-word caution: ‘leng jing guan cha’ (Be calmly observant), ‘wen zhu shen jiao’ (Holding your ground), ‘chen zhuo ying fu’ (Responding with care), ‘tao guang yang hui’ (Biding your time), ‘jue bu dang tou’ (Never taking the lead), and ‘you suo zuo wei’ (Be constructive).
Nevertheless, in an increasingly open and interdependent multi-polar world, China cannot always hide her light under a bushel, nor avoid sticking her neck out over the parapet. As the world’s second largest oil importer, China’s oil import dependence is expected to grow from 50% to over 70% by 2020 (4). To drive her breakneck industrialization and urbanization, her demand for natural resources and minerals from Africa, Latin America and Australia is vociferous. Moreover, China’s economy is now fully embedded in the world. Her supply chains for both imports and exports reach out far and wide. Her accumulated capital is ‘going-out’, buying up or into ‘strategic’ companies such as Volvo, ADDAX Petroleum (with drilling rights in Iraq and West Africa) and Repsol-YPF with oil block stakes in Brazil’s Santos and Espirito Santo basins. On the global front, from combating Climate Change to maritime piracy, from promoting international trade to maintaining international financial and currency stability, China has been playing and is expected to play an ever-increasingly proactive role, on a variety of broad issues with multi-polar dimensions.
Africa
Africa holds a quarter of the world’s arable land and a vast quantity of the world’s most-wanted metals and minerals. By 2050, 20% of the world’s population will live in sub-Sahara Africa, of whom one in five will be in the dynamic age group of 15 – 25 years, many forming part of the emerging 200 million ‘basic-needs’ consumers. Other than mining, oil and gas, the African economy is set to continue registering high rates of growth, in areas including infrastructure, agriculture, banking, retail, and telecommunications (including over 400 million mobile phone subscribers) (5). With a rising African identity, continuing tribal conflicts and humanitarian disasters, not to mention ecological challenges, Africa is set to become one of the world’s major geo-economic and geo-political theatres in the coming decades
One-third of China’s oil imports comes from Africa with Angola overtaking Saudi Arabia as China’s largest oil supplier (6). In recent years, China-Africa trade and economic ties have been growing by leaps and bounds. Bilateral trade has jumped from $18.6 billion in 2003 to $100 billion in 2010. What is more, China is set to be managing ‘Special Economic Zones’ on behalf of a strategic network of African nations: Zambia (for a copper-mining hub), Tanzania (for an East Africa logistics hub), Mauritius (for an Indian Ocean trading hub), Nigeria (for a West Africa manufacturing hub), and Egypt (near the Suez Canal, for a Middle East North Africa (MENA) export hub) (7).
China’s unique if controversial model of no-questions-asked engagement with Africa has succeeded in delivering much-needed infrastructure, trade and investment, laying the physical groundwork for economic, social and political development. It has nevertheless stirred up heated debate on whether such model is undermining the West’s strategy of putting pressure on rouge states to turn over a new leaf, or whether there are lessons to be learnt in comparison with the many failures of the accumulated $1 trillion African Aid meted out by the West over the past 60 years (8).
Iran
Since March this year, the China National Petroleum Company (CNPC) has started drilling in Iran’s South Pars natural gas field, the world’s largest. In barrel-of-oil equivalents, this field would dwarf the reserves of the world’s largest oilfield in Ghawar, Saudi Arabia. Moreover, there is a 1,865-kilometre pipeline that supplies natural gas from Turkmenistan through Uzbekistan and Kazakhstan into China, which will reach full capacity by 2012. Turkmenistan shares a 300-kilometre border with Iran to its south and already has a gas export deal with Tehran. If the Iranian-Chinese South Pars gas field development could network with this transnational pipeline, it would confirm Iran as the beating heart for China’s life-blood which fuels the Factory of the World and the world’s second largest economy. According to the US-based Energy Information Administration (EIA), China is likely to import over a third of her natural gas consumption by 2030. Natural gas is 30% greener than oil and 45% than coal. Global natural gas consumption is expected to treble between 1980 and 2030. By then, it is set to become the world’s primary energy of choice for industrial and public needs (9). These developments are set to change the geo-politics and geo-economics in the Middle East and beyond.
Climate Change and Green Cars
China’s per capita energy consumption is only one-tenth of that of the United States. However, burdened with a population the size of a fifth of mankind, China’s restless development and long-term sustainability have to grapple with a host of pressing environmental and resource constraints. Responses to Climate Change for China are thus more a matter of ecological survival and energy security rather than tree-and-polar-bear hugging for future generations. So, it is no surprise to see that as the world’s largest polluter, China is amongst the world’s top leaders in a host of green energies including hydroelectric, wind, and solar power. According to the International Energy Agency, China is expected to increase the reliance on renewable energies from 8.3% to 15% of primary energy consumption by 2020. Energy and resources are the absolute essentials for China and other newly industrializing countries at their stages of development. How to reach a multi-polar consensus between developing and developed countries on emission reduction targets, mandatory or otherwise, and on how much technology and funding the developed nations should offer remain to tax the ingenuity, wisdom and vision of world leaders. It is by no means certain that meaningful accommodation, let alone a breakthrough in the deadlock, can be reached at the World Summit on Sustainable Development in Cancun from 29 November to 10 December this year or in South Africa in 2011.
While Climate Change may still be deemed by some as a lot of hot air, the ‘Great Battery Race’ has begun, particularly between China and the United States, to develop the green cars of tomorrow that may spell the demise of the internal combustion engine and transform the world’s car industries for good. The consequential geo-economic and geo-political implications across the world would be mind-boggling (10). It is no coincidence that in 2008 Warren Buffet took a 10% stake ($230 million) in BYD, China’s leading battery and electric car manufacturer, which earlier jumped seven times in value (11) while China overtook the US as the world’ s largest car market.
International currency stability
Perhaps nothing illustrates multi-polarity better than the looming ‘global currency war’ in the aftermath of the financial crisis.
Well before the global financial meltdown, the world was already in a huge imbalance. Asian exporting countries’ mounting surpluses were sterilized and fed into the West’s financial system through investment in US Treasuries making for perennially low interest rates and easy credit. Financial wizardry driven by heady market fundamentalism and the ‘fool’s gold’ of inflated property wealth built up a huge exotic mountain of highly-leveraged debt feeding unbridled consumerism, which in turn pushed up Asian countries’ exports and surpluses. When the whole pack of cards collapsed, Western countries, especially the key reserve currency nations (the US, the EU, and Japan), resorted to Keynesianism to revive their struggling economies, substituting the term ‘Quantitative Easing’ for turning on the money printing press. This has the effect of depressing the exchange rates of the key currencies, which are expected to boost these countries’ export earnings. The tsunami of excess liquidity finds its way into emerging markets, particularly the surplus countries, seeking higher yields. To safeguard their currency competitiveness and to prevent asset bubbles, these countries have to intervene by buying foreign currencies to keep their own from rising and by increasing taxes on foreign investments (such as for bonds in Brazil and Thailand). Now every country, from .Japan, South Korea to Australia, is looking after its own interests and ‘Beggar thy neighbour’ is the name of the game.
In the run-up towards the US mid-term elections, China has been singled out as the main culprit (or a convenient scapegoat), accused of manipulating the yuan to gain unfair advantage at the expense of US exports and jobs. The House of Representatives has passed a currency bill with a large majority, strengthening protectionist sentiments all around. The irony is that even if Chinese products were priced out of the world market, consumers in the US and elsewhere are likely to buy similarly competitively-priced substitutes produced by other developing countries. This is unlikely to succeed in turning around the prospects for US exports and jobs. Moreover, as Premier Wen has pointed out, the yuan has appreciated by some 55% since China’s first currency reform in 1994 without helping US exports or diminishing Chinese imports. The same can perhaps be said of the substantial appreciation of the Japanese yen since the Plaza Accord of 1985. What is more, most of Chinese exports are trading at very thin margins, often below 5%. A substantial appreciation, as Premier Wen has warned, will drive many manufacturers out of business, resulting in massive unemployment and social instability in China. This will be a disaster not only for China, but also for the world where China’s economy is fully integrated. Indeed, as Fareed Zakaria has pointed out, the real challenge from China is not her currency but the huge army of her well-educated college graduates who are increasingly becoming more capable of the kind of jobs that were until recently considered the prerogative of the Western world (12).
So what is at stake is not only the value of the yuan, but the stability of the global currency system. Indeed, the need for a more stable international currency system was earlier highlighted by Zhou Xiaochuan, the Governor of the People’s Bank of China. Referring to the so-called Triffen Dilemma (13) he proposed using Special Drawing Rights to replace the US Dollar as a primary reserve currency. While this may not be the ideal solution and is unlikely to gain international consensus, there is every indication that the momentum for the international acceptability of the yuan, if not its full and free convertibility, is gathering pace. Already, Hong Kong, as a leading financial centre, is being used as an international plaftorm for yuan-based banking settlements and yuan-denominated financial products. The days when the yuan emerging as one of the world’s reserve currencies no longer seem too far away.
Global imbalance between saving and consumption
Learning from the external vulnerability in a global financial crisis, China has been putting more and more emphasis on boosting domestic consumption in order to achieve a more balanced economy. Studies by Credit Suisse and Mckinsey have highlighted the burgeoning consumer market in China and how it will account for a lion’s share of global consumer growth in the coming decades (14). As outlined earlier, the shift towards higher domestic consumption is expected to be incorporated into China’s next 12th Five Year Plan (2011 -2015). Indeed, a rebalancing between an Asia spending too little and an America spending too much is already taking shape, according to Stephen Roach (15). But don't expect China's reliance to switch entirely from exports to domestic consumption overnight. Consumption accounts for 70% of most economies in the West, predicated on an average 70% urbanization rate. Though China is already urbanizing at break-neck speed and is set to achieve the 70% urbanization rate by 2030 (16), with the population the size of a fifth of mankind, China is only about 50% urbanized right now. Nevertheless, this also means that most of the global incremental growth in consumer demand is likely to come from China in the coming decades (17).
'Capitalist Fundamentalism’ and the Role of the State
Following the collapse of the former USSR, the continuous rise of Western capitalism gradually spawned a creed of market fundamentalism with its holy tabernacle in Wall Street. This eventually led to the repeal of the Glass-Steagall Act in 1999 and the gradual erosion of the role of the state. The worship of financial innovation and ever-rising property values became a hotbed for an exotic concoction of highly-leveraged tradable debt feeding an insatiable consumerism. The subsequent financial implosion with repercussions to this very day has been a clarion call for a re-examination of how Capitalism should work. Indeed, it was ironic that it took Premier Wen to point out to the West that Adam Smith’s ‘invincible hand’ needed to be moderated by The Theory of Moral Sentiments, Adam Smith’s other oft-forgotten work, including the role of the state to safeguard the greater public good. These words of caution are now echoed in Joseph Stiglitz’s latest book, Freefall: Free Markets and the Sinking of the Global Economy, explaining why Capitalism needed to be changed, including how to manage banks deemed too big to fail (18).
Alternative approach to universal values and conflict resolution
One of the reasons why China-bashing has become such a favourite sport in the West is that while China is converging with the world economically, there remains much divergence in approach to such universally-held values as human rights, freedom and democracy. This is notwithstanding the impressive strides China has made in lifting over 400 million of her people from poverty, raising the living standards of the whole country, and developing a civil society much more open and inclusive than say three decades ago. The recent decision of the Nobel Committee to award the Peace Prize to Liu Xiaobo, an imprisoned Chinese dissident activist, has been regarded by China as a Western affront. It nevertheless serves to remind China that economic excellence is not enough to gain international respectability as a Great Power. Indeed, on a visit to Shenzhen in September, Premier Wen said that "Without the safeguard of political reform, the fruits of economic reform would be lost and the goal of modernisation would not materialise" (19). In a CNN interview on 4 October 2010, Premier Wen reaffirmed that "The people's wishes for, and needs for, democracy and freedom are irresistible." Taking these words at face value risks jumping to the wrong conclusions. If political reform is to be put on a firmer footing, China is unlikely to copy the Western model outright. She is more prone to proceeding at a pace and in a manner best suited to her national interests and stage of development. Indeed, China is still very much ingrained into Deng Xioping’s view of political reform predicated on the three key imperatives of political stability, national unity, and economic productivity.
Such divergence of approach is not limited to universal values but extend to how China engages problematic states. The collapse of the former USSR, the attempt of the West to impose democracy in the Middle East, and the evolution of modern Vietnam have convinced China that coercion and regime change to adopt a Western model of democracy are not always the best solution to a country’s development. Moreover, studies such as those by Randall Peerenboom (20) have show that according to United Nations Development Indices, there is at least no correlation to support the contention that democracy is a pred-condition to economic development. As Dambisa Moyo points out in Dead Aid (21), ‘any improvements in Africa’s economic profile have been largely achieved in spite of (nominal) democracy, not because of it.’ 'What poor countries at the lowest rungs of economic development need is not a multi-party democracy, but …. reforms required to get the economy going’. Indeed, ‘democracy is not the prerequisite for economic growth.’ ‘On the contrary, it is economic growth that is a prerequisite for democracy.’
A Transformed World - National Intellingence Council Report: Project 2025
The world has become much more inter-connected, inter-dependent, and more multi-polar with power becoming more diffused by globalization and the emergence of mobile technologies and asymmetric fundamentalist forces. The future scenario is well captured in the National Intelligence Report, Project 2025, published on the eve of the Obama Presidency (22). The Report , entitled A Tranformed World, captures the following dynamic trends and undercurrents:
(a) Weakened militarily and morally in the Middle East and by the financial crisis, hitherto-unchallenged US dominance is clearly on the decline in a world becoming multi-polar. The EU remains a ‘hobbled giant’ with its many internal squabbles and an inability to act as a single sovereign state. The so-called BRIC countries, the Gulf oil-exporting nations, as well as some other large developing countries, are on the ascent;
(b) The unprecedented industrialization and urbanization of several continent-sized countries all at once have pitted energy, minerals, water, food and other natural resources in the centre of global, regional, and local competition and rivalry. The concentration of oil and gas in a few relatively less stable countries are empowering them with new-found confidence and aspirations. In the case of Iran and Russia, it has given rise to increasing national, regional if not global assertiveness. Such dynamics are rendering outcomes less predicable;
(c) The limitation of natural resources to keep pace with rising demand, the likelihood of regional or international conflicts to disrupt supply and its transportation through geopolitical choke points such as the Strait of Hormuz and the Strait of Malacca, and the clear and present danger of climate change threatening a number of unstable countries, underline the growing international concern for energy, food, water and climate security;
(d) Struggles for development with bulging young populations in weak or failed states have created an ‘Arc of Instability’ from Sub-Sahara Africa to the Middle East, the Balkans, the Caucasus, Central and South Asia and certain areas in south East Asia. Climate or economic migration are expected to add to the severity of any chaos;
(e) Increasing diffusion of technology and actors of influence have created a variety of asymmetric risks both military and non-military, including small nuclear weapons, portable precision missiles, chemical, biological and pathogenic weapons, cyber and media warfare, and indiscriminate terrorism. Traditional warfare concepts are no longer effective;
(f) Religious fundamentalism, coupled with growing multi-cultural communities such as Muslims in Western Europe and Arabs in Israel, is compounding rising concerns about ethnic, religious, and ideological identities;
(g) A diversity of non-state actors, including NGO networks, international forums, religious bodies and influential individuals, is exerting increasing influence on issues or topics across national or organizational boundaries;
(h) The rise of emerging economies with common developmental concerns, burgeoning intra-regional trade, and growing investments in other developing countries have resulted in a host of new regional alliances such as the Shanghai Cooperation Organization and ASEAN+3. The former with Russian participation may balance the influence of NATO and the latter may lead to the birth of an Asian Community and even an Asian Dollar;
(i) In a world changing beyond recognition, the original Bretton Woods international institutions such as the United Nations, the World Bank and the International Monetary Fund (IMF) are straining to maintain their credibility and relevance. They have remained largely constituted as they were first established at the time of the Second World War. How to embrace and leverage the newly rising emerging powers including China and India in maintaining international order is becoming a pressing challenge, particularly in the midst of the global financial crisis;
(j) Contrasting with the plight of the majority of developing ‘democracies’ in Sub-Sahara Africa and democratic republics’ like the Congo and North Korea, dramatic economic success in ‘non-democratic’ China for three decades begs the question whether state capitalism or the so-called ‘Beijing Consensus’ (23) can be viewed as an alternative model to the ‘Washington Consensus’, at least for countries with different historical, cultural, social and economic backgrounds. In other words, it begs the question whether there should be a one-size-fits-all development formula, and how effective such formula has proved to be if imposed from the outside regardless of the lack or readiness of local institutions.
The Report concludes that in the light of these global undercurrents, trends and challenges in a transformed world, a financially and morally weakened US may continue to lead but her capacity to do so has shrunk. This may come as a shock to the traditional US national psyche of ‘Frontier’, America Plenty’, and ‘US Exceptionalism’. But as Simon Schama hints in The America’s Future: A History (24), the US has to lead within her ‘Limits’. For the first time in over a century, the West’s share of global GDP has dropped to about 50% and is expected to decline to below 40% within a decade, given the ‘mature’ growth rates in rich countries compared with those in emerging markets. The tide has indeed turned towards a multi-polar world.
Conclusion
To address global issues of the 21st century, including international terrorism, proliferation of nuclear and small arms, regional instability, world trade imbalances, natural resource constraints and Climate Change (25), the rigidity of an out-moded, uni-polar or bi-polar mindset has to be discarded in favour of a more inclusive and multi-polar approach, working more closely and cooperatively (albeit preserving certain disagreements) with other stakeholders, not just with traditional allies. It is a sign of the times that ‘the G8 is dead’, effectively replaced by the G20 (26).
The rise of the emerging powers during the past two decades may have belied the Western triumphalism as in Francis Fukuyama’s The End of History (27). 9/11 and China’s Rise may have revived the fears of a Clash of Civilizations as expounded by Samuel Huntington (28). But in a world becoming truly inter-connected and inter-dependent, Clash is not pre-ordained, although squabbles and conflicts are inevitable. In particular, the relationship between the United States, as the only status quo superpower and China as a rising world power in a multi-polar world calls for more mutual understanding, accommodation and cooperation if the world is to recover more quickly from the financial and economic crisis, let alone to succeed in grappling with the many global challenges of the coming decades.
Andrew
http://www.andrewleunginternationalconsultants.com/
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(1) Simon S C Tay, Asia Alone: The Dangerous Post-Crisis Divide from America, John Wiley & Sons, 6 July, 2010, pp. 133 -141.
(2) See, for example, Jonathan Watts, When a Billion Chinese Jump: How Will China Save Mankind – or Destroy It, Scribner, October 2010.
(3) Tang Shiping, China’s Ascent, Cornell University Press, 2008.
(4) “China's crude oil import dependence exceeds 50%, raises security concerns”, in Global Times, 29 March 2010, at http://business.globaltimes.cn/china-economy/2010-03/517059.html (accessed on 8 October, 2010).
(5) See, for example, McKinsey Quarterly, Fulfilling the Promise of Sub-Sahara Africa, June 2010 and Africa’s Paths to Growth: Sector by Sector, July, 2010.
(6) “Angola Overtakes Saudi Arabia as Biggest Oil Supplier to China” reported in Bloomberg on 28 April, 2008 at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aqJ3Wjxs.OWs (accessed on 8 October, 2010).
(7) Martyn Davies, Special Economic Zones: China’s Developmental Model Comes to Africa, in China into Africa, Trade, Aid and Influence, Robert Rotberg (Editor), Brookings Institution Press, Washington D.C., 2008, pp. 137 – 154.
(8) See Dambisa Moyo, Dead Aid, Allen Lane, Penguin Books, 2009; Deborah Brautigam, The Dragon’s Gift, The Real Story of China in Africa (New York:
Oxford University Press, 2009); and my Paper A New China-Africa Financial, Investment & Business Partnership: Lessons for the international aid, investment and trade architecture, which is accessible at http://www.andrewleunginternationalconsultants.com/files/paper-on-a-new-china-africa-financial-investment-business-partnership-4.pdf
(9) Finian Cunningham, “Iran’s Natural Gas Riches: US Knife to the Heart of World Future Energy” in Global Research, Centre for Research on Globalization, 18 March 2010 at http://www.globalresearch.ca/index.php?context=va&aid=18176 (accessed on 8 October, 2010).
(10) Steve Levine, The Great Battery Race, Foreign Policy, November 2010.
(11) In late October 2010, BYD posted a 99% drop in Third Quarter (Q3) earnings, following an accumulated loss of more than a quarter of its value in the same year, as its sales strategy and over-expansion backfired (see http://www.reuters.com/article/idUSTRE69P0ST20101026 accessed on 29 October, 2010).
(12) Fareed Zakaria, The Real Challenge from China: Its People, Not Its Currency, Time Magazine, 6 October, 2010. See http://www.time.com/time/world/article/0,8599,2024090,00.html (accessed on 29 October, 2010).
(13) Identified by Belgian-American economist Robert Triffin in the 1960s, the Dilemma postulates that a deficit is necessary for the United States to supply world demand for its Dollars but such a deficit will, in time, lessen the value of the Dollar and endanger the entire global currency system.
(14) For example: J f. Garner, The Rise of the Chinese Consumer:
Theory and Evidence, John Wiley & Sons, 2005 and The Value of China's Emerging Middle Class in McKinsey Quarterly, 2006.
(15) Stephen Roach, Next Asia: Opportunities and Challenges for a New Globalization, Wiley, 2010.
(16) Jonathan Woetzel et al, Preparing for China's Urban Billion, McKinsey Global Institute, March 2008.
(17) Jonathan Garner, The Rise of the Chinese Consumer, Theory and Evidence, John Wiley and Sons, 2005.
(18) Joseph Stiglitz, Freefall: Free Markets and the Sinking of the Global Economy, Penguin, October, 2010.
(19) Article in The Telegraph at
http://www.telegraph.co.uk/news/worldnews/asia/china/8040534/Wen-Jiabao-promises-political-reform-for-China.html (accessed on 10 October 2010).
(20) Randall Peerenboom, China Modernizes: Threat to the West or Model for the Rest, Oxford University Press, April, 2008.
(21) Dambisa Moyo, Dead Aid, Allen Lane, Penguin Books, 2009.
(22) Global Trends 2025: A Transformed World, National Intelligence Council, Washington D.C, November 2008.
(23) The term ‘Beijing Consensus’ was coined by its author, Joshua Cooper Ramo, in his eponymous work, published by the Foreign Policy Centre on 18 June 2004. A recent critique is Stefan Halpher’s The Beijing Consensus, Basic, 22 April, 2010
(24) Simon Schama, The American Future: A History, Bodley Head, January, 2008, pp. 303 – 312.
(25) Some of these global undercurrents, trends and challenges are studied in Chris Patten’s 528-page What Next?: Surving the 21st Century, Penguin, July 2009.
(26) See Adelina Marini’s article ‘There no longer be G8 - the G20 is the new global economic format’, published in EUINSIDE on 26 September, 2009 at http://www.euinside.eu/en/news/g20-is-the-new-global-forum (accessed on 29 October, 2010).
(27) Francis Fukuyama, The End of History and the Last Man, Penguin, 28 January, 2003.
(28) Samuel Hungtingon, The Clash of Civilizations: And the Remaking of World Order, Free Press, 5 June, 2002.
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