China and the global economy


  • Business
  • Saturday, 15 May 2010

I hardly write about the Chinese economy, preferring to concentrate on the global economy.

There are many who better understand the Chinese economy, whereas my comparative advantage has been in the international economy.

But the rise of China to become an important economy means that no Chinese policy can be discussed without reference to international implications and vice versa.

Now that there are signs of improvement in the global economy, the current hot debate has been about two issues: the Greek crisis and the Chinese renminbi (RMB).

I see the Greek issue as one of the contradictions of European integration, while the RMB is a flashpoint of cross-Pacific balance. Both deserve evaluation on a more objective plane from a longer and wider perspective.

Looking 30,000 feet up, the Greek problem is fiscal over-spending of a smaller member of a fixed exchange rate regime, the euro.

Since Greece cannot devalue its way out of the problem, the only solution is to borrow temporarily from the European Union members and the International Monetary Fund, and slowly shrink its fiscal deficit to a more sustainable level.

Thus, the greater issue is the trade imbalance across the Pacific. Even though the US current account deficit has ameliorated to just around 3% of gross domestic product (GDP) and the Chinese surplus has also halved to 5% of GDP, we should not forget that Germany, Switzerland and Norway are running surpluses in excess of that.

Saudi Arabia and other oil producers are similarly a major source of trade surpluses. No one hears the US grumbling about asking the Gulf oil producers to delink their currencies from the US dollar.

Actually, my personal view is that the RMB issue is a short-term one, whereas what we should really be worried about is the right economic model within the next 30 years, both in China and globally.

It is not just the economic model, but also the financial model, because the present financial model and its regulatory structure, as former US Treasury Secretary Hank Paulson frankly said during his visit to Beijing recently, is broken.

Why the next 30 years? The next 30 years will be the second half of the 60-year cycle after China embarked on the opening up strategy in 1979.

Based on various projections of China’s current growth trajectory, the country may overtake the US in terms of nominal GDP in 2025-2030, and India may overtake Japan.

This is not a historical inevitability, as we know that Japan was touted as No. 1 in the late 1980s and was in terms of GDP and stock market wealth, a close second to the US very briefly.

But after the sharp rise of the Japanese yen post-Plaza Accord, Japan went into a debt deflation from which the country has still not recovered.

Modern Chinese philosopher Nan Huai-Chin, who has a huge following in Greater China, said in his review of Chinese history (that in looking at the rise of China in the modern world), we must reflect on three major questions.

The first is which Western model China should choose, because there is no single Western model to learn from?

The second is how to have a long-term vision to design, using science, technology and education, philosophy and culture, to create an unprecedented deed for humanity and contribute to mankind.

If not, scientific development could be like a wild horse without harness, and bring mankind to eventual destruction.

The third question is how the confluence of China with the West would influence China’s culture and political society? In this, Nan pointed to how Japan dealt with this question.

Unfortunately, Japan’s recent lessons have been more negative than positive. This is an issue that deserves greater analysis.

Since our economic theory has largely been learnt from the West, let me go back to classical economic analysis to see what challenges we are facing.

The Labour Theory of Value of David Hume and Karl Marx goes back to the three key factors of production, land, labour and capital. What do we find in 2010?

The price of capital is zero, under the zero interest rate policy and the printing of money by the global central banks.

The price of labour is very low, due to the rise of young labour from the emerging markets. The result is that the price of land is rising rapidly, as investors worry about long-term inflation.

In the advanced markets, the asset bubble has deflated, but in the emerging markets, because of globalisation and carry trade hot money, the asset bubbles are still emerging.

No emerging market can raise interest rates without attracting hot money from the carry trade, which is leveraged speculation.

Why is there speculation with such leverage? Because the costs of speculative mistakes have been rescued by governments, so that there is no pain or high interest rates that would have cleaned out the inefficient during a deflation.

Hence, my own conjecture is that we have not yet seen the end of this crisis. So far global growth has been due to fiscal pump priming and historically low interest rates.

From 30,000 feet up, there is also awareness that there are at least two crises going on – the global warming crisis and the financial crisis, both due to excessive consumption financed by excessive leverage.

So what is the solution? My answer to the first question by Nan about which Western (economic) model to choose is more straightforward. The choice is between the Anglo-Saxon model of free markets and the European model of Austrian institutional economics and Scandanavian socialism.

In my view, the Anglo-Saxon model has been found wanting by this crisis because of its unfettered greed and the widening gap between the wealthy and the under-class.

Surprisingly, the Japanese model is actually even more socialist than the Europeans through its consensus society.

In my next article, I shall draw upon Japanese views on where Japanese policies failed in the last 20 years.

·Datuk Seri Panglima Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served in key positions at Bank Negara, the Hong Kong Monetary Authority and the Hong Kong Securities and Futures Commission, and is currently a member of Malaysia’s National Economic Advisory Council. He is the author of the book From Asian to Global Financial Crisis.

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