Thu, Jun 01, 2017 page8

• Rethinking the ‘Next China’ focus

  • By Stephen Roach
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  For the past seven years, I have taught a class at Yale University, called “The Next China.”

  The focus has been on the transitional imperatives of the modern Chinese economy — namely, the shift from a long-successful producer model to one driven increasingly by household consumption. Considerable attention is devoted to the risks and opportunities of this rebalancing and to the related consequences for sustainable Chinese development and the broader global economy.

  While many of the key building blocks of China’s transitional framework have fallen into place — especially rapid growth in services and accelerated urbanization — there can be no mistaking a new and important twist: China now appears to be changing from an adapter to a driver of globalization.

  In effect, the “next China” is upping the ante on its connection to an increasingly integrated world, creating a new set of risks and opportunities along the way.

  This strategic shift is very much a reflection of Chinese President Xi Jinping’s (習近平) leadership, in particular, his focus on the “China dream.”

  Initially, the dream was something of a nationalist mantra, framed as a rejuvenation by which China would recapture its former position of global prominence, commensurate with its status as the world’s second-largest economy.

  However, now that is taking shape as a concrete plan, centered on the “One Belt, One Road” initiative. This ambitious pan-regional infrastructure initiative combines economic assistance with geostrategic power projection, supported by a new set of China-centric financial institutions — the Asian Infrastructure Investment Bank, the New Development Bank and the Silk Road Fund.

  While the shift remains a work in progress, I would stress three tentative implications.

  First, China has not made a full about-face. As an economist, I am prone to placing too much emphasis on models and on the related presumption that policymakers can flip the switch from one model to another.

  Yet, it is not that black and white — for China or for any other nation.

  Chinese leaders have, for all practical purposes, now conceded that a consumer-led growth strategy is tougher to pull off than originally thought.

  The consumption share of GDP has risen just 2.5 percentage points since 2010 — far short of the boost to personal incomes that might be expected from the 7.5 percentage-point increase in the share of services and a 7.3 percentage-point increase in the high-wage urban share of its population over the same period.

  This disconnect largely reflects a porous social safety net that continues to foster high levels of fear-driven precautionary saving, which is inhibiting the growth of discretionary consumption.

  While still committed to urbanization and services development, China has elected to draw on a new external source of growth to compensate for a shortfall of internal demand.

  Second, this global push has many of the features of the old producer model.

  It enables an increasingly worrisome overhang of domestic excess capacity to be directed at the “One Belt, One Road” infrastructure requirements. It relies on state-owned enterprises to drive that investment, forestalling long-needed reforms in this bloated industry segment.

  The flip side of this newfound support for the producer model has been a deprioritization of consumer-led growth.

  In Chinese Premier Li Keqiang’s (李克強) annual Work Report — the official statement of economic policy — emphasis on the consumer-led structural transformation has been downgraded in each of the past two years.

  Third, China’s new global approach reflects a recasting of governance.

  Xi’s consolidation of domestic power is only part of the story.

  The shift in economic decisionmaking away from the Chinese National Development and Reform Commission toward party leading small groups is particularly important, as are the anticorruption campaign, heightened Internet censorship and new regulations on nongovernmental organizations.

  The irony of such power centralization is unmistakable.

  Xi issued early promises to break up deeply entrenched power blocs, and the 2013 Third Plenum reforms emphasized the promotion of a more decisive role for markets.

  However, there is an even deeper irony for China’s new global push. It runs against the grain of a populist antiglobalization backlash that is brewing in many developed nations.

  As a producer-focused economy, China has long been the greatest beneficiary of globalization — both in terms of export-led growth and poverty reduction stemming from the absorption of surplus labor.

  That approach has now been stymied by mounting internal imbalances, a post-crisis slowdown in global trade and an increase in China-focused protectionism.

  As a result, China’s new attempts to gain increased leverage from globalization are not without serious challenges.

  A more global China also has important ramifications for its foreign policy.

  Territorial disputes in the South China Sea loom particularly large, but China’s footprints in Africa and Latin America are also drawing heightened scrutiny.

  This new strategy raises perhaps the biggest issue of all — whether China fills a hegemonic void created by the isolationist “America first” approach of US President Donald Trump.

  The “next China” is shaping up to be more outwardly focused, assertive and power-centric.

  At the same time, there appears to be less commitment to a market-based reform agenda featuring private consumption and restructuring of state-owned enterprises.

  The jury is out on whether this changes the final destination of Chinese rebalancing.

  Stephen Roach, former chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs.

  Copyright: Project Syndicate
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