Commentary: The resurgence of China

In June 2016, my partner and I had a vacation in Hallstat, Austria. Besides the haunting beauty of Hallstat, one of the things that caught my attention was the sheer number of Chinese tourists. In May 2015, the Tiens Group Company sponsored an all expense paid trip to France of 6,400 of their employees during their 20th Anniversary. The following monthPerfect, another Chinese-owned company, sponsored the trip of their employees to the Netherlands; 4,500 employees in a fleet of ninety buses stormed Amsterdam, “the biggest single group of Chinese tourists ever to visit the Netherlands.” This manifests the trickle-down effect of China’s dramatic economic achievement, which “lifted 680m people out of poverty” since Deng Xiaoping implemented the Four Modernizations in 1978.

Figure 1 shows the spectacular decrease in the poverty level in China in just three decades. According to the World Bank, “more than 500 million people were lifted out of poverty as China’s poverty rate fell from 88 percent in 1981 to 6.5 percent in 2012.” From being supported by the World Bank’s International Development Association (IDA) funds, which is for the world’s poorest, “China graduated from IDA in 1999 and became a contributor in 2007.” And from being a mere recipient of funds from IDA, China became “the third largest shareholder in the World Bank.”

The dramatic decrease in China’s poverty level is complemented by an equally dramatic rise in its Gross Domestic Product (GDP). As Figure 2 illustrates, China’s GDP has increased from less than $200 billion in 1978 to around $11,000 billion in 2015. What greatly contributed to this transformation was Deng Xiaoping’s Open Door Policy.

It was a a policy that changed “China’s development strategy from one based on self-sufficiency to one of active participation in the world market,” as Guocang Huan described it in China’s Open Door Policy, 1978-1984.  Because of this policy, China has been flooded with foreign investments “as many of the world’s largest manufacturers have established operations there.”

In 2015,  China “has overtaken the US as the top destination for foreign direct investment (FDI).”  The service industry became the main beneficiary. This is not the first and only news that declared that China has already surpassed the United States.

In 2014, International Monetary Fund (IMF) estimates have shown that China has surpassed the US in terms of  GDP, purchasing power parity (PPP); at that time China’s GDP (PPP) was $17.6tn, while US had $17.4tn. China has maintained that lead in 2015 with $19.5tn GDP (PPP), against the US’s $17.9tn (see Figure 3).

Blogging for the Financial Times, Fray said that “in a long-run historical perspective, China’s rise has merely restored the status quo ante,” because China was the largest economy until 1870, before economic power shifted to the the Europe and US for 150 years.

China is now the number one export partner of 31 countries, five of them are members of the G20 (Australia, Brazil, South Korea, Saudi Arabia, and South Africa). This is just four countries less than the number of countries that are export partners of the US: 35; and seven of them are members of the G20 (Canada, China, Germany, India, Japan, Mexico, and the UK) – six if we take China away, that makes it just one more G20 country than China. Meanwhile, China has three times import partners than the US: China has 57 against US’s 19. But do these numbers mean that China is now the new US?

The reach of the awakened dragon’s stretched arms

No doubt about it, China and the US  are  fighting out a rivalry for economic eminence. The most apt symbols of this rivalry are the Trans-Pacific Partnership (TPP) led by the US and the Asian Infrastructure Investment Bank (AIIB) founded by China. Writing for Bloomberg, Martin Schuman called it the “symbols of an historic battle,” as China competes for control of the world’s global economy.

TPP aims to open up a free trade zone among twelve economies, the US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru. According to Schuman, the TPP is “a U.S. attempt to maintain dominance in the face of a rising China.” In an op-ed for the Washington Post, President Obama said that the TPP gives the US “the power..[to let ] other countries…play the rules that America and our partners set, and not the other way around [and that] the United States, not countries like China, should write them.”  On the other hand, AIIB is a multilateral development bank that rivals the US-initiated World Bank. AIIB’s aims “to focus on the development of infrastructure and other productive sectors in Asia.”

The US pressured its European allies to not join the AIIB, yet Europe’s four largest economies defied it. According to the DW, European economies joined the AIIB despite of US pressures because “they all believe that the possible benefits from a stronger relationship with China, the world’s second-largest economy, outweigh whatever perceived negatives such a decision entails.” This decision is also perceived as “European goodwill or a vote of confidence in China’s contributions to global development and order.” Larry Summers, one of the former economic advisers of President Obama, viewed the formation of the AIIB as the end of the role of the US “as the underwriter of the global economic system.”

On the the other hand, the fate of the US-led TPP is uncertain. One US senator said that “the sweeping 12-nation Pacific Rim trade deal championed by President Obama will remain on ice until another president revives it.” Meanwhile, in Asia, Lee Hsien Loong, the Prime Minister of Singapore, warned that the US would be harming its “standing and credibility with countries around the world if the Trans-Pacific Partnership (TPP) trade deal is rejected by its lawmakers.” According to the report by the Pew Research Center, 49% of Americans support the the TPP, but not as much as  other countries that also support it.

Too early to say

During President Nixon’s first visit to China in 1972, Zhou Enlai, China’s Premiere, was asked what he thought was the significance of the 1968 Paris Protests. Zhou reportedly said: “Too early to say.” In a similar vein, I would say that it is too early to say whether China has now eclipsed the US as the new economic superpower — for good. How long could China sustain this lead? If China is a sleeping dragon that is now awake, the US might just be an eagle taking a short nap rather than entering a long slumber. Certainly, China’s economy has dramatically changed, and it has somewhat parlayed this economic weight into actual influence, as demonstrated by the divergent paths traversed by TPP and AIIB.

Yet China’s battle is far from over. Though China has lifted people out of poverty, inequality remains a huge issue.  China’s Gini coefficient was at 0.49 in 2012, which falls within World Bank’s bracket for “severe income inequality.” Besides tackling inequality, China’s main challenge is to change its “growth regime, based on the exploitation of the cheap labor force, natural resources, and high investment,” which may no longer be sustainable, as Zhun Xu, Ying Chen, and Mingi Li, noted in Are Chinese Workers Paid the Correct Wages? Measuring Wage Underpayment in the Chinese Industrial Sector, 2005-2010.

To keep on growing, China has “to undergo a major rebalancing, with the economy led by domestic consumption rather than investment and exports,” Zhun, Ying, and Ming further advised. 

So after that transition happens and China still remained on top of the global economic ladder, that is the time that we could finally say that the dragon’s arms are now stretched wider than the eagle’s wing span. Indeed, China has greater influence than what it had before it opened its economy to the rest of the world. Nonetheless, this influence need to be more sustained to be considered as greater than what the US wielded since the aftermath of World War II. China is not yet the new US, but it has already taken the several steps and leaps to reach that destination.

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