MILAN
– For most of the past 35 years, China’s policymakers have set their
focus on the domestic economy, with reforms designed to allow the market
to provide efficiency and accurate price signals. Though they had to be
increasingly aware of their country’s growing impact on the global
economy, they had no strategy to ensure that China’s neighbors gained
from its economic transformation.
But now China does
have such a strategy, or at least is rapidly developing one. Moreover,
it extends well beyond Asia, embracing Eastern Europe and the east coast
of Africa.
A key element of
China’s strategy is the recently established Asian Infrastructure
Investment Bank (AIIB), and to some extent the BRICS’ New Development
Bank, established last year by Brazil, Russia, India, China, and South
Africa. Both banks are obvious alternatives – and so rivals – to the
Western-dominated World Bank and International Monetary Fund.
Also vital to the new strategy are two prospective modern-day Silk Roads:
an overland route through Central Asia to the Black Sea and a “Maritime
Silk Road” by which shipping will pass from the South China Sea,
through the Strait of Malacca, across the Indian Ocean to East Africa,
and from there through the Red Sea into the eastern Mediterranean.
Economists sometimes
portray the global economy as a huge bazaar. But it is not. It is a
network, in which the links are built by expanding the flows of goods,
services, people, capital, and – importantly – information. China’s goal
is to create these links, and it has plenty of assets that will allow
it to act as a catalyst of global growth and development.
The most obvious
asset is China’s large and growing domestic market, to which other
economies can gain access via trade and investment. China will thus be
joining the ranks of the advanced countries in providing an export
market (and jobs) for countries at earlier stages of economic
development. In addition, because China has built up a capacity to
invest that is far larger than its domestic economy can now absorb, it
will inevitably seek opportunities abroad, both public and private.
Chinese companies, in particular, will increasingly want to establish
their brands internationally.
With the involvement
of the AIIB and the New Development Bank, China has developed what
amounts to a multinational development strategy. While there are
skeptics, broad support for the AIIB suggests that the benefits outweigh
the risks, and that China’s initiatives may help build a network that
is open to everyone. After all, the trade and investment that will
follow could not possibly all flow through China.
Meanwhile, by virtue of more than 30 swap arrangements
with other central banks (the first was with South Korea in December
2008), China is using its foreign-exchange reserves to help its
neighbors and others defend themselves against volatile international
capital flows. This is in tandem with the authorities’ efforts to
promote the internationalization of the renminbi, which is rapidly
expanding its role in trade settlement. There are significant efficiency
gains to be had by settling transactions in trading partners’
currencies, without the intermediation of, say, the US dollar.
Of course, there is
much more to the internationalization of a currency, not least large and
liquid domestic financial markets and the establishment of trust and
confidence. This takes time, but China is already applying to the IMF to
have the renminbi included in the basket of currencies that determines
the value of the Fund’s unit of account, Special Drawing Rights, with a
decision likely in late 2015.
Joining the US
dollar, the British pound, the euro, and the Japanese yen in the SDR
club would be symbolically significant. More important, as with China’s
accession to the World Trade Organization in 2001, which required
substantial reforms, fulfilling the conditions for joining the SDR promises to speed progress toward full capital-account liberalization – and thus toward a fully convertible renminbi.
China’s policymakers
have long time horizons. Their strategy will doubtless face obstacles in
the coming years. The question is whether the strategy is worth
pursuing now.
The answer almost
certainly is yes. The overland “silk road,” for example, will reduce
China’s reliance on sea-lanes, which can be blocked or disrupted,
especially at the Strait of Malacca. More generally, Chinese investment
will ease the constraints on the silk road economies caused partly by
slow growth and investment shortfalls in advanced economies. Ultimately,
vibrant growing economies in the region will benefit China’s economy
and its stature.
Many believe that
public-sector investment is a good way (perhaps the best way) to use the
global economy’s productive resources and increase its efficiency and
growth potential. But this requires a multinational effort. China’s
leaders surely want international recognition of their country’s global
stature. But they also want China’s rise to high-income status to occur
in a way that is – and that is perceived to be – beneficial to its
neighbors and the world. The new external focus of China’s growth and
development strategy seems to be intended to make that vision a reality.
Read more at http://www.project-syndicate.org/commentary/china-international-growth-agenda-by-michael-spence-2015-06#BVZ4ACXCmIpzPALM.99
