Download 3. Global crisis - University of Nottingham

China’s Role in the World Economy
Martin Wolf, Associate Editor & Chief
Economics Commentator, Financial Times
Nottingham University
March 3rd 2010
China in the World Economy
• The presentation will address five issues:
– China’s strategic interests;
– Natural resources and the global environment;
– Trade;
– Finance; and the
– Balance of payments.
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1. China’s strategic interests
• China is a developing country and is likely to remain
a relatively poor country for decades, in terms of
incomes per head.
• But, by virtue of its size, it has a gigantic impact.
Indeed, it is on its way to becoming a superpower.
• As a result, it is one of the few countries – arguably
one of two or three (if the European Union is viewed
as one) – that must take account of the impact of its
actions on the world economy.
• China cannot just “import order”. It must “export
order”, too.
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1. China’s strategic interests
• How then should China define its interests, while
taking account of its impact on the world in which it
finds itself?
• China’s interest, I would argue, lies in maintaining a
stable, peaceful and co-operative global political and
economic environment.
• Only such an environment would be able to support
and adapt to China’s rapid economic development.
• How should China, as one of the world’s leading
powers, seek to achieve that objective?
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1. China’s strategic interests
• I would argue that this interest will be best secured
via a rules-governed, institutionally-based global
system, on lines created by the US after the Second
World War.
• China’s objective should be to strengthen and
develop that order, not overthrow it.
• The alternative is a world of power politics:
– Such a world has proved highly unstable in the past;
– China has to recognise that in such a world, there is a big
risk that other powers might “gang up” against it;
– In such a world, development will be much more difficult.
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2. Natural resources and the global environment
• China is already the world’s largest consumer of
natural resources and the world’s biggest emitter of
greenhouse gases.
• Its impact on global resource markets and the global
environment, already enormous, is sure to grow
further in the decades ahead.
• Its specific interest with respect to raw materials is
secure access at the lowest possible prices.
• Its dominant policy seems to be to invest in raw
material supplies abroad.
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2. Natural resources and the global environment
IMPORTS OF THE “WORKSHOP OF THE WORLD”
CHINA'S SHARE IN WORLD COMMODITY IMPORTS
(2009 estimates)
60.0%
55.0%
48.0%
50.0%
40.0%
30.0%
30.0%
25.0%
20.0%
20.0%
20.0%
8.0%
10.0%
0.0%
Iron ore
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Soybean
Cotton
Copper
Nickel
Palm Oil
Oil
2. Natural resources and the global environment
IMPORTS OF THE “WORKSHOP OF THE WORLD”
SHARES IN WORLD MERCHANDISE IMPORTS 2007
(per cent)
30.0%
27.0%
Source: World Bank
25.0%
20.0%
17.1%
16.2%
15.0%
10.0%
14.5%
14.3%
14.3%
9.5%
8.6%
6.8%
6.7%
4.5%
5.0%
4.5%
0.0%
Agricultural Raw Ores and metals
materials
Manufactures
China
8
Food
US
Fuels
Total
9
Goldman Sachs Commodity Index - PRICE INDEX
Non-Energy
Energy
31/01/2008
31/01/2006
31/01/2004
31/01/2002
31/01/2000
31/01/1998
31/01/1996
31/01/1994
31/01/1992
31/01/1990
31/01/1988
31/01/1986
31/01/1984
31/01/1982
31/01/1980
31/01/1978
31/01/1976
31/01/1974
31/01/1972
31/01/1970
2. Natural resources and the global environment
COMMODITY PRICES SOAR
REAL COMMODITY PRICES
(Goldman Sachs)
300
250
200
150
100
50
0
10
Energy
Agricultural
Industrial Metals
31/01/2008
31/01/2006
31/01/2004
31/01/2002
31/01/2000
31/01/1998
31/01/1996
31/01/1994
31/01/1992
31/01/1990
31/01/1988
31/01/1986
31/01/1984
31/01/1982
31/01/1980
31/01/1978
31/01/1976
31/01/1974
31/01/1972
31/01/1970
2. Natural resources and the global environment
COMMODITY PRICE DIVERGENCE
REAL COMMODITY PRICES
(Goldman Sachs)
300
250
200
150
100
50
0
2. Natural resources and the global environment
• The advantage of this policy is preventing the
formation of cartels against China.
• But the policy will not necessarily increase security:
– Raw material supplies located in other countries can be
expropriated, at will, as has frequently happened;
– The principal risk is the variability of price, rather than
physical supply;
– Governments of exporting countries have an interest in
securing the maximum price of exports, whoever notionally
owns the supply;
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2. Natural resources and the global environment
– These risks can be managed only by securing direct control
over the governments of supplying countries;
– But any such policy risks creating a strategic rivalry with
other countries that are also dependent on imported
materials; and, at worst,
– This might even lead to open conflict.
• It might make sense for China to complement a
policy of investing in raw material supply with a policy
of promoting free trade in resources themselves.
• That should allay suspicion that China is trying to
achieve a privileged position, at the expense of
others.
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2. Natural resources and the global environment
• On climate change, China has clearly conflicting
interests.
• As a rapidly growing developing country, China’s
interest lies in ensuring that cuts in emissions fall
elsewhere and that it is more than adequately
compensated for any cuts it is forced to make itself.
• But if it sticks to this position, it is likely to find that no
cuts are made at all, which might ultimately be very
damaging to China.
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2. Natural resources and the global environment
THE GREAT EMITTER
SHARES IN WORLD EMISSIONS OF CO2 2005
19.7%
47.7%
19.0%
8.8%
4.8%
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US
China
Eurozone
India
Rest of world
2. Natural resources and the global environment
• Thus, it is going to be necessary to make
commitments. This should at least promote a
desirable improvement in energy efficiency.
• If China accepts some quantitative limits, these will
be globally tradable.
• That could be a source of revenue for China (and
China’s businesses) in the early years of the regime,
though in the longer run China will have to buy
emissions permits, rather than sell them.
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3. Trade
• China ranks with the European Union and the US as
one of the world’s biggest trading entities.
• Trade has also played a dominant role in China’s
development, as well.
• As a global player, China needs an open global
economy. Purely regional arrangements will not
satisfy China’s needs.
• This makes China the natural defender of the
multilateral, rules-based global trading system in the
21st century.
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3. Trade
• It is important, for this reason, that its own policies be
compatible with WTO rules, in all respects, and that it
also fully obey rulings against it by the WTO.
• It is also important for China to use WTO procedures,
to manage disputes with other trading powers.
• It is, finally, important for China to play an energetic
role in securing the completion of the Doha round of
multilateral trade negotiations.
• Subject to the above, China can also play a
productive role in ensuring an open set of trading
arrangements in the Asia-Pacific region.
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3. Trade
EXPORTS OF THE “WORKSHOP OF THE WORLD”
SHARES IN WORLD MERCHANDISE EXPORTS, 2007
(per cent)
Surce: World
Bank
12.0%
11.3%
9.5%
10.0%
8.9%
8.3%
8.3%
8.7%
8.3%
8.0%
6.0%
4.4%
3.7%
4.0%
3.3%
1.7%
2.0%
0.0%
0.0%
Manufactures
Ores and metals
Food
Fuels
China
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US
Agricultural Raw
materials
Total
4. Finance
• China will ultimately become the centre of the global
financial system.
• Already China’s gross savings match those of the US
in size.
• Its interests lie in:
– Securing a domestic financial system that promotes its own
development; and
– Promoting a stable global financial system that supports a
rapidly growing and reasonably stable world economy.
• As a leading member of the Group of 20 China is in a
good position to secure these aims.
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5. Balance of payments
• China is both the world’s fastest-growing emerging
economy and the country with the largest current
account surplus and so the world’s largest net capital
exporter.
• This has turned out to be a disruptive combination.
• While one would expect the real exchange rate of the
world’s most dynamic economy to soar, that has not
happened.
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5. Balance of payments
THE RISE OF THE IMBALANCES
GLOBAL CURRENT ACCOUNT BALANCES
(per cent of World Output)
3
2
1
0
-1
-2
-3
1996
1997
1998
1999
US
China and East Asia
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2000
2001
2002
Oil Exporters
Rest of World
2003
2004
2005
2006
2007
Germany and Japan
Discrepancy
2008
2009
2010
2011
Other Deficit Countries
5. Balance of payments
CHINA RISES TO THE TOP OF THE SURPLUS LIST
CURRENT ACCOUNTS OF WORD'S THREE LARGEST SURPLUS
COUNTRIES ($bn)
Source: IMF WEO
$500.00
$400.00
$300.00
$200.00
$100.00
$0.00
-$100.00
2000
2001
2002
2003
2004
China
22
2005
Germany
2006
Japan
2007
2008
2009
2010
5. Balance of payments
CHINA EXPORTS A BIGGER SHARE OF GDP TOO
CURRENT ACCOUNT BALANCES
(as per cent of GDP)
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
2000
23
2001
2002
2003
2004
2005
China
Germany
2006
Japan
2007
2008
2009
2010
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Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
90
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
5. Balance of payments
CHINA’S MODEST REAL APPRECIATION
REAL EXCHANGE RATE
(JP Morgan, 2000=100)
130
120
110
100
)
80
70
60
5. Balance of payments
• This outcome has been the result of intervening
massively, to keep the exchange rate down, and
acting, at the same time, to prevent the natural
consequences for money and inflation.
• Thus, the normal paths to global and domestic
adjustment have been blocked.
• High Chinese savings – even higher than the
extremely high levels of domestic investment – and
low household consumption also, of course, reflect
the extraordinarily low share of household disposable
income in China’s GDP and the high share of
undistributed corporate profits.
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Ju 2
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Ja 2
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Ju 3
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Ju 4
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5. Balance of payments
THE GREAT RESERVE ACCUMULATION
CHINA'S RESERVES ($m)
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
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5. Balance of payments
CHINA’S SAVINGS EXPLOSION
COMPOSITION OF SAVINGS
(per cent of GDP)
60.0
Source: World Bank
50.0
7.0
7.6
40.0
7.8
4.5
4.8
8.6
6.8
7.9
6.9
30.0
28.3
15.6
25.0
15.8
15.3
20.0
10.0
18.7
14.4
16.2
19.8
14.2
16.7
14.8
14.2
16.3
15.8
15.4
14.6
15.3
1999
2000
2001
2002
2003
2004
2005
2006
0.0
1998
Households
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Enterprises
Government
Gross capital formation
5. Balance of payments
• One of the ways in which corporate profits are kept
high is via the low rate of interest charged by banks.
• This is also partly the consequence of the policy of
keeping the exchange rate down.
• More important, the ability to export surplus savings
abroad, to support demand for Chinese production,
has made it much easier for China to avoid desirable
and necessary structural reforms, at home.
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5. Balance of payments
• The needed reforms would benefit the Chinese
people, by raising the living standards of today’s
Chinese, and lowering the rate of investment in low
return – and risky – foreign assets, particularly
liabilities of the US government.
• They would also help the world economy, because
the high quality, safe foreign assets that China seeks
do not, alas, exist.
• That is one of the lessons of the financial crisis.
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5. Balance of payments
• China insists that the US keep its currency a safe
store of value. But one of the reasons the US
currency is increasingly unsafe is the role of the US
as the world’s borrower of last resort.
• That is undermining the finances of the US Federal
government:
– Once the private sector stopped spending borrowing, the US
government emerged as the ultimate spender and borrower;
– This is because it is difficult to achieve a big enough swing
in the US external accounts, in a world of structural surplus
countries, notably China.
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5. Balance of payments
• Whether or not one agrees with my view on the role
of savings-surplus countries in causing the current
crisis, it is widely accepted that rebalancing of world
demand and current accounts is necessary to
achieve a full exit from the crisis.
• China’s decision to devalue the renmimbi, along with
the dollar, is an obstacle to such an adjustment. For a
huge surplus country to try to defend its surpluses in
world of under-consumption is destabilising.
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32
08/01/2010
08/01/2009
08/01/2008
08/01/2007
08/01/2006
08/01/2005
08/01/2004
08/01/2003
08/01/2002
08/01/2001
08/01/2000
08/01/1999
08/01/1998
08/01/1997
08/01/1996
08/01/1995
08/01/1994
08/01/1993
08/01/1992
08/01/1991
08/01/1990
08/01/1989
08/01/1988
08/01/1987
08/01/1986
5. Balance of payments
THE REMNMINBI STABILISES AGAINST DOLLAR
RENMINBI-DOLLAR EXCHANGE RATE
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
5. Balance of payments
• What is needed now is a shift in policy.
• This would involve:
– A real appreciation of the currency;
– Liberalisation of private capital outflow from China;
– A redistribution of income, via taxation, dividends and higher
interest rates, from corporations to households;
– Development of safety nets for the population; and
– Higher spending on public consumption.
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5. Balance of payments
• These changes would be good for China and the
world.
• The policy of relying on external demand has run its
course and now needs to be reversed.
• China needs to become a source of net demand for
the world.
• Indeed, it is the natural large-scale net importer of
capital (as the US was at a comparable stage of its
development in the 19th century), not a net exporter.
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5. Balance of payments
• Changes in China’s policies are not enough.
• There also need to be large changes in the global
monetary system, many of which have been
identified by People’s Bank of China Governor Zhou
Xiaochuan.
• The reliance on a single national currency is
inherently destabilising, because of the “Triffin
problem” – excessive issuance undermines trust.
35
5. Balance of payments
• Reliance on a single currency makes it difficult for
others to be large net borrowers, in a world of
adjustable exchange rates, unless they are able to
borrow in their own currencies (many cannot).
• The solution is not a move to several national
currencies, since that does not help the vast majority
of countries.
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5. Balance of payments
• The best solutions are two-fold:
– A much large International Monetary Fund or similar
insurance arrangement, to insure countries against the risk
of a “sudden stop” in foreign lending; and
– Issuance of Special Drawing Rights on a regular basis,
particularly to developing countries, thereby allowing them to
finance large ongoing current account deficits.
• To make this happen, there also needs to be
substantial reform of the governance of the IMF.
37
5. Balance of payments
• The big aim is to achieve a better balanced and more
stable world economy.
• It is crazy that stability has depended on
irresponsible and excessive spending by the world’s
richest consumers.
• This process has, in any case, ended in crisis.
• China can play a huge role – and it is very much in its
interests to do so – in securing necessary reforms.
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