Blog Post

China’s new role in the global economy

The changing role of China in the world economy has recently been highlighted by its registering of a first current account deficit in 17 years. We review the economists’ analyses of this new role and associated challenges.

By: and Date: May 28, 2018 Topic: Global Economics & Governance

Conversable Economist Timothy Taylor presents the evolution of the quarterly current account since the 1990s. The current account is the sum of net exports in goods and services, capital income paid in and out, and net transfer payments such as foreign aid. China had a $282 billion current account deficit in the first quarter of 2018, its first in 17 years. This occurred after a three-year downward trend and is the result of the modern Chinese economy requiring imports of more services, among other things, from abroad. He explains that this weakens the rationale used for the ongoing trade war, though he notes that the annual current account might well still be positive in 2018 given the seasonal patterns of Chinese exports.

The Council on Foreign Relations’ Brad W. Setser takes a deeper and more sceptical look at the data. He argues that the Chinese current account balance is not accurately measured, and the prediction of an annual current account deficit for 2018 hinges on high oil prices, a commodity that China imports in great quantities, and flawed methodological changes in the measurement of the value of tourism. Also, the current account’s trend downwards is partially due to the Chinese government’s fiscal stimulus, implemented since 2015. Were this stimulus policy to be withdrawn, the current account deficit might well be reversed quickly. Finally, he explains that China’s manufacturing trade surplus remains one of the strongest in the world, and should not be included in any explanation of this recent current account deficit.

PIIE’s Nicholas R. Lardy earlier in April brings some perspective by deconstructing the recent growth performance of the Chinese economy. Trade surplus indeed fell by about a fifth compared to the first quarter of 2017, but it is driven by greater imports demand, not by reduced exports. More fundamentally, the strong GDP growth (6.8% in 2018, predicted based on Q1 performance) is driven by consumption, which is expected to take on even greater importance if household disposable income continues to outpace GDP growth. Combined with the fact that most of the GDP growth came from services rather than industry, the current account deficit is merely symptomatic of desirable domestic circumstances for China’s new role, and not a sign of Chinese weakness.

On Project Syndicate, Kent Harrington summarises the rising power of China in Asia and Latin America, relative to the US or the EU. China accounted for 21% of exports coming to Southeast Asia in 2015, and is also the largest importer of goods from neighbouring countries. As it has turned into an industrial hub, it has become the main trade partner of most countries in the area. More strikingly, China now brokers trade and investment agreements in Asia, Latin America and even globally through its Belt and Road Initiative. In the Latin American case, it has been successful: China is now among the top five export markets for 12 of the region’s 20 countries.

While Kent Harrington criticises China’s “predatory economic practices” and Martin Feldstein calls these policies “disingenuous”, Harvard’s Dani Rodrik defends them. As the global economic system has been shaped by US lobbies, China has all the reasons to diverge from the WTO rules for its own interest. This unorthodoxy, he argues, has helped rather than hindered China’s spectacular growth, lifting hundreds of millions out of poverty. Like China nowadays, the US in the 19th century caught up with Britain by stealing intellectual property and flouting the hegemon’s imposed global order. Carefully weighing respect of global rules with its development, China has carved itself a new role the same way the US has in the past.

Barry Eichengreen takes a broader view on the implications of China’s new role. The renminbi has been increasingly used internationally following the government’s promotion policies, directly challenging the American dollar. China is also the leader in volume traded globally and in foreign investment into Africa and South Asia. This has enabled the nation to acquire military and other strategic assets abroad, and to project its soft power even further. More importantly, these repeated economic and political successes make leaders worldwide covet an emulation of China’s centralised power and authoritarian practices. However, Barry Eichengreen questions the sustainability of authoritarian models of policy making, as the lack of course-correction mechanism makes them inherently fragile to crises.

There are, of course, other indications of China’s changing economic role, outside macroeconomic and trade data. PIIE’s Martin Chorzempa details how the Chinese economy has surpassed that of the US in terms of innovation for fintech, due to minimal or even absent regulations. Earlier, Harvard’s Laboure, Zhang and Braunstein had detailed the rise of the Chinese tech industry, overtaking the US thanks to Chinese culture’s little concern for privacy, huge domestic market, and the absence of incumbent firms to displace. They however point to limited financing and investment opportunities as a structural problem that might hinder further development of the industry.

China has become economically more powerful and there is evidence that it has started wielding that power abroad more assertively. Some aspects worry observers worldwide. Paul Krugman argues that the Chinese government has negotiated a deal he views as a bribe to ensure US market access to one of China’s foremost tech companies. Last month, Bloomberg’s Editorial Board summarised the two Chinese policy strategies that are most problematic to Western economies: China’s forceful push to achieve superiority in military technology and its systematic disregard for global rules, which are the main sources of complaints among US companies. Similarly, Bloomberg’s Michael Schuman was pessimistic and argued that even when seemingly conceding, by opening its markets, the Chinese government always ensures its domestic players benefit more from the new situation.

On the other hand, there are also hints that the Chinese government recognises the great responsibilities that come with their new global role. Nicholas R. Lardy points to positive developments with respect to China’s payments for the use of foreign intellectual property, which increased by roughly 20% in 2017, arguably placing the Chinese economy second globally after the US as purchaser of foreign technologies. Martin Wolf recounts the frankest high-level discussion he ever had with Chinese officials, academics and businessmen. From this snapshot of China’s decision-makers’ worldview, he concludes that they firmly believe China needs strong central rule, as Western models of democracy are discredited. More fundamentally, China will develop “first-class” military power and survive the testing years ahead, but has no desire for world domination.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic More by this author
 

Opinion

The EU-China investment deal may be anachronic in a bifurcating world

Ultimately, only time will tell if this landmark trade agreement will be productive and counter the potential bifurcation of international value chains.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: April 6, 2021
Read article More on this topic More by this author
 

Opinion

Letter: ‘Strategic autonomy’ is now an EU catchphrase

Strategic autonomy should not be an illusionary search for independence, but rather a strategic management of interdependence, based on diversification of supply chains.

By: Simone Tagliapietra Topic: European Macroeconomics & Governance Date: March 24, 2021
Read article More on this topic More by this author
 

Opinion

中國兩會的主要目標在於長遠經濟規劃

2021年相對較低的經濟目標實際上有助於保持2021和2022年增長的相對穩定。

By: Alicia García-Herrero Topic: Global Economics & Governance Date: March 12, 2021
Read article More on this topic More by this author
 

Opinion

Anchoring expectations as Two Sessions’ main objective

Interestingly, the growth target for 2021 is pretty humble: over 6 percent for 2021, while most forecasts hover between 7 and 10 percent.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: March 10, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Will China fall into the middle/high income trap?

The middle to high-income trap in East Asia and its China dilemma.

By: The Sound of Economics Topic: Global Economics & Governance Date: March 3, 2021
Read article More on this topic More by this author
 

Opinion

外國投資者可能會放緩在中國債券市場的步伐

總體而言,誘人的息差縮小和信貸風險的上升可能會削弱此前中國債券的優勢。儘管中國仍在推動債券市場多元化,但越來越多的中國企業被實施制裁對2021年來說並不是個好兆頭。

By: Alicia García-Herrero Topic: Global Economics & Governance Date: March 3, 2021
Read article Download PDF More on this topic
 

Policy Contribution

China’s state-owned enterprises and competitive neutrality

The concept of competitive neutrality can be used to assess how far a market is from being a competitive environment. In China, competitive neutrality is lacking, with state-owned firms favoured in most sectors, even over Chinese private firms.

By: Alicia García-Herrero and Gary Ng Topic: Global Economics & Governance Date: February 23, 2021
Read article More by this author
 

Opinion

Will COVID accelerate productivity growth?

The COVID-19 pandemic has prompted an increasing number of rich-country firms to reduce their reliance on global supply chains and invest more in robots at home. But it is probably too soon to tell whether this switch will increase productivity growth in advanced economies.

By: Dalia Marin Topic: European Macroeconomics & Governance, Global Economics & Governance Date: February 10, 2021
Read about event
 

Past Event

Past Event

Carbon Border Adjustment Mechanism: Greening the EU trade?

Assessing CBAM from a trade perspective.

Speakers: Suman Bery, Luis Garicano, Emily Lydgate and André Sapir Topic: Energy & Climate, Global Economics & Governance Date: February 4, 2021
Read article Download PDF More on this topic
 

External Publication

China and the WTO: Why Multilateralism Still Matters

An examination of China’s participation in the World Trade Organization, the conflicts it has caused, and how WTO reforms could ease them.

By: Petros C. Mavroidis and André Sapir Topic: Global Economics & Governance Date: January 28, 2021
Read article Download PDF More on this topic
 

External Publication

Getting America Back In The Game: A Multilateral Perspective

How can friends of the multilateral system re-engage the United States under President-elect Biden?

By: Richard E. Baldwin, Chad P. Bown, Jonathan T. Fried, Anabel González, André Sapir and Tetsuya Watanabe Topic: Global Economics & Governance Date: January 28, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

A rushed deal or a rush to judgement?

The Comprehensive Agreement on Investment (CAI) is supposed to improve market access for European companies operating in China and to ensure a level playing field, as well as reciprocity. Does it fulfil such expectations?

By: The Sound of Economics Topic: Global Economics & Governance Date: January 27, 2021
Load more posts