China has good agenda for global growth
Updated: 2015-08-04 08:10
By Michael Spence(China Daily)
President of the New Development Bank (NDB) Kundapur Vaman Kamath (L), China's Finance Minister Lou Jiwei (C) and Shanghai's mayor Yang Xiong attend a opening ceremony of the New Development Bank in Shanghai, China, July 21, 2015. [Photo by Gao Erqiang / Asianewsphoto]
For most of the past 35 years, China's policymakers have set their focus on the domestic economy. 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: 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, and to some extent the BRICS' New Development Bank, established last year. Both banks are obvious alternatives to the Western-dominated World Bank and International Monetary Fund.
Also vital to the new strategy are the prospective Silk Road Economic Belt through Central Asia to the Black Sea, and the 21st Century Maritime Silk Road from the South China Sea, through the Strait of Malacca, across the Indian Ocean to the eastern Mediterranean via the Red Sea.
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 its 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. And with the involvement of the AIIB and the New Development Bank, China has developed what amounts to a multinational development strategy.
Also, by virtue of more than 30 swap arrangements with other central banks (the first was with the Republic of 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 is much more to the internationalization of a currency, but China has already applied to the IMF to have the renminbi included in the basket of currencies that determines the value of the IMF'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 speed the renminbi's progress toward full capital-account liberalization - and thus toward full convertibility.
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.
The author, a Nobel Prize winner in economics, is professor of economics at New York University's Stern School of Business and senior fellow at the Hoover Institution.