The Chinese Model and The Global Crisis

1. The Chinese Model and The Global Crisis Professor Shaun Breslin

2. Schizophrenia and the study of China’s political economy International vs domestic Economics vs politics/society Schizophrenia and the study of China and the Global Financial Crisis China thought of as a potential model for others….. …. but a greater focus in China itself on the failings of the model assertive china promoting its “core interests” … ….. but also assertions of China’s relative lack of development and challenges to political and social stability Multiple voices of China Not just the monolithic single interest and single view and voice that its sometimes easier to think it is Real debates in China over the nature of its global role; what it CAN do and what it SHOULD do Managing global expectations? China and global public goods Lessons of the crisis globally powerful but domestically fragile (though perhaps not as fragile as sometimes appears)

3. Why Change the “model”? Context No.1 - The Party’s view of the Party’s position Sept 2004, 4th plenum 16th CC china’s ruling capacity zhizheng nengli执政能力 the party as hyper sensitive? the role of the central party school a constructed discourse of danger? CCP = Stability = Growth democracy = chaos A new political paradigm – democratisation of authoritarian rule A new “scientific” economic paradigm environmental sustainability social stability (inequality, HEW, migration, etc) “irrational” development Yu Yongding on local leaders and “growth” Roland Berger on overcapacity and duplication “quality” of export growth – dominance of processing trade where are the national champions? Investment and innovation – glass half full or half empty? Changing notions of security …. from guns, bombs and bullets to economics and resources 1997 and the Asian regional crisis (crises?)

4. Though some strong (security) continuities The unipolar global order, US hegemony and the “China threat” perceptions of “globalisation” Wang Yizhou, Wang Zhengyi, Wang Yong etc and the failings of traditional IR Wang Hui, Wang Ning, Chen Xiaoming, Zhang Yiwu etc and the search for “indigenisation” of thinking saying no, being unhappy and demonisation “Of the myriad threats identified by these experts as potential threats to China’s economic security, five core themes stand out: (1) challenges to the competitiveness of Chinese enterprises and economy, (2) issues relating to the security of resources vital to the economy, (3) questions to the health of China’s financial infrastructure, (4) security issues relating to its socio-economic development, and (5) economic security issues stemming from its embracing of free trade agreements and an open market economic system. “ Ben Yeung

5. How export dependent is China? China in 2007 (ie: pre global crisis) domestic consumption = 38.6 per cent of growth investment = 37.7 net exports = 22.7 domestic consumption = 36 per cent of GDP (down from 60s in 1990s) exports = c.39 Anderson - the myth of export dependence because of processing trade domestic value added = c20 per cent of GDP (take out value of imports from domestic sectors = 10 per cent) Cui and Seyd – misses the increasing importance of “domestic” exports Cui, Shu and Su – exports a key driver of domestic consumption and investment Akyüz – exports generate 50 per cent of growth when the export component of “spillovers to domestic consumption” and the “knock-on effects on domestic investment” are added in (the “better” the quality of global engagement, the greater the vulnerability; the shallower the engagement, the greater the insulation from global shocks?)

6. Hyper-sensitivity to export growth? 1997 and the response to the decline in the rate of export growth to 11% Uneven distribution of exports Low margins in a number of export sectors Exports, unemployment and rural poverty “Although the economy has maintained double-digit growth for years, fixed-asset investment and exports have dwarfed consumption as the two pillars of expansion. With global recession clearly in view, China must sustain itself by exploiting the domestic market to offset weaker demand abroad” (People’s Daily 2008) Yao Yang and the “end of the Beijing Consensus”

7. Context No.2 – The distribution of (economic) power in China 1980s and early 1990s - growth of local financial autonomy (though unequally distributed amongst provinces) 1994 onwards – redressing the imbalance fiscal reforms fee to tax reforms reforming the financial sector towards central regulation debt to equity and recapitalisation 2004ish onwards – on (not) slowing economic growth Wen Jiabao on 7% growth in 2007 2007-8 – on (not) changing the pattern of export growth

8. Monthly % changes in exports (year on year), October 2008-Nov 2009 Source: Ministry of Commerce

9. China’s response to the global crisis Fiscal Expansion – not just the $US4 trillion but the combined total of local government fiscal stimulus plans that collectively announced a barely believable US$18 trillion worth of stimulus in 2009 ….. ….. and other measures for the Promotion of Domestic Consumption – divided into formal support (subsidies to aid rural consumption, tax breaks on some automobile purchases etc) and informal (state entities encouraged to buy – and buy Chinese) Exchange rate policy – a cause of much debate and Sino-US friction in particular…. ….. and other measures designed to Protect and Support domestic interests from international competition. Both European and US surveys have both concluded that there has been an inward turn and it is harder to do business now in competition with domestic companies than before the crisis Monetary policy – 2008 witnessed a dramatic shift from interest rate rises to fight inflation to interest rate cuts and, through Central Document 18 attempts to restrain credit growth over the previous five years were removed as banks were encouraged to lend to keep the economy going. By the end of 2009, new bank loans in China had reached RMB9.6 trillion with about half funding infrastructure projects via local investment platforms (difang fazhan rongzi pingtai 地方发展融资平台)

10. China’s Successes 8.6 per cent growth From Socialism saving China to China saving socialism The validity of the “Chinese model”? Increased influence in Africa, Latin America and Middle East? Back at the high table of global politics G20 and IMF quota reforms – but only the start Zhou Xiaochuan on “super-sovereign reserve currency managed by a global institution” Spanish bonds, Greek trade and economic influence in Europe towards a new round of (SME) outward investment? China’s foreign currency holdings as diplomatic weapon mutually assured economic destruction, but deterrent capability Swaine and China’s “core interests” (核心利益hexin liyi) maintaining the “state system and national security” “sovereignty and territorial integrity” “the continued stable development of China‘s economy and society” China’s Monroe moment?

11. China’s Challenges From growth to development back to growth again? Not wholly true cause of Increasing funding for welfare, development of infrastructure to help develop interior, promotion of rural consumption, environmental projects etc but the will and the ability to change course? The return of (unevenly distributed) local debt as high as 400 per cent of local GDP ? On Bubbles and land investment in real estate equally roughly 11.5 per cent of GDP in 2009 bank loans “underwritten” by rising prices of government owned land NPLs and bubbles Not just when, but how to slow growth m2 expanded again in 2010 – c20% The politics of currency appreciation dealing with inflation and dollar denominated imports doing things on China’s terms and not being seen to bow to pressure

12. Implications/Conclusions Lets not exaggerate – its easy to talk in extremes when it comes to china – collapse or superpower, both by tomorrow morning Economy easy to expand but harder to control Importance of local governments – Wen Jiabao, its nothing new and has been an issue since the 80s powerful interests benefit from the status quo How committed is the leadership to really changing pattern of growth Growth in the DNA of economic actors Will short term social stability issues always trump long term trajectories How able is the leadership to change it ? An outward turn vulnerabilities and resource security; towards food security? expect a new wave of outward investment – smaller companies going West The need for political reform/democratisation with Chinese characteristics An inward turn? guojin mintui 国进民退 chambers of commerce and doing business in China

13. Towards real decoupling? China as developing country, only 103rd in a league table of global per capita GNP, has over 150 million people living in poverty, and is reliant on foreign companies to produce most of its export value China to focus on its own problems and own people “China’s primary responsibility lies at home; that is, to develop the country for the welfare of 1.3 billion Chinese people. Improving the welfare of the Chinese people is not only the primary responsibility of Chinese state domestically, but also has tremendous international implications” Chen Zhimin Nationalism and the global economy The appeal of the Chinese “model” or the decline of the Western hegemonic model? A Neo-listian developmental state with Chinese characteristics?