Yves Tiberghien, Harvard University China and Globalization: Toward a Mutual Transformation

1. Yves Tiberghien, Harvard University China and Globalization: Toward a Mutual Transformation Presentation at the CÉRIUM’s Summer SchoolChina Risen How it changes and change us

2. China and Globalization:Toward a Mutual Transformation Yves Tiberghien Harvard Academy Scholar ytiberghien@wcfia.harvard.edu CERIUM-Summer School, July 5, 2006

3. From this…

4. To this…

5. Preliminary Test - Who are they?

8. Who is this cow-boy?

9. What about this event?

11. And this event?

13. Presentation Outline: • 1. Stakes and Big Picture • 2. Impact of Globalization on China • 3. Some Chinese Vulnerabilities in the Process • 4. Impact of China on Globalization • 5. Some Essential Milestones

14. 1. Stakes: • 1) The process of Chinese modernization has entered a new phase of intense internationalization since 1997. Does it destabilize China? Can the Chinese state maintain control over the process? Is the balance between a communist regime and a market economy sustainable? • 2) Can the global economic system absorb China without getting destabilized? Will levels of national political support last? • 3) Will China’s integration into the international system force a global power transition? Can the transition be managed peacefully?

15. Key Points: • 1. Until Now, China has kept an astonishing degree of control over the process of globalization and has managed to influence the sharing of benefits. • 2. The current path leads to new milestones that may be harder to manage. • 3. The continuation of mutual gains depends on political factors in the US, the EU, and Japan, as well as a wise management of relations with the US.

16. 2. Globalization and China: Many Benefits

17. A/ FDI Flows and Technology Transfers

18. Key Points on FDI flows • Cumulated Total in 2004: $600 billion, much beyond other developing countries • Concentration in a few regions: Pear River Delta, Fujian, Shanghai area, a few cities. • 22% of FDI = M&A • Impact on SOEs: competitive pressures, some crowding out, discipline effects • Impact on the generation of laws and rules • Rise of a transnational elite

20. Wuhan: Citroen Factory

21. B/ Trading Boom

22. A few Key Figures in 2005 • Trade Surplus with the US (=total with world) reached $200 Billion. • 2004: China became Japan’s first trade partner: $200 billion total trade (surplus of $15 bn for Japan) • Enormous production: 85% of world’s tractor production, 75% of world watches, 70% of world toys, 50% of world PCs.

27. C/ Growing Financial Weight • Jan 2006: China’s foreign reserves reached $816 Billion, #2 of world, just behind Japan. Key for stability of US$. • China can influence the world forex markets, just by changing the mix of its foreign reserve holdings. • Growing % of US Treasury Bonds held by China (cf related debates during Katrina last summer).

28. New Fact: Explosion in Chinese Outward FDI • 2004: 8000 Chinese companies present in 160 countries • Lenovo purchases IBM’s PC division • Oil Companies very Active (cf Battle CNOOC- UNOCAL in the US) • Well-Known Names: Huawei (telecom), Ningbo, Haier (electric appliances)

29. Summary of Economic Picture in Context of Globalization • Economic Growth: 10% per Year • GDP (just revalued in 2005) now superior to FR, probably passing UK this year. Will pass Japan in 2020 and the US in 2040. • Chinese growth = 18% of world growth in 2004. • Technological rise • Trade explosion since 1995: #3 world exporter in 2004, 8% of world exports. • Huge impact on world oil market • Large role in all global issues, soon likely in G8 (G9) • Rapid military modernization

30. Economic By-Product: Growing Military Budget

31. 3. Some Chinese Vulnerabilities • Is the hands-on approach to globalization sustainable? • Is the trajectory domestically stable and sustainable?: precarious banks, rising tensions in the countryside, iron rice bowl now broken (xiagang gongren) • Can the regime retain its political legitimacy in the context of SOE restructuring and a social contract in tatters? • Politically, is the regime stable over time? • Risks related to national unity (growing inequalities)

32. Key Point: SOE Restructuring • Since 1997, SOE restructuring has become a key bottleneck for China’s integration in the world economy (development of competitive companies). • Recent acceleration of the process: 58% of SOEs disappeared between 1997 and 2002, 92% of collective enterprises. • Several pathways followed: identification of 1000 national champions, mergers, bankruptcies, or privatization for smaller SOEs. • Use of WTO as Troyan horse?

33. Social Impact • 50 Million workers laid-off between 1997 and 2003 in SOEs • Collapse of living conditions • Concentration in North-East: 27 M workers laid-off, 16% of entire population in Fushun, 7.5% in Shenyang • Many protests, riots, and petitions • Pressure to build a welfare system

34. The Mingong - migrant workers • 140 Million migrant workers with limited legal identity and protection • Still attached to their rural hometowns • Comparative advantage for China or exploitation?

35. Another weak point: the stock market • Created in 1991 in the midst of euphoria • Aim: raising funds for SOEs • Only a third of shares are sold, other 2/3 remain controlled by state directly or indirectly • Weak corporate governance, question marks about quality of regulators, weak minority shareholder protection

36. 4. Impact of China on Globalization • Key lessons: gradualism works, the state has a key role in managing the process, power matters. • Convergence? No! A socialist market economy is compatible with the globalization • Trade: theories of comparative advantage and free trade pushed to the limit, due to size and speed of China’s entry into the trading system. Adjustment takes time and has human costs. • Flying Geese Theory also pushed to the limits • On the interaction between development and democracy, was Lipsett wrong? • The Unknown: how stable is the process?

37. 5. Five Key Debates in Recent Years • A/ The Asian Crisis: salutary role played by China in stopping the domino reaction • Chinese choices come out reinforced • Another lesson: any financial vulnerability can be exploited by other economic powers • B/ Hong Kong’s peculiar role during the Asian crisis

38. Other Debates: • C/ Global Exchange Rates: the Chinese Debate • D/ Energy, oil, raw materials: the role of diplomacy is rediscovered • E/ WTO: rise role played by China within the G 22 group • F/ Global Environment Treaties • G/ GMOs: Pivotal Role played by China

39. A Striking Example: Airbus, dec05

40. Conclusion: • Rediscovery of the role of politics in managing global economic flows. • China is able to benefit from globalization, due to its political and economic power and to its political stability - a state able to manage transition • Challenging some of the key debates on globalization (convergence, loss of maneuvering space) • At the same time, the sustainability of the current equilibrium hangs on international political relations and on the capacity of the current regime to manage a painful social transition (and rising inequalities).