The global financial crisis presents an opportunity for China to seize the leadership of the globalization movement and become a worldwide center for goods, services and capital. The crisis could catalyze a new China boom that could last a decade or longer, and turn China into the world’s largest economy — and a developed country — within two decades.
China has long been a bottom feeder in the global economy. Making low-cost, labor-intensive products has brought it safety and growth.
Australia, Brazil and Russia sell natural resources to China in return for cheap manufactured goods. Japan and Germany sell expensive cars and technology to China in exchange for cheap manufactured goods. And America just hands over dollars for goods and services, and gets them back selling derivatives like collateralized debt obligations, backed by inflated US house values, to foreigners.
The global economy has run like a motorcycle, with American consumption as one wheel and China’s savings as the other, with everyone else piled up on top.
The sustainability of this world depended on foreigners believing in the Wall Street debt instruments that paid for America’s imports, while keeping inflation at bay.
But, three years ago, surging oil prices brought inflation, which tightened the economy and burst the US property bubble. It took another year for the subprime market, and another still for financial derivatives, to blow up. The resulting crisis has destroyed Wall Street’s credibility. The wheels have well and truly come off the motorcycle economy.
The US now offers the world, and China in particular, a plan for recovery: buy my Treasuries, Uncle Sam will give the proceeds to the American people to spend and your exports and your economies will hopefully recover. The recovery plan tries to put the motorcycle economy back on the road by replacing American households with the federal government.
Accepting this offer is not in China’s best interests. First, the plan may bring modest growth for a few years but will be followed by another, bigger crisis in the US Treasuries market. Second, instead of taking America up on its offer, China can start attracting investment as part of its trade-led development model. In short, it can start competing with the US for money, rather than just raising dollars by selling goods to the US.
China has been attracting foreign capital for some time. But this has been mainly to improve its production capacity, especially in the export sector. The new strategy calls for foreign capital to fund China’s economic capacity in anticipation of generating profits from richer Chinese consumers in the future. It would help China to shift its economy onto a consumption footing without sacrificing growth.
China is in a good position to replace the US at the center of globalization: with little debt, enormous savings and its sheer size, its growth potential is vast.
Its current per-capita income of USD 3,300 could be raised to USD 10,000 within two decades through a combination of growth and currency appreciation. At the same time, its gross domestic product could rise from its current USD 4.3 trillion to USD 13 trillion in today’s dollar terms. Such an increase would offer plenty to investors who bet on China’s future. This is why China can succeed in changing its growth model.
To engineer the transition, China must create a first-world environment for capital flow and pursue an aggressive urbanization strategy to anchor domestic consumption. First, China should fix a date, preferably within five years, for floating the RMB; that is, forgoing accumulating foreign exchange reserves and making the capital account freely convertible.
Such a change would require the economy to modernize in many ways. As money could travel freely, only a first-world environment for investment would attract and keep money at home. The rule of law would need to be strengthened enormously to make the new system viable. A corollary is that arbitrary administrative power would have to be severely limited. Fixing a date for currency convertibility would be similar to joining the World Trade Organization almost a decade ago: it would set in motion a new wave of reforms.
Second, as China succeeds in attracting foreign money, it must have a strategy to turn it into efficient economic growth. Otherwise, the money would be used for blowing bubbles, which could bring down the country.
The anchor for domestic demand must be urbanization. To become a developed country in two decades, China must aim to increase its urbanization to 75% by then. Moreover, urbanization must be viable in the long-run; the system needs to change so that migrant workers become rooted in cities.
China’s urbanization strategy should focus on building 30 mega-cities of more than 20 million residents each. These cities would have the right to issue bonds to fund their development.
Because infrastructure in these cities would benefit from an economy of scale, the environment and job market would benefit, and the cities would have enough tax revenue to pay off their bonds. When money was plentiful, they would have easy financing and could accelerate urbanization. When money was scarce, they would face high funding costs and could slow down in response.
Basically, China should turn its urbanization into a sponge for global capital. Shifting the rural population into big cities is the only way for the nation to modernize.
The global financial crisis is casting a shadow over globalization. Developed economies may resort to protectionism to keep jobs at home, leading to a vicious cycle of recession and further protectionism.
China is in a position to carry the baton for globalization. This is a unique chance to become a developed nation within a generation.
via :
http://www.cibmagazine.com.cn/Columnists/Andy_Xie.asp?id=865&driving_the_world.html
