Jim O'Neill: How Does China Respond to External Shocks?
One of the key issues that China has had to come to grips with in the past decade, is how to deal with shocks from the rest of the world, particularly of course, those emanating from the U.S., or the EU, if it were collective, as these are the other two parts of the world that are large enough to cause significant disruption in terms of direct trade, as well as indirectly through the knock on effect to other countries. It is of course the case that a significant shock could emanate through a significant tightening of global financial conditions, which in addition to starting from either the U.S. or EU, could come from a contagious risk in financial markets including in other so-called emerging markets, such as Argentina or Turkey.
Now given China’s size, both in terms of its population and gross domestic product (GDP), in principle, it is in a much better position to deal with any such shock, whichever variety it is from above, but whether it can will depend on the coincidental priorities in terms of domestic policy, especially monetary and fiscal policy priorities, and in addition, what are the current major structural policy priorities.
In the past 30 years, I have been generally extremely impressed with how China has dealt with two big shocks in particular, firstly the Asian crisis in 1997-98, and then the global financial crisis in 2008. In 1997-98, at the core of the contagious domino of other Asian countries being sucked in to the twin burden of collapsing currencies, and higher dollar debt payments, was the underlying weakening of the yen versus the dollar. And I recall the crucial indirect role that China played in persuading the then U.S. Treasury Secretary, Robert Rubin, that they should signal help to stop yen weakness, in order to stop the risks of a yuan devaluation, which could escalate the crisis to a whole new level. The U.S. indeed, subsequently intervened, and that, in my view was the beginning of the end of that crisis.
In 2008, China was hit with a more conventional shock with the global financial crisis, and the rapid shift into recession of the U.S., as at the time, China was exporting a very large amount of cheap low value added exports to the U.S., indeed, close to 10% of China’s GDP. I have often reflected that, in an odd way, that crisis helped China realize that it needed to reduce its dependency on cheap value added exports, especially to the U.S. 10 years on, China exports a lot less as a share of its own GDP, much less to the U.S., and of course, its overall current account surplus has virtually disappeared. But over that same time, its economy has more than doubled in size, and the growth of its own consumer has essentially become a central engine to growth and a big helpful role to the world.
I spell all of this out in detail, because today, China faces two shocks from the rest of the world, and this is the case at a time when China’s debt-to-GDP ratio has risen notably in the past 10 years, partly because of the fiscal stimulus that came in 2008-09. And of course, China has embarked on a plan to reduce its corporate debt as well as that of its big local authorities. The two shocks are the Trump-led trade tariffs, which appear to be building into an attempt to cajole other Western countries to also get tougher with China about its trade practices. But there is also, another, more subtle shock that is building, which relates to one of China’s own priorities, namely the so called BRI, or One Belt One Road.
China needs to think smartly about how to respond to each, as well as to explore the internal scope for a suitable — non-debt exploding — fiscal policy response. With the U.S.-led move on trade restrictions, I think China needs to consider some different practices as to how its companies are supported by its government in global markets, as it is here where the U.S. will find a sympathetic ear from other countries. This is more important than the direct tariffs from the U.S., not least because as I said, exporting to the U.S. is way less important than it was. And there are some issues that China needs to recognize.
On the other dilemmas however, is what I would call “soft skills diplomacy.” Many other countries, including some neighboring ones, are worried that BRI is not really something to their own long-term true structural benefit, and is not as “ win win” as China publicly portrays. So my suggestion is that President Xi’s office should have their next BRI convening with other key regional leaders, and crucially invite other countries to offer recommendations for forthcoming stages of BRI. What is at stake is potentially massive benefit to all, just for example if India, Pakistan, Bangladesh could all start to trade more freely with each other, and China, the boost to regional trade, and world trade, would be a massive “ win win” and reduce the relevance of the U.S. even further.
I suspect, and truly hope, that just like in 1997 and 2008, China will rise to the challenge.
Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former U.K. treasury minister, is honorary professor of economics at Manchester University and former chairman of the British government’s Review on Antimicrobial Resistance.
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