14 August, 2015
China spent much of mankind as the world’s most prosperous country. Now it is back on top. But it isn’t the China many expected at the turn of the century: one with double-digit growth, a powerful military and dominant corporations. Neither has it supplanted the U.S. in terms of soft power and the cultural beats that help define empires. On this measure it is even further off.
In short, it may have overtaken the U.S. this year as the world’s biggest economy in terms of purchasing power parity, but it is not a true 21st Century super-power. Not yet.
Instead, the People’s Republic remains focused on shoring up a faltering economy, taming an overheating property bubble and jealously protecting its borders.
Add to this the political battle to eradicate corruption from the upper echelons of government and the emergent picture is of a country fighting itself and others for an identity.
The picture looked a little different at the turn of the century when China’s first five- year plan of the 21st Century called for broad reform, foreshadowing the difficulties the country would have in terms of the balance of its economy.
It called for a shake-up of its state-owned enterprises, an end to business monopolies, the development of its own technology expertise and the embracing of foreign investors.
“I can’t be sure that 2014 is going to be China’s year, or 2015 will be China’s year, but I have no doubt that this will be China’s century.”1
Lloyd Blankfein CEO, Goldman Sachs
The global financial crisis of 2008 should have hastened this sea change as investors searched for alternatives. The fact that it hasn’t, highlights the difficulties China has faced in connecting with the outside world.
Crucially though, it also suggests an economy more in tune with reality than before; one trying to find the middle ground between strong growth and responsibility.
Fifteen years into the new century and SOEs are indeed being reformed, China’s technology groups are making huge strides home and abroad and foreign investors are being afforded new opportunities to take part.
The economy is faltering but is still outperforming most other countries. GDP growth reached a giddy 10.4% in 2010 and has fallen steadily since to 7.4% in 2014.
Although this is the lowest level since 1990, it is still way short of the collapse some have predicted.
Those predictions typically focus on China’s overheating property market, which has displayed signs of bursting this year with the near- defaults of property developers’ bonds.
“Near default” is another issue.
The implicit guarantee offered by the Chinese government has been a major distortionary factor hampering the development of China’s markets, clouding investor judgment and fuelling a surge in speculative hot money.
The fact that Beijing is now trying to sever this in many parts of the economy is the surest sign that a maturing government is attempting to meet the world halfway while managing a downturn rather than inviting collapse.
Politically, the government — President Xi Jinping in particular — is rooting out corruption, with civil servants, businesspeople and other high-profile luminaries being punished. It has also investigated companies listed (and listing) on its stock exchanges in an effort to dampen inflated valuations.
Part of the drive is to encourage the world that the country is getting its house in order as it continues to open up parts of its economy to foreigners — slowly of course.
The economy is faltering but is still outperforming most other countries. GDP growth reached a giddy 10.4% in 2010 and has fallen steadily since to 7.4% in 2014.
The Shanghai and Shenzhen free-trade zones, and the Hong Kong- Shanghai (and soon Shenzhen) Stock Connect schemes allow foreign and domestic investors to dip their toe.
Speaking of foreigners; China is relatively new to the foreign relations game and many had expected a dramatic escalation of aggressive tactics from China in the Asia region.
But disputes over islands and fishing waters with the Philippines, Japan and others have largely been peaceful and its “One Belt One Road” strategy will see a reopening of the Silk Road to Central Asia and Europe.
China also continues to fund projects in Vietnam, the Philippines and Indonesia, while its state-owned banks have started lending money to Indian corporates.
Perhaps the greatest sign of its financial and political maturity is the Asia Infrastructure Investment Bank (AIIB), which China is organising.
In spite of some nervousness and opposition from the U.S. and Japan, it is being embraced across the region as an alternative to the U.S.-centric World Bank and ADB.
The key issue for China as the century unfolds is to convince the world it has a compelling idea or set of ideals worth adopting. The AIIB is a good start.
China also continues to build ties with the U.S. business world (Alibaba, Tencent), is building management expertise by buying European assets and continues to play an active role in developing projects in Africa.
China’s changing relationship with Australia is another case in point and highlights the Middle Kingdom’s efforts to rebalance its economy from low-end manufacturing to consumer goods.
In the early part of the 21st Century — at the height of the commodities boom — Chinese groups made plays for Australian miners, drawing suspicion from Canberra.
The sentiment threatened to spill over into hostility at times but the end to the commodities boom coupled with the rebalancing of China’s economy has changed the game.
Australia’s dairy and agricultural groups are now perhaps more important as China seeks to secure food supplies for its burgeoning middle class.
The usual opposition exists but there are signs many in Australia are adopting a more common sense approach to the attention.
Furthermore, this year marks the 40th year of diplomatic ties between the two countries and a key free-trade deal was signed at the end of last year after a decade of talks.
This should give Australian companies access to potentially lucrative Chinese industries as well as access for Chinese companies to key investment projects in Australia.
This economic rebalancing is helping to define many of China’s moves in the political and business spheres.
In the latest five-year plan, which will take the country up to 2020, the leadership will seek to further develop the central and western regions and its ties with Central Asia and Europe through the re- imagining of the Silk Road.
The success of the plan will help to better define the parametres to Chinese power. And, with the U.S. recovery uncertain, the next five years are crucial for the world.
Perhaps the key question is not one of politics or economics.
The U.S. didn’t just become the world’s most powerful country through finance; it also exported an idea in the “American Way”.
The key issue for China as the century unfolds is to convince the world it has a compelling idea or set of ideals worth adopting. The AIIB is a good start.
In the meantime, in the early days of the century, 7% economic growth will have to do.
Lloyd Blankfein, the CEO of Goldman Sachs, summed things up nicely when he spoke of the China question: “I can’t be sure that 2014 is going to be China’s year, or 2015 will be China’s year, but I have no doubt that this will be China’s century.”
1 Article in Bloomberg Business (http://www.bloomberg.com/news/articles/2014-11-05/goldman-s-blankfein-sees-china-s-ce
For further information, please contact:
Rod Sutton, Chairman, Asia Pacific, FTI Consulting
rod.sutton@fticonsulting.com
