China might be the workhorse of the world and its second-largest economy, but it’s not a global superpower. Not yet anyway. Before it can take its rightful place at the international top table, it must transform its institutions, liberalise its currency and address the yawning gap between the urban rich and rural poor.
These were the challenges highlighted by Bloomberg Television economics editor Linda Yueh at the ACT summer keynote event in the broadcaster’s London headquarters at the end of June.
Yueh pointed out that despite China’s economic might, it remains one of the poorest countries in the world, ranked 106 in per capita income, with an average income of $4,300. And the gap between urban and rural incomes has widened over the reform period of the past 30 years. Rural incomes are approximately a quarter of urban incomes, an issue that China must confront. “No country, however populous, can afford to have second-class citizens,” Yueh told attendees. Large-scale corruption and land grabbing are also problems for China’s rural populace.
Back in 1980, China wasn’t forecast to become the world’s second-largest economy. But the country, which is home to a fifth of the world’s population, has doubled in economic size every seven years for the past three decades. Botswana, with its stash of diamonds, is the only nation that has grown faster during that period.
No country, however populous, can afford to have second-class citizens
The drivers for China’s growth are the string of agricultural and economic reforms it has undertaken since the late 1970s. But reform of its political, financial and legal institutions has lagged behind and that is what is now holding the country back, said Yueh. She also warned of weaknesses in the Chinese banking system and said there was a risk of a banking crisis as a result of non-performing loans made to state-owned enterprises in the 1990s. China is in the fortunate position, however, of having over $3 trillion in government reserves, which it could use to recapitalise its banks if necessary.
China’s policy at present is to internationalise its currency, the renminbi, so that there is greater global use of it for trade purposes. This is not the same as liberalising it, which would mean the currency is freely convertible and floating.
“The Chinese are not clear they want to liberalise,” said Yueh. “They want to see if they can make the renminbi tradeable offshore without opening up their financial sector that has its own fragilities.” According to Yueh, China faces three main challenges with renminbi internationalisation. It lacks depth in financial markets, it needs to reform its banking system and it may not be sufficiently ready for the ‘exorbitant privilege’ of being a reserve currency with all that implies. She added: “And they don’t want to be Japanese yen, which is not a reserve currency, but is one of the six most liquid currencies in the world. Then you get volatility without the benefits such as lower borrowing costs.”
Falling consumption is a problem for China. Like their peers in the Western world, its corporates have been saving. The share of income going into labour is less than the share of income going into capital, which effectively means they are not creating enough jobs. Meanwhile, Chinese authorities want to create a broad spectrum of jobs that encompasses skilled, high-end jobs through to low-end jobs, which will create opportunities for Western expertise. “China wants to attract foreign expertise to increase services as a percentage of GDP,” said Yueh.
China is, without doubt, a superpower in the making, but the next three decades will be crucial to its development. During that time, it needs to restructure its economy, establishing productivity and innovation as growth drivers, address the income gap between urban and rural dwellers and reform its institutions. If it has achieved all this by 2040, said Yueh, “that’s when China will have arrived as a global superpower”.
She added: “Will the boom end? Yes, but not for some time yet.”
For more information on events organised by the ACT, see www.treasurers.org/events
Sally Percy is editor of The Treasurer.