New Changes in the World Economy and the Challenges Facing China

China International Studies | 作者: Jiang Yuechun | 时间: 2014-03-28 | 责编: Li Xiaoyu
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By Jiang Yuechun

 

 

The overall world economy grew slightly weaker in 2013 than in previous years. As developed economies like the United States, Europe and Japan experienced slow recoveries, and as emerging economies underwent a general slowdown in economic growth, slow growth unfolded in major economic blocs, with different growth speeds predominant in different regions. Given the United States, Europe and Japan’s strong promotion of trade liberalization, and various frameworks of cooperation competing for development in the Asia Pacific, regional cooperation has entered a new phase of vigorous and accelerated development. China’s external economic environment is thus becoming more complex.

 

I. Major Economies Are Undergoing Multi-speed Growth and Economic “Engines” Might Shift Gears

 

The year 2013 witnessed many changes in the development of world economy, most highlighted among which was the structural shift of economic growth between developed economies and emerging economies. The role of emerging economies as the engine of global economic growth relatively declined and the US, Japan and other developed countries once again became the main engine of world economic growth.

 

1. US economy underwent a moderate recovery but there were still uncertainties.

Since 2013, with the fiscal sequestration entering into force in the US, a trend of negative growth unfolded in government spending, and the rise of personal tax rates was expected to have a negative impact on personal consumption. Nevertheless, since 2013, a number of economic data in the US have been getting better and overall situation has become significantly warmer. According to the latest data released by US Department of Commerce in December 2013, US GDP for the third quarter of 2013 grew by 4.1% in the final value, being not only higher than the previous two quarters of 1.1% and 2.5% respectively, but also the highest level in nearly two years.  Specifically, the growth rate of business investment exceeded 4%, and the growth rate of consumption was 2%, higher than the previous corrected value of 1.4%. It is worth mentioning that the GDP growth attributed to expenditures of non-government sectors in the first two quarters of 2013 was 1.92% and 2.68% respectively, higher than the overall GDP level, indicating that the normality of government spending supporting economic growth is being changed in the US. As of September 2013, US unemployment rate fell to 7.2%. After adjustment for six years, US real estate market continued to recover and rise in both volume and price in 2013. Sales of existing homes rose for 22 consecutive months on the year-on-year basis, which indicated the continued recovery of US housing market. The rebound in the property market not only promoted directly the GDP, but also supported household wealth and consumption, led the development of related industries including construction, upholstery and retailing, and further enhanced the ability of US economy to cope with the impact of fiscal austerity. The above mentioned achievements of US economy can be mainly attributed to the crucial supporting role played by personal consumption, private inventories, exports and growth of fixed asset investment. Particularly, the marked growth of spending in equipment and software indicates that the trend of enterprises expanding production is becoming clear. Given these favorable factors, coupled with the support from consumer spending in the shopping season, the growth rate of US economy in the fourth quarter would remain fairly high.

According to its trajectory, US economy will still face some uncertainties. The first problem is unemployment. Although the unemployment rate continued to decline, the situation of employment was not going well. US unemployment rate fell to 7.2% in September 2013, the lowest since November 2008, but the labor force participation rate still remained at 63.2%, the lowest in 35 years. The nonfarm payroll and initial jobless claims were still unstable, indicating the lack of momentum for recovery in US job market. The second problem is the real estate market facing a tight financial environment. As the 30-year mortgage rate increased, business and individual financing costs rose significantly, which to some extent suppressed the property demand and led to stagnation in new home sales. In July and August 2013, personal consumption expenditures grew by 1.3% and 1.2% respectively on the year-on-year basis, but there was no significant growth in real average disposable income. Since the third quarter, the savings rate rebounded, indicating the lack of confidence of American families in the future. In addition, the problem of US sovereign debt was not alleviated and was still deteriorating. According to the figures released by US Treasury Department, quoted by The Washington Times, as of October 2013, US national debt had reached $17.075 trillion, exceeding the government-mandated ceiling of $14.29 trillion. Whether the Democratic and Republican Parties can reach an agreement on raising the ceiling in the future was of great concern.

 

2. Japanese economy was steadily recovering, but the outlook was hardly optimistic.

Since the enforcement of “Abenomics”, the yen has depreciated by about 20%, the Nikkei Index has risen by 70% at its peak, Japan’s exporting capacity has enhanced and personal consumption has significantly grown. In the first two quarters of 2013, Japan’s GDP growth rate reached 4.3% and 3.8% respectively. Impacted by the end of the depreciation of the yen and the violent fluctuation of the stock market, the annualized GDP growth rate on quarter-on-quarter basis in the third quarter was 1.9%, higher than the estimated 1.7%, but the slowdown was significant compared to the previous two quarters. Of the 1.9% growth, 1.4 percentage points were from public investment, with a contribution rate of more than 70%. In addition, private real estate investment has become a hot spot with a growth rate of 2.7%, indicating that consumers want to buy property before the consumption tax is raised in 2014. The significant rise of real estate prices in the three major business circles including Tokyo has strongly promoted economic growth. Rapid economic recovery has also led to the rise of employment. In June 2013, Japan’s unemployment rate fell to 3.9%, the first time under 4% in 4 years. In July, the significant victory of the Liberal Democratic Party in the Senate election boosted the confidence of the private sector in policy stimulus. A survey released in early August showed that Japan’s consumer confidence index rose by 5 points to 78, its highest level since 2006.

Abe’s “unlimited” quantitative easing and forcing the central bank to engage in the monetary policy of “artificial inflation” were indeed effective to Japan’s economic recovery, but the marked fluctuation in the market was also a cause for concern. Abe administration was faced with two urgent problems: First, once the US withdraws from quantitative easing(QE) policy, the pace of foreign hot money flowing out of Japan will accelerate. Can Japanese economy and stock market, supported by a loose monetary policy, withstand the consequences? Second, Japan’s government debt has been more than 2.4 times of the GDP. Is this stimulus policy of “financial growth” type sustainable? After mid-May 2013, Japanese stock market plunged continuously, business investment remained sluggish, and CPI growth rate was still hovering around 0%, all of which reflected the concern of the market about Abe’s monetary policy. In addition, the expectation of Abe administration raising the consumption tax rate to 8% in April 2014 led to uncertainties of Japan’s economic development.

Either pulling up the inflation rate or devaluing the yen can only stimulate domestic demand and promote exports in the short term. The fundamental solution to the low domestic demand caused by the aging of Japanese society, the weak creativity of Japanese firms, the low labor productivity, the high production costs and other “Japanese diseases” lies in thorough structural reforms.

 

3. Signs of stabilizing appeared in the euro zone, but they hardly indicated the end of recession.

In the first quarter of 2013, the euro zone economy fell by 0.2% on the quarter-on-quarter basis, being in recession for six consecutive quarters. In the second quarter, driven by economic recovery of Germany, France and other countries, euro zone economy underwent a significant change. The trend of decline of personal consumption and fixed investment was reversed, and net exports continued to be the main force driving economic recovery. Euro zone economy grew by 0.3% on the quarter-on-quarter basis, the first growth since the fourth quarter of 2011. EU economy also grew by 0.3%. In the third quarter, euro zone economy grew by 0.1%, amounting to an annualized rate of -0.4%.  Thus, the overall economic situation of the euro zone in 2013 was better than the previous year and signs of a stabilizing economy appeared.

Nevertheless, it was still too early to assert that European economy had entered the recovery phase.

First, euro zone unemployment rate still hovered at a high level. In October 2013, the unemployment rate was as high as 12.1%. Particularly, Greece and Spain reported the most severe unemployment rates, 27.3% and 26.7% respectively. Austria had the best situation with an unemployment rate of 4.8%, followed by Germany and the Netherland, with rates of 5.4% and 5.5% respectively. Youth unemployment was of particular concern. In October, unemploy-ment rate for youth under 25 in the euro zone reached 24.4%, and was still climbing. The figure in Spain reached a record high of 57.4%, just slightly lower than that of Greece, which was 58%. The figures of Italy and Portugal were 41.2% and 36.5% respectively.

Second, both internal and external demands of the euro zone were obviously inadequate. In terms of domestic demands, since the fourth quarter of 2011, household consumption in the euro zone had been declining on the year-on-year basis for seven consecutive quarters, which directly weakened the driving power of domestic demands. In terms of foreign trade, despite the surplus achieved in recent commodity trade, foreign trade situation facing the euro zone is not optimistic for a period of time in the future, affected by weak recovery of global economy, rising trade protectionism and other factors.

Third, economic recovery of the euro zone was faced with other negative factors. For instance, Spain and Italy were still in a recession. After two large-scale, long-period recessions, the output capacity of European countries had been under severe shock, and it might take longer time for them to restore “vitality”. Economic recovery of the euro zone needs substantial progress in structural reforms, including moves to break the rigidity of the labor market to reduce unemployment rate, to create an environment conducive to technological innovation, to speed up construction of infrastructures, to establish a banking union to promote the normal development of the banking system, and so on. Euro zone countries have achieved some progress in the above areas, but a breakthrough transformation has yet to be achieved. It is not easy for euro zone economy to achieve a true recovery. It is estimated that, if global demands improve, European export situation may be improved, and the weak recovery of the euro zone may be sustained. Economic growth rate in the euro zone may reach 1.1-1.3% in 2014.

 

4. Emerging economies are facing more difficulties, hard to repeat the past glory

First, economic growth slowed down in the emerging market countries. Except China’s economy maintaining a growth rate above 7%, other emerging market countries underwent a simultaneous fall for the first time since 2009. In constant prices, China’s third-quarter GDP in 2013 grew by 7.8% on the year-on-year basis, higher than 7.7% of the first quarter and 7.5% of the second quarter,  still leading the global economic growth. From January to September 2013, Russia’s GDP only grew by 1.5%, and its third-quarter GDP growth rate was likely to be close to zero, well below 1.6% of the first quarter and 1.2% of the second quarter. So far, Russia’s economic growth had declined for seven consecutive quarters, and Russian government had significantly lowered the growth rate of 2013 to 1.8%, only about half of the estimate made early that year. According to IMF forecasts, Russian economy would grow by 1.5% and 3% in 2013 and 2014 respectively, encumbered by weak investment and export. This was the third time in 2013 IMF lowered the estimated figure of Russia’s economic growth.  Indian economy slowed down significantly, with its GDP growth declining from above 9% in 2010 to 4.4% in the second quarter of 2013, the lowest growth rate in nearly three years since the Financial Crisis. Although there was a rise in the third quarter, the figure was just 4.8%. Affected by the slowdown in economic growth, China’s demand for commodities and other merchandise declined, which had a great impact on other emerging market countries, Latin American and Southeast Asian countries in particular.

Second, the pressure of inflation in emerging market countries was increasing. The US and the EU depressed the inflation rates at about 2%, while Russia’s inflation rate reached 7%, Brazil’s 6.5%, India’s remained in double-digit for eight consecutive months, and Indonesia’s climbed to 8.79%.

Third, the emerging market countries were affected by international capital outflows. Owing to the economic recovery of developed countries, international capital, short-term capital in particular, began to flow from emerging economies to developed countries, resulting in the “bleeding” phenomenon in the capital market of the emerging market countries.

Fourth, stock markets of the emerging market countries continued to slump. The deepest declines appeared in Indian and Indonesian stock markets, and those in Thailand, the Philippines, Vietnam and Malaysia all broke the record of the longest continuous declines since the Asian Financial Crisis.

Fifth, currencies of the emerging market countries devalued in succession. From May to August 2013, except the yen, the yuan and Hong Kong dollar, other major Asian currencies all devalued, among which the Indian rupee fell by 11%, the Malaysian ringgit by 8.8%, the Philippine peso by 6.5%, the Thai Baht by 6% and the Indonesian rupiah by 5.7%.

According to the trend, given that the emerging market countries face not only adjustment of their own economic structures and other internal problems, but also a weak external economic environment, an export situation hard to improve in the short term and other difficulties, it is unlikely for them to restore high-speed economic growth in the short term.

 

II. The United States is Promoting a “Two-Ocean” Strategy, and Regional Cooperation is Entering a Phase of Comprehensive Promotion

 

Since the Financial Crisis, the awareness of cooperation between countries has significantly increased. Coordination and cooperation in the international community has been strengthened in preventing financial risks, strengthening monitoring and early warning, integrating regulatory frameworks and other areas. Meanwhile, various bilateral and multilateral FTA negotiations have become an important starting point for all parties to expand trade, boost economy and create jobs. Almost all major economies are launching or deepening FTA arrangements to inject new momentum to regional economic growth.

 

1. The US is promoting “two-ocean” strategy simultaneously

The US-led Trans-Pacific Partnership (TPP) has undergone 19 rounds of negotiations, with an average of five per year. The high-frequency, high-intensity negotiations up to 10 days for each round highlight the US power in leadership and control. The number of member states has increased from originally four to twelve, with South Korea, Thailand and other countries eager to join. To the US, joining the TPP amounts to binding US economy closely with Asia-Pacific markets, to maximizing the power of an international bloc, and to providing an important platform and vehicle for the US to “pivot” to Asia and lead in the Asia-Pacific. At the same time, the US announced in early 2013 the launch of the Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations with the EU, and set eight goals, i.e., further opening markets, enhancing US-EU investment relations, eliminating all trade tariffs, dealing with non-tariff barriers, enhancing market access of services trade, reducing differences in regulation and standards, making rules of global concerns and promoting global competitiveness of SMEs. In November 2013, the US and the EU held the second round of TTIP negotiation in Brussels, involving services, investment, energy, raw material and other areas. The key issue of the negotiation was how to coordinate regulations to reduce trade barriers. In terms of economic size, the US and the EU are the largest two economies of the world, accounting for half the size of the global economy. The bilateral trade volume is about $3.8 trillion, about one-third of the total volume of global trade. US investment in the EU amounts to nearly $2 trillion, three times its investment in Asia, and EU investment in the US amounts to $1.7 trillion, eight times its investment in China and India combined. Therefore, once a US-EU FTA with a population of 800 million is completed, it will no doubt become the largest FTA of the world. The US believes that the “dividends” of the existing WTO rules enjoyed by developed countries are attenuating, so it wants to develop international standards favorable to Western countries in services industries, environment and intellectual property rights and other areas where they have clear advantages. By actively promoting the TPP and accelerating the pace of the TTIP, it is promoting the development of regional FTAs in a circuitous and inclusive way. The economic size of the FTAs will account for more than 80% of the world total. If the negotiations succeed, they will inject new momentum to US economy. More importantly, by creating economic circles spanning the two oceans and making and implementing new rules, the US wants to disempower the WTO and regain its say in international trade and the rights to make “game rules”, in order to build a “new order” of international trade under its auspices, dominating the new international trade structure again.

 

2. Japan is carrying out bilateral and multilateral negotiations simultaneously

At the same time of the announcement of joining TPP negotia-tions, Japan kick-started the negotiations for a Japan-China-ROK(CJK) FTA and launched a bilateral FTA negotiation process with the EU. After Japan’s joining TPP negotiations, the total GDP of TPP negotiation participants reached $26-27 trillion, accounting for about 40% of the world total, and the total trade volume accounted for about one third of the global trade volume. Japan’s joining TPP negotiations provides the US with the largest momentum to pivot to Asia, and helps Japan gain the initiative to restore its influence in the Asia-Pacific. The rise of China is a thorn in Japan’s throat. Particularly, China’s highlighted performances in regional cooperation in the Asia-Pacific in recent years have dwarfed Japan’s influence in the region. For this reason, Japan shifted its strategic focus to the TPP despite the appeal of CJK FTA in the north and Regional Comprehensive Economic Partnership (RCEP) in the south. Japan’s joining TPP negotiations was obviously driven more by political considerations than by economic benefits. On the one hand, Japan wanted to further explore markets for its foreign trade by means of TPP negotiations. More importantly, it intended to draw the US closer to Japan in China-Japan-US triangular relationships, while distancing itself from China and distancing the United States from China, achieving a comprehensive binding of Japan and the US in economy and security. On the other hand, with Japan’s participation, the TPP countries wold account for nearly 40 percent of the global GDP and about one third of all world trade, making China look isolated and weakened in Asia-Pacific and its influence checked. Of course, Japan will not give up Chinese market. It will adopt a strategy of simultaneously promoting the CJK FTA and the TPP so as to reap benefits of all trade arrangements and offset risks by making advantage of bilateral and multilateral FTA mechanisms. By so doing, it wants to ultimately achieve the strategic goal of helping the US to check China and revive its glory in East Asia, even in the whole Asia. Therefore, joining the TPP is Abe’s diplomatic move to “hit many birds with one stone”.

 

3. ASEAN-led regional free trade is developing

At the end of 2012, the ASEAN-led RCEP was launched at the East Asia Summit. In May and September 2013, two rounds of RCEP negotiations were held in Brunei and Australia respectively. The negotiating committee held working group meetings on merchandise trade, services trade, investment and other issues respectively. On merchandise trade, all parties focused on the modes of tariff reduction, the chapter structure and elements of the agreement, exchanged views on tariffs and trade data exchange, the rules of origin, customs procedures and other issues, and decided to establish a sub-group on the rules of origin and a sub-group on customs procedures and trade facilitation. On services trade, all parties discussed the chapter structure and elements of the agreement and other issues, and conducted a preliminary exchange of views on the opening up of services sectors some countries were interested in. The working group on investment focused its discussion on the chapter elements of the agreement. In addition, all parties exchanged views on economic and technological cooperation, intellectual property rights, policies on competition, dispute settlement and other issues.

RCEP covers merchandise trade, services trade, investment, eco-nomic and technological cooperation, intellectual property rights, competition, dispute settlement and other areas. By promoting RCEP, ASEAN will integrate and optimize the free trade agreements it has signed with the six countries including China, Japan and the ROK, change the current situation of too much regulation and chaotic management, and ultimately build a high-quality FTA accounting for about half of the world population and one-third of the global GDP, achieving wider trade liberalization and economic integration. The negotiations are expected to complete by the end of 2015.

 

4. CJK FTA negotiations were formally opened

As an important building block of East Asian trade framework, CJK FTA negotiation process was officially initiated in November 2012. In 2013, the three parties completed the first two rounds of negotiations in March and July respectively, discussing the institutional arrangements of the FTA, the range and form of negotiations and other issues. In November, the third round of negotiations was held in Tokyo, Japan. Many issues were involved in the negotiation which included working group meetings on such issues as investment, intellectual property rights and expert dialogues on environment, government procurement and food.

Despite Japan’s participation in TPP negotiations and other unfavorable factors, China, Japan and the ROK finally launched a regular negotiation after ten years’ efforts, which still can be seen as significant progress in CJK FTA negotiations.

China, Japan and the ROK are all major economies of the world and they are major trade and investment partners with and trade markets to one another, exercising close cooperation in the division of labor of the global industrial chain. In 2012, the total economic output of the three countries reached $14.3 trillion, accounting for 20% and 70% of the total economic output of the world and Asia respectively. In the same period, the total imports and exports of the three countries were $5.4 trillion, accounting for 35% of the world total. After its conclusion, the CJK FTA will form the third largest market following the NAFTA and the EU. The formation of the FTA will greatly improve the overall level of trade, and strongly promote regional cooperation in East Asia. According to a forecast, the building of the CJK FTA will elevate China’s GDP by 1.1-2.9%, Japan’s GDP by 0.1-0.5%, the ROK’s GDP by 2.5-3.1%.

In other parts of the world, many bilateral and multilateral negotiations for regional cooperation have also been launched.

 

III. New Changes in the International Economy will Impose Influence on China’s External Economic Environment

 

1. The tide of monetary easing can easily lead to inflation

Since 2008 when the Financial Crisis broke out, the US has for several times launched the quantitative easing policy. In the wake of euro debt crisis, the Central Bank of Europe lowered the interest rate to a record low of 0.75%, followed by a “direct currency trading scheme” and the announcement of unlimited purchase of the sovereign bonds of euro zone member states. In the first half of 2013, Japan’s Abe administration also adopted a monetary policy of unlimited easing. Thus, loose monetary policy has become the path to resolve the huge debt of developed countries. The common feature of the new round of loose monetary policies of the US, Europe and Japan was the lack of upper limit. The US specified for QE3 the scale of the purchase of bonds per month but did not specify the date of expiry, which meant no limit on the total size. The direct currency trading of the Central Bank of Europe set no limit on the amount of purchased bonds and Japan’s central bank also set no limit on the amount of financial assets purchased.

This round of unprecedented quantitative easing policy can in the short term boost market confidence, ease the euro debt crisis and force some money into real economy, but it cannot address the deep-seated structural problems that affect economic growth. Generally, once the debtor uses currency control as the means to address its debt, the creditor may suffer from both shrinking debt earnings and currency disorder. Currently, the real effect of quantitative easing is directly leading to asset price bubbles and “competitive devaluation” of exchange rates, and the vast majority of the cost for exchange rate adjustment that QE generates has to be borne by some developing countries. In the long term, sustained loose monetary policies will exacerbate the excess of global liquidity, further push up commodity prices, and increase the global inflation.

In today’s complex world currency system, it is crucial for China, an emerging developing power having huge amount of foreign exchange reserves and US treasury bonds, to make a full assessment of the risks of potential currency warfare in the future and work out counter-measures. For China, while the yuan is forced to follow a trend of gradual appreciation by the domestic and international economic and political environment, it must maintain a grip on exchange rate and capital flow and strictly prevent the rapid flow of international hot money from impacting the stability of China’s financial system, while further promoting the reform on RMB exchange rate regime.

 

2. FTA strategies of Western powers may affect China’s share in foreign trade

Since 2009 when the US was involved in TPP negotiations in a high profile, the number of TPP member states has increased to twelve. The launch of US-EU FTA negotiations indicates that US global economic and trade strategy after Obama’s reelection has entered the fast lane. To sum up, US strategy is aimed at ultimately building a new structure of global free trade, with both TPP and TTIP negotiations as the driving forces, doubling the trade as the near- and medium-term goal, high-standard and comprehensiveness of free trade regimes as the banner, and regional trade liberalization as the leading task. In the near-and medium-term, this strategy focuses on serving the development of US domestic economy. Particularly, it is aimed at doubling exports by 2014 to increase domestic employment and get the US out of the plight of low-speed economic recovery by means of expanding exports. Thus, US global rebalancing strategy includes not only security and political concerns, but also the direction for the evolution of global economic landscape in the future.

The series of moves of the US that include accelerating TPP and TTIP negotiations and obstructing the economic integration of East Asia indicates a strategic encirclement of China by means of its institutionalized hegemony after the US realized that it was hard to contain China’s economic development through normal economic competition. Against this backdrop, CJK FTA negotiations will be more difficult and tortuous. China should make more objective, comprehensive and long-term considerations when developing a regional economic strategy in the future.

 

3. Increased protectionism may lead to more frictions in China’s foreign trade

In the context of a downturn in the world economy, with particularly the developed countries facing a weak economy and emerging economies suffering a sluggish growth, China still faces a grim environment for exports, which is mainly manifested in the facts that trade frictions China faces are increasing and it is difficult to maintain a sustained and stable external demand. In this regard, China needs to bargain with good reason and to China’s advantage in compliance with the existing WTO rules, and if necessary, implement countermeasures. Meanwhile, China should pay more attention to the transformation of the modes of foreign trade development, while promoting the transformation and upgrading of processing trade, elevating the quality of exported goods, cultivating independent brands and sales channels, improving after-sale service system, making efforts to stabilize and expand emerging markets, and improving the triad mechanism of the government, industry associations and enterprises responding to trade frictions, so as to safeguard the legitimate rights and interests of Chinese overseas enterprises as far as possible.

  

Source: China International Studies January/February 2014 122-138

 

 

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