China's External Economic Environment in the Next Five Years and Thoughts on Further Opening Up

China International Studies July/August, 2015 pp.51-pp.66 | 作者: Zhen & Li | 时间: 2015-09-18 | 责编: Wang Jiapei
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Zhen Bingxi & Li Xiaoyu[1]

 

 

The next five years will be a crucial time for China’s economic development, which is related to China’s two major strategic objectives: namely, building a moderately prosperous society and realizing the country’s industrialization. China should reconsider its direction and thinking concerning its opening-up strategy in a changing external economic environment, so as to assure steady, sustainable and healthy economic growth during the 13th Five-Year Plan period (2016-20).

 

 

Opportunities and Challenges China Faces in its Opening Up in the Next Five Years

 

 

Over the next five years, China will be confronted with a more complicated external economic environment. Generally speaking, major strategic opportunities for China’s development remain in existence. But its further opening up faces both opportunities and challenges, which are interwoven. To make accurate judgments and to skillfully handle opportunities and challenges is of great importance for China to consummate and implement its opening-up strategy in a new era.

 

1. Four opportunities

First, China faces a favorable external economic environment. The foundation for world economic growth is improving as the US economy enters a new growth period, and China and the United States will be joint leaders in promoting the world’s economic development. Through structural reforms, India and other emerging economies will see fast economic growth. The European Union and Japan will have moderate economic growth. The global economic recovery will in turn boost global demand, which is beneficial to China’s economic cooperation with other countries.

 

The increasing investment in global infrastructure building, the expanding connectivity among countries, especially between China and its neighbors, and the improvement in the business environment overseas, all of these will provide huge opportunities for Chinese enterprises to “go global”. In addition, the development of new energy and the shale oil revolution will proceed, resulting in a steady increase in energy production. The supply of other major commodities is also sufficient. The stabilized prices of staple commodities, especially the calm and downward trend in energy prices, will benefit the world and China’s economic development.

 

Second, the new industrial revolution is conducive to China’s industrial transformation and upgrading. The new industrial revolution, while introducing science and technology innovation and application in China, will also bring permeability effects and obscure industry boundaries, thus forming new formats, new products, new business models and new industries, providing new opportunities for industrial transformation and upgrading. The new industrial revolution will also result in transformation of China’s industrial organization and improve its status in the global value chain and the international division of labor.

 

Historically, China has lost its chances to lead the science and technology revolutions and the Industrial Revolution. Therefore, China should take hold of this opportunity to participate in and play a leading role in the new industrial revolution and new round of economic development. This will help China realize leap-forward development, by transforming itself from a big manufacturing country to a manufacturing power, and from an ordinary “made in China” producer to a smart and inventive producer. As the US economist Jeremy Rifkin has said in his book The Third Industrial Revolution, How Lateral Power is Transforming Energy, the Economy, and the World, China can become a major force in the third industrial revolution and lead Asia into the next great economic era.  

 

 

Third, the new developments in globalization will help China advance its opening up. The resumed growth in world trade and investment benefits the expansion of Chinese business activities overseas and helps China promote its “Belt and Road” initiative. At a time when global multilateral trade talks are underway, China has accelerated negotiations on free trade agreements at both the multilateral and bilateral levels and taken swift steps to implement FTA treaties, such as the upgraded China-ASEAN FTA treaty, the China-ROK FTA, and China-Australia FTA. The construction of new rules for world trade and investment is enabling China to have a bigger say in the setting of rules, and pushing the convergence of rules between China and the United States and the European Union. And this, after all, is good for China’s long-term development. In the next five years, negotiators will speed up the TPP, TTIP and RCEP negotiations, and progress is also expected to be made in the FTAAP talks. Fresh world economic and trade rules are about to come into being, and China can take an active part and play a big role in the rules-setting process.

 

It is necessary to take a rational view and handle properly the existing rules made by the United States and European Union, that means taking an active and constructive approach to the opening up of its service sector, along with strengthened intellectual property rights protection and environmental protection, all of which accord to China’s new reform drive, and on issues such as government procurement, rivalry policy and labor standards, which are all very controversial at the moment, yet can bring long-term benefits to China. China should unite with other developing countries to actively express the opinions and positions of the “South”.

 

Finally, in terms of major power competition, the overall situation is in China’s favor. The world situation has shown that China and other emerging countries keep growing, while the United States and other Western countries are weakening relative to them, resulting in an irreversible trend toward multipolarization. China’s increasing overall national strength will further narrow the economic and trade gap between it and the United States. In 2010, China became the second-largest economy in the world, and it is expected to be the largest economy by 2020. China now ranks No. 1 in the trade in goods, and before long China will become the largest trading country in the world. China became the third-largest destination for foreign direct investment in 2014[2]; in the future, China will increase its direct investment overseas and will rank among the big global foreign investors. Big countries will also increase their coordination and cooperation while engaging in intensive competition. Through bilateral dialogues and multilateral mechanisms, such as the G20, China has stepped up its coordination with the United States, European Union and Japan, and deepened its coordination and cooperation with emerging economies, especially with the BRICS countries.

 

 

2. Four challenges

First, readjustments made by the United States and other Western countries in their monetary policies have increased volatility in emerging countries, bringing added risks to China in its economic cooperation with other emerging economies. Washington’s exit from its quantitative easing monetary policies has created spillover effects. The expected interest rate increase by the Fed by the end of 2015, together with a strong US dollar, will create a volatile economic situation in emerging markets. There will be speedy outflow of capital, continued devaluation of currencies and a slowdown in economic growth in many emerging countries. The Managing Director of the International Monetary Fund Christine Lagarde has warned that emerging markets are set to face a renewed period of economic instability when US interest rates rise this year.[3] According to the Bank for International Settlements, there is a risk that crises similar to those of the late 1990s might occur in emerging markets. Related figures show that, by the end of 2014, BIS members’ cross-border credit to emerging market borrowers reached $6 trillion, increasing nearly 2 times compared with 1999. [4] Since most of the countries along “the Belt and Road” are emerging economies, any turbulent situation in their markets will increase the risks for Chinese investment activities there, and have a negative impact on the “Belt and Road” initiative.

 

Second, the Chinese manufacturing industry faces sandwiching pressures from the return of manufacturing to developed countries and the speedy transfer of industry to other developing countries. On the one hand, the United States and European countries, by taking policy measures for reindustrialization, industrial intra-contracting and improvement of their investment environments, have attracted the steady return of high-end manufacturing and created huge pressures on China to upgrade its enterprises to the high-end of the value chain, posing a challenge to China in its efforts to prolong its industrial chain and to develop its strategic emerging industries.

 

On the other hand, low- and medium-income countries are working energetically to make use of their advantages to attract the transfer of low-end and middle-end manufacturing, and engaging with great efforts in the labor-intensive and resource-intensive industries, posing another challenge to China maintaining and developing its low-end and middle-end industries over the long term. With the rise of the new industrial revolution, rivalry for a commanding position in science and technology and newly-emerging industries is expected to become fierce. At a time when its traditional comparative advantages are weakening, China should take swift steps to establish new comparative advantages in newly emerging industries, so as to avoid a situation in which its competitiveness in the traditional advantageous industries is fading while it is unable to establish its newly emerging industries in a timely manner.

 

Third, the challenges to China posed by the imbalanced free trade development in the world should not be underestimated. The “two wheels” of trade and investment liberalization and facilitation are not running in parallel. Multilateral trade talks are progressing slowly, while regional trade arrangements are developing rapidly, causing fragmentation of the global free trade arrangements. New rules and regulations for the world economy and trade are under deliberation. Protectionism for trade, investment, finance, new industries and others are on the rise. All of these pose unfavorable conditions for Chinese enterprises as they “go global”. Chinese enterprises should build up their capability to cope with risks with improved services and safeguard measures. In the face of increasingly diversified challenges to China’s economic security, China should strengthen its capabilities in risk control and management.

 

Fourth, China has to directly face the challenges brought about by the competition of major powers. In the global economic landscape, it has become a general trend that the countries of the “South” are on the rise and the countries of the “North” are in decline, relatively speaking. However, in terms of the balance of power, the basic posture that the “North” countries are stronger than “South” countries remains unchanged. At the moment, in terms of PPP, the newly emerging markets and developing countries account for 52 percent of global GDP, however, in terms of nominal value by market exchange rate, they account for roughly 35 percent of global GDP only. [5] There exists a huge gap between China and the United States in their respective overall national strength, although the gaps in their economic and trade scale have narrowed remarkably. So far as trade and investment are concerned, China’s trade in services volume in 2014 was only half that of the United States, and FDI stock was only one-ninth that of the United States. [6] What is even more important is that the United States and other Western countries play a dominant role in international setting of rules and in international systems of governance, while China and other emerging countries are still in a passive position of acceptance, whether they like the rules or not. China’s continuous rapid development and its rising strength have impacted the existing international systems, therefore, the Western countries, headed by the United States, have taken more measures to guard against, restrain and maintain pressure on China. Doubts and misgivings about China on the part of some developing countries are also on the rise.

 

 

Thoughts on China’s Further Opening Up

 

 

The 18th National Conference of the Communist Party of China called for the improvement of an open economic system featured by mutual benefits, diversification and balance, safety and efficiency. The third Plenary Session of the 18th CPC Central Committee further called for the establishment of a new and open economic system. In 2013, the Silk Road Economic Belt and the 21st Century Maritime Silk Road initiative were proposed. Reflecting an evolving world as well as the domestic situation, these new opening-up strategies indicate the directions of China’s further opening up in future, and will be put into practice over the next five years. At the same time, taking into consideration the new development trends at home and abroad, China should align the domestic market with the and world market, domestic and overseas resources, domestic rules with the global rules, and promote a new-round of higher-level opening up with innovative ideas, models and policies.

 

 

1. Four objectives for further opening up

First of all, China’s capability of participating in global governance should be improved, and a new-type of global governance model should be established with proactive planning and defensive approaches, featuring shared responsibilities and the promotion of reform at home and appeals-seeking abroad. At present, China is transitioning from a big economic country to a major economic power with new appeals for opening up and increased responsibilities in global governance. Since the global financial crises, China has become a key player in global economic governance. However the United States and European Union have pressurized China to shoulder more responsibilities and intensified restraints on it through rules and regulations, because they fear losing their dominance in the international system. China should stick to the principle of responsibilities commensurate with its capabilities, take an active role in reform of the global governance mechanisms and rules setting, and navigate the global economic order and international governance system in a direction favorable to the developing countries. In global economic governance, China should have a bigger voice, and in rules setting, China should transform itself from an accommodator and follower into a policymaker and leader.

 

Second, China’s capability to lead international cooperation should be strengthened, and the global layout for economic and trade cooperation with other countries should be reinforced, so that a comprehensive mechanism for cooperation between China and the world can be put into effect. China should focus on its “Belt and Road” initiative, and carry out diversified economic cooperation with countries in various regions. From a long-term perspective, China should plan models to deepen the cooperation with the United States and Europe through bilateral and multilateral FTA and investment agreements. Taking into consideration traditional friendships and practical interests, and combining both political and economic factors, China should steadily promote economic cooperation with Latin America and Africa by strengthening the China-Latin America Forum and China-African Forum, and signing FTA and investment protection agreements with countries in these regions.

 

Third, China’s competitiveness in international cooperation should be advanced, making best use of both government and market mechanisms; at the same time, new advantages from China’s participation in world economic cooperation and competition should be nurtured and the comprehensive efficiency of an open economy should be increased. In the face of the evolving situation, China should stress the role of the market, transform government functions, and provide continuous services and guarantees to its enterprises going global. At the same time, China should encourage enterprises to participate in global competition and overseas investment and international cooperation projects according to market principles. China should also further reform and improve its foreign investment management mechanisms so as to minimize government interference in the investment decision-making of enterprises. Meanwhile, Chinese enterprises should adapt to marketization and internationalization, improve their efficiency and become modern transnational companies according to market standards, raise the position of Chinese industry in the global production chain and gradually improve the position of emerging economies in the global chain of production.

 

Fourth, China’s capability to cope with world-wide risks should be improved. China should enhance awareness of potential risks, make accurate evaluations of risks, and step up the establishment of risk-control mechanisms and management, so as to protect economic security in multiple ways. Over the next five years, by expanding its opening up, China is bound to confront many financial, market, and political risks, among which some are predictable, others unpredictable. With China’s expansion of services and financial openness in particular, and with increasing flows of capital and currency and more activities by enterprises and individuals, it is of vital importance China improve its forecasting capabilities and strengthen its precaution and risk control measures and management. China should take steps to make better use of its related coordination and management mechanisms, enhance close interactions between its diplomacy and economy, boost its capability to guard against external impacts and risks through political, diplomatic, economic and legal means, and make great efforts to safeguard major national financial and industrial interests.

 

 

2. Policy proposals for reform and opening up in four fields

 

In the field of foreign trade, equal importance should be attached to trade in goods and trade in services, and FTAs should be built simultaneously at home and abroad.

 

 China should create new competitive advantages while maintaining its advantages in traditional exports. In the global value chain, Chinese exports are basically in the middle and lower end. In the next five years, it should focus on upgrading its traditional export products, encourage innovation and creation, and form new competitive advantages in technology, brands, quality and services, thus speeding up the transformation from “made in China” to “created by China” and “innovated by China”. At the same time, China should expand its trade in services and intensify its opening up. It should speedily develop its trade in services, so as to nurture a foreign trade pattern based on both “services by China” and “made in China”. It should boost its competitiveness in the service sector, enlarge the scale of trade in services, readjust the structure of the trade in services, and nurture the trade in telecommunication, finance, accounting, computer and information services, as well as media and consulting services. To accomplish this, the thresholds for market access in service sector should be further lowered, and the service sector opened in an orderly but rapid manner. China’s overall efficiency in services should also be enhanced.

 

China should expedite the building of FTAs both at home and abroad and coordinate various FTA mechanisms. Great efforts should be made to build the China (Shanghai) Pilot Free Trade Zone, so that new experiences in reform and opening up will be accumulated, which can serve as a solid foundation for China’s participation in higher-level international FTAs. It should persist in strengthening bilateral and multilateral, regional and sub-regional cooperation so as to form a global and high-standard FTA network. High-standard FTA talks reflect mainly the interests and appeals of the developed economies, yet they also represent demands for development of high-level globalization. China’s participation in these FTA talks will help it integrate with greater depth in the global economy and promote its higher engagement in the global industrial chain. However, to this end, China needs to adopt corresponding reform measures. Talks on new issues such as environmental protection, investment protection, government procurement and e-commerce should be speeded up so that a global and high-standard FTA network will be formed.

 

In the field of investment, the emphasis should be on improving the level and effectiveness of two-way investment.

 

When bringing in foreign investment priority should be given to raising its comprehensive effectiveness. In the future, FDI should be used in those sectors which are beneficial to China’s efforts to transform its economic mode, adjust its economic structure and upgrade its industries. Foreign capital should be guided to the technology and capital intensive industries so as to transform the existing industry patterns. To improve the comprehensive effectiveness of the FDI, China should coordinate the opening up of the manufacturing, services and agriculture sectors, as well as a balanced and harmonious opening up of various regions. In managing the FDI, it should liberalize investment access, open up in an orderly way the finance, education, culture, healthcare and other service sectors and loosen FDI access restrictions in related fields.

 

When investing overseas, priority should be given to upgrading capability. China is already among the net foreign investment countries and ranks among the world’s investment powers. This fact calls on China to do more to improve its FDI institutional building with policy promotion, operational direction and investment. So far as the FDI’s layout is concerned, Chinese enterprises should follow the guiding principle of mutual benefits and win-win cooperation, promote readjustment of the domestic structure and industrial upgrading, introduce China’s equipment manufacturing industry abroad, and strengthen international cooperation in industrial capacity and equipment manufacturing. In terms of management, the strategic objectives should be to establish an independent and internationalized production and operation network so that a group of transnational corporations with international influence is created. In providing investment guarantees, the emphasis should be on negotiating bilateral investment agreements with its major investment partners the United States and Europe, so that effective legal guarantees will be provided for Chinese transnational companies to increase profits and avoid risks.

 

In the financial field, reform of the domestic and global financial systems should be promoted in a progressive way.

 

Reform of the international financial system should be carried out actively and international institutional power should be expanded. China should work together with other major world economies to urge the implementation of IMF reform, start reform of the World Bank at a proper time, and push for the inclusion of renminbi in the IMF’s Special Drawing Rights’ basket of currencies. The G20’s role as an important platform for global governance should be strengthened, so as to build a stable long-term governance mechanism. China should make good use of hosting the G20 Summit in 2016, and bring new vitality to the G20’s mechanism building. Efforts should be made to construct a global governance architecture in which the G20 plays the leading role and other mechanisms, such as the IMF and the World Bank, complement each other.

 

An open financial management mode should be created, along with a new financial development mechanism. Taking into account the relatively low degree of opening up in the financial sector, China should set up a management mode of pre-establishment national treatment and a negative list and remove restrictions such as a “glass door” or “spring door”. The negative list should be gradually shortened, and access requirements replaced with prudent supervision, so as to eventually remove the financial sector from the negative list. Reform and opening up in the financial sector have given support to China’s participation in global economic and trade cooperation. In 2014, under China’s leadership, the BRICS New Development Bank, the Asian Infrastructure Investment Bank, and the Silk Road Fund have been established one by one, thus ushering in a new era in which China interacts with other countries economically, and coordinates the overall situation both at home and abroad. China should clearly position the strategies, objectives, regions and business of these three banks, and gain political, economic and technical support from member states or stakeholders so as to ensure their sustainable development. China should also promote multipolarization and democratization in the international financial order through the performance of the above-mentioned Banks.

 

Major efforts should be made to carry out the “Belt and Road” initiative in China’s peripheral regions.

 

Being a roadmap for economic and trade cooperation in China’s peripheral regions, the “Belt and Road” initiative constitutes an important strategy for China’s long-term economic and trade development. Upholding China’s peripheral diplomatic policy of amity, sincerity, mutual benefit and inclusiveness, the “Belt and Road” initiative takes cultural exchanges as a link and adheres to the principle of joint consultation, joint construction and shared interests. By carrying out the initiative, China will, together with countries along the “Belt and Road”, work to build a community of shared interests, shared destiny and shared responsibility, featuring mutual political trust, economic integration and cultural inclusiveness. In the next five years, China will make efforts to push forward greater peripheral economic and trade cooperation along the “Belt and Road”. Strategically, an overall and integrated regional cooperation pattern will be established with policy coordination, infrastructure connectivity, unimpeded trade, financial integration and people-to-people exchanges as the five major goals, featuring the sharing of dividends for the purpose of regional growth. Institutionally, mechanisms for cooperation should be sustained through bilateral cooperation and supported by multilateral cooperation. Cooperation should be project-oriented and should accord to local conditions, and long-term and overall plans should be formulated. Financial support will be provided by newly-founded mechanisms such as the Silk Road Fund and the AIIB. In terms of project options, early harvests and long-term layouts should be taken into consideration, and a balance between economic gains and bonus sharing should be struck. In exchanges with the countries concerned, cooperation should be carried out with attention paid to confidence-building and the dispelling of distrust. Economic and trade cooperation should be the key purpose, with increased transparency in development, so as to attract more countries to join.

 

 

3. To facilitate the opening up

 

China should have a stronger sense of serving its opening up. With intensive endeavors and tapping of potential, domestic and overseas resources, in particular diplomatic resources, should be fully mobilized to provide a high-standard and efficient service to China’s new opening-up strategy.

 

First of all, new objectives for economic diplomacy should be identified. Over the next five years, one of China’s new endeavors in its opening-up strategy is to increase its voice in determining the global economic and trade rules. Its economic diplomacy should adapt to this change. It should make good use of political, economic and legal means to safeguard and expand its national interests. China should participate and play an active role in reforms of the world economic, trade and financial systems, increase its voice and strengthen its rights in decision-making and pricing, and create a more favorable international environment for the expansion of its opening up. In the near and mid-term, supporting services should be provided to the BRICS New Development Bank, AIIB and the Silk Road Fund, and in the mid and long-term, unremitting efforts should be made to reform and improve the global economic and financial systems.

 

Second, priority should be given to render services to the “Belt and Road” initiative. China’s foreign services abroad should support the implementation of the “Belt and Road” initiative, and their role in this respect is not replicable by any other departments. Public diplomacy should actively and energetically promote the win-win mutual benefits of the “Belt and Road” initiative. Studies on the social, political and economic situations in the countries along the “Belt and Road” should be reinforced, and guidebooks on cooperation with each of these countries should be compiled.

 

Third, ways of serving Chinese enterprises as they go global should be optimized. As China becomes a major investor, Chinese enterprises are going abroad for their sustainable development and they are transforming into typical transnational corporations. Chinese diplomacy should adapt to this situation by providing services to the enterprises “going global”.  China should make use of its political relations to promote and safeguard the economic activities of these enterprises, and provide them with comprehensive services in the fields of information, public relations, legal consultations, problem resolutions and political safeguards. Government (diplomatic) clout and legal means (BITs) should be employed to properly deal with the political risks Chinese enterprises encounter overseas. Diplomatic services should also further improve the efficiency of maintaining Chinese people’s rights and interests overseas, enhance the capacity of coping with political risks and emergencies in investment cooperation, and effectively protect legitimate Chinese interests and rights overseas.

 

Finally, the competence of the service providers should be improved. Measures should be taken to intensify education, training and the attracting of talent, so as to provide for China’s expanding opening-up strategy a large group of diplomats who are both highly professional and comprehensively knowledgeable.

 

 

 Source: China International Studies July/August, 2015 pp.51-pp.66.

 

 

 

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