Globalist Perspective

Change in China?

What effect could Western opposition to China’s handling of Tibet have on China’s economic growth?

Takeaways


  • Chinese history abounds with examples of ambivalent responses to international integration.
  • The huge losses suffered by the China Investment Corporation, the nation's sovereign wealth fund, from its investment in Blackstone have already set off some alarms.
  • Democracy and market economy are two interdependent concepts and those who believe in the power of the market will — or should — also respect democratic principles and human rights.
  • According to economists' hypothesis, emerging economies can grow faster under a dictatorship than under a democratic regime.
  • If China were indeed to step back from globalization, then it would only be natural for it to part with some of its currency reserves.

Ever since Beijing won the right to stage the 2008 Olympics, the world expected that the Games would bring change to China.

Many people believed that the tensions and imbalances in the country would be kept “under the lid” until summer 2008 — only to become more virulent in the aftermath of the Olympics, which could then severely slow down economic growth.

This is still a realistic scenario. The Tibet crisis, however, introduces a new factor into the equation.

So far it was believed that the emerging economies, as a side effect of their economic expansion, would also better integrate in the institutional network of the global economy.

This is why efforts were made to admit them to the World Trade Organization — or boost their IMF voting rights. Thereby, the assumption went, these countries would come to embrace the political values of the West.

The idea behind this thinking is that democracy and market economy are two interdependent concepts. In other words, those who believe in the power of the market will — or should — also respect democratic principles and human rights.

Yet, the Chinese view things differently. Regarding political and economic order as completely unrelated, they have developed a market economy under a dictatorship. This practice has worked remarkably well over the past 25 years.

Policymakers granted business the necessary freedom to act on the market. The economic agents, in turn, accepted the primacy of politics.

So now, there is economic freedom in an environment of political oppression. Some economists have even come up with a theoretical foundation of this model.

According to their hypothesis, emerging economies can grow faster under a dictatorship than under a democratic regime. This theory, of course, is highly disputed — and seems to be refuted by such examples as India.

The Tibet crisis, at any rate, demonstrates the limitations of the Chinese model. On an international level, the strict separation of political dictatorship and market economy obviously cannot be upheld.

Any country that wants to take advantage of foreign trade and capital flows will eventually have to deal with political demands for the protection of human rights. This is not new to the Chinese.

But today these demands are much more forceful, and the industrial nations seem no longer in the mood for compromise. Whether this tough stance is ultimately in their interest, is a different question.

China now has two options to respond to this situation. The option that seems most natural to many Westerners would be to comply with the demands of the global community — and pay more respect to human rights.

The other option is to keep letting politics reign. But that would mean stepping back — at least to some extent — from international economic integration. Many observers consider this reaction unlikely, given China’s tremendous profits from trade and capital exchange with the West.

On the other hand, Chinese history abounds with examples of ambivalent responses to international integration. Foreigners were often viewed as “barbarians” whom China tried to keep out with the Great Wall.

Of course, part of this protectionist inclination can be explained with the difficulties of keeping such a vast country together politically.

It was not until the Deng Xiaoping era that China carefully started opening to the West — though carefully and reluctantly. Against this background, it is not unthinkable that, in the wake of the Tibet crisis, China will slow down its participation in globalization — or even put it in reverse.

Such a step could have serious consequences for the West. Recent calls for boycotting French products after the chaos surrounding the Olympic torch relay in Paris offer a taste of what could come.

More generally, the Chinese leadership might try to shift growth from export to domestic demand. This would not just make the country politically more independent from the rest of the world — it would also make sense in terms of putting growth on a more solid foundation and serving the needs of their own people.

From a global perspective, however, this would stifle the Chinese growth impulses that are desperately needed in the face of a U.S. recession.

Furthermore, China might raise its barriers to foreign direct investments while at the same time pulling out of Western capital markets. The huge losses suffered by the China Investment Corporation, the nation’s sovereign wealth fund, from its investment in Blackstone have already set off some alarms.

The liberalization of China’s domestic capital market — and its opening to Hong Kong — will also likely proceed at a slower speed. While the Chinese leaders know that their tight capital market is still to vulnerable to fluctuations, they want to avoid a stronger dependence on the West at all costs — particularly with the Tibet crisis in full swing.

And finally, there will potentially be less willingness to compromise with regard to the appreciation of the Chinese currency.

Although the renminbi has continued to strengthen against the dollar immediately after the onset of the Tibet crisis, this was primarily an act of “saving face” — and failure to admit that there might be dark clouds on the horizon.

China could also stop its first careful attempts at achieving full convertibility of the renminbi. It is difficult to say whether we will ultimately see China’s vast foreign currency reserves — of currently around $1.7 trillion — grow or shrink.

But if the country were indeed to step back from globalization, then it would only be natural for China to part with some of its currency reserves.

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About Martin Hüfner

Martin Hüfner is the former chief economist of Germany's HVB Group.

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