Blog Post

China’s new role in the global economy

The changing role of China in the world economy has recently been highlighted by its registering of a first current account deficit in 17 years. We review the economists’ analyses of this new role and associated challenges.

By: Date: May 28, 2018 Topic: Global Economics & Governance

Conversable Economist Timothy Taylor presents the evolution of the quarterly current account since the 1990s. The current account is the sum of net exports in goods and services, capital income paid in and out, and net transfer payments such as foreign aid. China had a $282 billion current account deficit in the first quarter of 2018, its first in 17 years. This occurred after a three-year downward trend and is the result of the modern Chinese economy requiring imports of more services, among other things, from abroad. He explains that this weakens the rationale used for the ongoing trade war, though he notes that the annual current account might well still be positive in 2018 given the seasonal patterns of Chinese exports.

The Council on Foreign Relations’ Brad W. Setser takes a deeper and more sceptical look at the data. He argues that the Chinese current account balance is not accurately measured, and the prediction of an annual current account deficit for 2018 hinges on high oil prices, a commodity that China imports in great quantities, and flawed methodological changes in the measurement of the value of tourism. Also, the current account’s trend downwards is partially due to the Chinese government’s fiscal stimulus, implemented since 2015. Were this stimulus policy to be withdrawn, the current account deficit might well be reversed quickly. Finally, he explains that China’s manufacturing trade surplus remains one of the strongest in the world, and should not be included in any explanation of this recent current account deficit.

PIIE’s Nicholas R. Lardy earlier in April brings some perspective by deconstructing the recent growth performance of the Chinese economy. Trade surplus indeed fell by about a fifth compared to the first quarter of 2017, but it is driven by greater imports demand, not by reduced exports. More fundamentally, the strong GDP growth (6.8% in 2018, predicted based on Q1 performance) is driven by consumption, which is expected to take on even greater importance if household disposable income continues to outpace GDP growth. Combined with the fact that most of the GDP growth came from services rather than industry, the current account deficit is merely symptomatic of desirable domestic circumstances for China’s new role, and not a sign of Chinese weakness.

On Project Syndicate, Kent Harrington summarises the rising power of China in Asia and Latin America, relative to the US or the EU. China accounted for 21% of exports coming to Southeast Asia in 2015, and is also the largest importer of goods from neighbouring countries. As it has turned into an industrial hub, it has become the main trade partner of most countries in the area. More strikingly, China now brokers trade and investment agreements in Asia, Latin America and even globally through its Belt and Road Initiative. In the Latin American case, it has been successful: China is now among the top five export markets for 12 of the region’s 20 countries.

While Kent Harrington criticises China’s “predatory economic practices” and Martin Feldstein calls these policies “disingenuous”, Harvard’s Dani Rodrik defends them. As the global economic system has been shaped by US lobbies, China has all the reasons to diverge from the WTO rules for its own interest. This unorthodoxy, he argues, has helped rather than hindered China’s spectacular growth, lifting hundreds of millions out of poverty. Like China nowadays, the US in the 19th century caught up with Britain by stealing intellectual property and flouting the hegemon’s imposed global order. Carefully weighing respect of global rules with its development, China has carved itself a new role the same way the US has in the past.

Barry Eichengreen takes a broader view on the implications of China’s new role. The renminbi has been increasingly used internationally following the government’s promotion policies, directly challenging the American dollar. China is also the leader in volume traded globally and in foreign investment into Africa and South Asia. This has enabled the nation to acquire military and other strategic assets abroad, and to project its soft power even further. More importantly, these repeated economic and political successes make leaders worldwide covet an emulation of China’s centralised power and authoritarian practices. However, Barry Eichengreen questions the sustainability of authoritarian models of policy making, as the lack of course-correction mechanism makes them inherently fragile to crises.

There are, of course, other indications of China’s changing economic role, outside macroeconomic and trade data. PIIE’s Martin Chorzempa details how the Chinese economy has surpassed that of the US in terms of innovation for fintech, due to minimal or even absent regulations. Earlier, Harvard’s Laboure, Zhang and Braunstein had detailed the rise of the Chinese tech industry, overtaking the US thanks to Chinese culture’s little concern for privacy, huge domestic market, and the absence of incumbent firms to displace. They however point to limited financing and investment opportunities as a structural problem that might hinder further development of the industry.

China has become economically more powerful and there is evidence that it has started wielding that power abroad more assertively. Some aspects worry observers worldwide. Paul Krugman argues that the Chinese government has negotiated a deal he views as a bribe to ensure US market access to one of China’s foremost tech companies. Last month, Bloomberg’s Editorial Board summarised the two Chinese policy strategies that are most problematic to Western economies: China’s forceful push to achieve superiority in military technology and its systematic disregard for global rules, which are the main sources of complaints among US companies. Similarly, Bloomberg’s Michael Schuman was pessimistic and argued that even when seemingly conceding, by opening its markets, the Chinese government always ensures its domestic players benefit more from the new situation.

On the other hand, there are also hints that the Chinese government recognises the great responsibilities that come with their new global role. Nicholas R. Lardy points to positive developments with respect to China’s payments for the use of foreign intellectual property, which increased by roughly 20% in 2017, arguably placing the Chinese economy second globally after the US as purchaser of foreign technologies. Martin Wolf recounts the frankest high-level discussion he ever had with Chinese officials, academics and businessmen. From this snapshot of China’s decision-makers’ worldview, he concludes that they firmly believe China needs strong central rule, as Western models of democracy are discredited. More fundamentally, China will develop “first-class” military power and survive the testing years ahead, but has no desire for world domination.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Demographics and Long Run Growth

Scholars have been investigating the relationship between demographics and long term growth, in the context of the secular stagnation hypothesis. We review recent contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: June 18, 2018
Read about event More on this topic

Upcoming Event

Jun
21
17:45

State of transatlantic trade relations

A conversation on transatlantic relations with Michael Froman.

Speakers: Michael Froman, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Jun
26
08:30

EU-LAC Economic Forum 2018

The second edition of the EU-LAC Economic Forum, a high level gathering for in-depth research-based exchanges on economic issues between European, Latin American and Caribbean (LAC) policy makers and experts.

Speakers: Angel Badillo, Federico Bonaglia, Sylvie Durán, Emilio Lamo de Espinosa, Alicia García-Herrero, Elisa Grafulla, Gonzalo Gutiérrez, Bert Hoffmann, Edita Hrdá, Ramón Jáuregui, Juan Jung, Carlos Malamud, J. Scott Marcus, Neven Mimica, Detlef Nolte, Guillermo Fernández de Soto, Anne Sperschneider and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Jun
28
12:30

Trade war trinity: analysis of global consequences

Analysis of the long-term impact of the trade war and its three key players: EU, US, and China.

Speakers: Alicia García-Herrero and André Sapir Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic

Blog Post

The G7 is dead, long live the G7

The summit in Charlevoix left behind a Group of Seven in complete disarray. The authors think that the G-group, in its current formulation, no longer has a reason to exist, and it should be replaced with a more representative group of countries. In this fast-changing world, is the G7 only a relic of the past?

By: Jim O‘Neill and Alessio Terzi Topic: Global Economics & Governance Date: June 13, 2018
Read article More on this topic More by this author

Blog Post

The Italian mini-BOT debate

Talks of parallel currency are not new in Italy. But one of the proposals – the so called mini-BOT – has made it into the government contract that underpins the current League-M5S coalition. We review what has been said about these proposals.

By: Silvia Merler Topic: Finance & Financial Regulation Date: June 11, 2018
Read article Download PDF More on this topic

Working Paper

European and Chinese trade competition in third markets: the case of Latin America

While Europe continues to hold important trade powers, the rise of China in the global economy has significantly reshaped international trade and competition. In this paper, the authors show that the degree of competition between both powers in Latin America has risen in the past decade due to China's increased trade of high-quality products. They address whether China is an increasingly relevant competitor for Europe in Latin America and in which sectors China-EU competition is fiercer. These findings should be a wake-up call to Europe in its quest to remain competitive at the global level.

By: Alicia García-Herrero, Thibault Marbach and Jianwei Xu Topic: Global Economics & Governance Date: June 7, 2018
Read article More on this topic More by this author

Blog Post

The Italian Crisis

While Italy has been through one of the gravest institutional crises in its history, we review recent opinions on the topic.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: June 4, 2018
Read article More on this topic

Blog Post

Trade wars: Just how exposed are EU Member States and industries to the US market?

This blog focuses on how a more restricted access to US final demand could affect EU economies and sectors, by measuring their share of value-added absorbed in the US. The exposure of the EU as a whole in value-added terms is lower compared to that suggested by gross exports to GDP and, overall, gross exports misconstrue the picture of spill-overs through trade linkages. For individual countries, the degree to which gross exports overestimate or underestimate exposure is relatively small, with the important exception of Ireland. However, gross exports significantly overestimate the exposure of EU manufacturing to US final demand.

By: Francesco Chiacchio and Konstantinos Efstathiou Topic: Global Economics & Governance Date: June 1, 2018
Read about event More on this topic

Past Event

Past Event

Making trade work for all – the Danish case

This event discussed how we can make trade work for all, focusing on the example of Denmark.

Speakers: Maria Åsenius, Sofia Bournou, Brian Mikkelsen, André Sapir, Eva Rytter Sunesen, Guntram B. Wolff and Casper Arnsbo Poulsen Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 28, 2018
Read about event

Past Event

Past Event

Where is China’s financial system heading? Implications for Europe

How ready is China for the transformation of its financial system and how will this effect Europe?

Speakers: Elena Flores, Alicia García-Herrero, Gene Ma, Hu Yuwei and Guntram B. Wolff Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 25, 2018
Read about event

Upcoming Event

Sep
3-4
08:30

Bruegel Annual Meetings 2018

The 2018 Annual Meetings will be held on 3-4 September and will feature sessions on European and global economic governance, as well as finance, energy and innovation.

Speakers: Maria Åsenius, Richard E. Baldwin, Maria Demertzis, Mariya Gabriel, Péter Kaderják, Joanne Kellermann, Jörg Kukies, Bruno Le Maire, Philippe Lespinard, Montserrat Mir Roca, Dominique Moïsi, Jean Pierre Mustier, Emma Navarro, Ana Palacio, Lucrezia Reichlin, André Sapir, Jean-Claude Trichet, Margrethe Vestager, Reinhilde Veugelers, Georg Zachmann and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Brussels Comic Strip Museum, Rue des Sables 20, 1000 Brussels
Load more posts