Will China become the centre of the world economy?
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China’s economy has developed at an extraordinary rate.
In Europe and the US, the mood has been shifting sharply and quickly.
China is so huge that it comprises different realities at the same time.
The global economy itself is starting to somewhat fragment.
China’s economy has developed at an extraordinary rate over the last 40 years across so many areas. The size of its domestic market, the technical prowess of its leading companies, even the feats of exploration in space and its growing military might have astounded the rest of the world. But Martin, the key question now is will China become the centre of the global economy?
There is no doubt that China’s growth up to this point and its continuing growth mean that it will be a major player in the global economy forever more. But there are reasons to doubt that it will be the centre, the unique centre of a global economy, partly because other parts of the world will not be keen to let it and partly because the global economy itself is starting to somewhat fragment into a more regionalised rather than a globalised economy.
I went to China as a student nearly 40 years ago. And it was a place completely different from the high-tech economic superpower that we see today. There was rationing of grain, cotton, and several other basic commodities. And a train from Hong Kong to Beijing took over four days to arrive. The same journey today would take about nine hours.
The best statistic I think to put this extraordinary change into context is average GDP growth. And since 1979 to the end of 2018, China’s GDP growth averaged 9.5 per cent a year. Martin, is this unique as far as you know in history?
I think it is unique in the following sense. There have been other countries that have racked up higher growth rates for a little bit of time. But you’ve never seen anything of this size.
Go back 2,000 years when everyone was equally poor. The point of gravity, the centre of gravity of the global economy basically followed population size. And then with the Renaissance and the Industrial Revolution, you saw Europe and then later North America forge ahead.
In the last 40 years, it’s been moving back towards Asia, into Asia and towards China. But in a sense, it’s really just getting back to what used to be the normal state. Still kind of extraordinary that they’ve done it so fast, even if it’s a return to normality, as I call it. But James, how did they do it?
To start with, in the late ’70s, they began a programme of market reforms that really overhauled the entire communist command economy. By the early to mid ’90s, they began to really put an accent on attracting foreign direct investment. But I think the really key change in China came, again, probably in the mid ’90s, when China began to allow the sons and daughters of farmers to migrate from the village to these big factory towns.
I would say that the Chinese Communist Party has sort of proved that capitalism works, capitalism and freeing up the movement of labour. But let me add one other aspect of this, which is how the western high-income countries were pursuing globalisation at the time, because in the ’80s and the ’90s, you saw a big push for more liberalised global trade. So globalisation was taking place at the behest and led by the high-income countries. But China could just slot straight into that.
A big part of the answer to the question we’re asking, whether China will become the centre of the global economy, is whether that development model can continue to work, because what strikes me is that with all of this success, China is still a relatively poor country. Isn’t that right?
Absolutely. In fact, China currently ranks 61st and the world in terms of countries by their average per-capita incomes. On an aggregate basis, China is still very much a developing nation. But it’s a very anomalous country as well, because it’s got all of this high-tech prowess. It’s got this amazing infrastructure. It’s a very different type of economic beast, I think, from the type of developed country that we can see elsewhere in the world.
Let’s look at Chinese average income compared to the world leader, the US. And we can see that while it was very poor before this whole economic revolution happened, it’s still not rich.
China is so huge that it comprises different realities at the same time. The Chinese middle class numbers these days about 400m people. That is, obviously, greater than the entire population of the United States. But there’s also about a billion Chinese that are much less well-off.
Economists call this the middle income trap. You get to a certain point, fast growth. And then you kind of stagnate before you’ve pulled everyone into the middle class. I mean, one reason why people think that happens is because getting from poor to middle income is a very different process from getting to middle income to high income.
Chinese consumers last year spent about $7.3tn. That, by the way, is greater than the entire GDP of the Japanese economy. But now I think we’re entering a very different phase. And that one is characterised by China’s emergence as a technological power.
I think that’s crucial, James, because one thing that economics and economic history show is that if there’s a way out of the middle income trap, it’s by changing from a growth model based on accumulating labour and capital to a growth model led by technological development and technological progress.
China is likely to be and really already is a middle-income country that leads the world in many areas of technology. Let me just put some flesh on those bones. Let’s just count the sectors in which China is either a global leader or at least close to the cutting edge, wind and solar power, online payment systems, digital currencies, aspects of artificial intelligence, such as facial recognition, quantum computing, satellites and space exploration, 5G telecoms, drones, ultra-high-voltage power transmission. China really is kind of at the cutting edge of a lot of important technologies in the world.
So maybe I can ask you, James, if you agree that there’s a very conscious strategy here among Chinese policymakers to make the world more Sinocentric?
China is driving its standards-setting processes around the world precisely to do as you describe, to try to ensure that the latest technologies around the world are at least partly or largely dependent on Chinese technologies.
It looks to me like the intention is there to be the unique global centre. The big question, though, is whether the rest of the world is going to play ball and let that happen. It’s not often fully appreciated that the globalisation we’ve seen in the last few decades, it’s still quite regionally organised.
In this chart that look, it looks at different economies, weight in the global trading system and the main trading relationship, what we really see is three hubs, one centred on Germany, one centred on China, one centred on the US. And if we look at the more complex kind of trade relationships, global value chains where inputs cross borders many times, it looks even more regional. So I think that this is actually the direction we’re going, that we’re probably going to see even more intensification of trade relationships at regional level, but not necessarily that much more deep trade or deepening of trade happening between the three big blocs, the EU, the US, and China.
It’s certainly true that China is putting a big accent on expanding its trade and investment relationship with southeast Asia, which, I think, it increasingly sees as a backyard market as it were. Also, China would be very reluctant to in any way give up its US market or the European market. I mean, these are huge drivers of China’s export growth.
So we’ll see what sort of choice China is given about this, because it’s very clear that in Europe and the US, the mood has been shifting sharply and quickly. And I think the fact that global trade in itself is moving to more, towards more complex value chains and more services trade and digital trade, that also is going to strengthen the political aversion to integrating with China. So this is why I think that while China will, as I said, forever more be a major part of the global economy, we are probably looking more at regional dominance than becoming the unique centre of one homogeneous global economy.
I think the scenario that the world splits into three or more regional trading blocs is certainly not conventional wisdom at the moment. And if the world was to move into that direction, it would suffer huge disruptions. There would be protectionism, the decoupling of supply chains, and several other reversals as well. However, sitting here in Hong Kong, I can see the pressures that might lead to such an outcome building up. So I think the key point right now is that unless the EU, the US, and China can sort out their differences, we could see the regionalisation of global trade becoming a reality in several years’ time.