GED blogpost series on China’s role(s) in the world economy (Part 1)

 

On July 1, 2021, the Chinese Communist Party (CCP) celebrated its 100th birthday. Following up on this important event, we will publish a five-part series on China’s future role(s) in the world economy.

From a western perspective, this role will oscillate within the triad of partner, competitor, and rival, covered by part two to four of the series.

The last part will be published shortly ahead of Germany’s general election and deal with the challenges and opportunities the new German government will face in its relations with China – a situation that will certainly be similar for other western countries, too.

We start this series with a brief overview of the political and economic background of China’s rise and even take a glimpse further back into history. Of course, all of this can only happen in a nutshell – especially given the fact that China credits itself with at least 5000 years of history.

Climate change, artificial intelligence, the Corona pandemic – it is impossible to imagine the world without China. 20 years ago, things looked different: the country’s political system was even predicted to lead to “The coming collapse of China” (Gordon Chang).

Instead, however, the world’s most populous country experienced an almost meteoric rise to become the new global superpower. Western countries, on the other hand, stumbled from one economic and social crisis to the next and seem to have no satisfactory answers to pressing problems. The Corona pandemic demonstrated this impressively.

These developments have brought back to the table the question of the “competition of systems”, which seemed to have been settled after the collapse of the former Soviet Union – which actually came! They also raised the question how China managed its impressive economic development without the accompanying political transformation expected at least by western observers.

In this debate, the historical context and in particular the Chinese view of things still too often recede into the background, even though a basic understanding of them is important for a better assessment of China’s current and future development. We therefore dig into this for a bit.

Ascent, descent, reascent: the “Middle Kingdom’s” rollercoaster-like development:

The term “Middle Kingdom” (Zhongguo), nicely sums up the Chinese view of the world: China is the center; the periphery, especially the Western “barbarians,” is politically, economically, and culturally subordinate.

This was also evident in China’s historical ascent to a global economic power over hundreds of years until the 19th century, which Justin Lin Yifu, former chief economist of the world bank, sums up as follows:

“Over a period of just over two millennia – from ancient times to the mid-19th century – China had the world’s greatest economic power, largest contiguous economic area, highest per-capita income, and highest standard of living.”

However, home-grown problems such as rampant corruption, rapid population growth and opium consumption fueled by the West, led to the descent of the Chinese empire by the mid-19th century. It culminated in the so-called Opium Wars (1839-1842 and 1856-1860).

In their aftermath, western nations forced China to open up to foreign trade. Only the founding of the People’s Republic of China in 1949 finally put an end to this semi-colonial state (Mao Zedong) and thus to the “century of humiliations” (Oskar Weggel).

In the subsequent Mao Zedong era, phases of chaos and stagnation alternated internally with phases of political stability and economic recovery until 1976. Externally, China was once again able to shape its relations with other countries in a self-determined manner.

In terms of foreign policy, this already set an important course for the “policy of reform and opening (gaige kaifang zhengce),” which was to help the “Middle Kingdom” to foster its reascent in the world economy.

After Mao’s death, a change in economic policy took place in 1978, when the policy of reform and opening was initiated under the leadership of Deng Xiaoping. Its success can be attributed, among other things, to the gradual approach to reform – in contrast to the “shock therapy” (Jeffrey Sachs) chosen by the former Soviet Union:

Market-economy reforms were first tried out in local “experimental points” – sometimes without the knowledge of the central government. If they were successful, they were applied nationwide. This approach was also applied to foreign investors from the early 1980s onward: They received preferential conditions, for example tax advantages, in so-called special economic zones (jingji tequ).

The Chinese government wanted to attract more foreign direct investment (FDI), and thus urgently needed capital and know-how, while at the same time keeping foreign companies controllable. The approach worked out and brought more and more foreign investors to China, albeit starting from very low levels in the early and mid-1980s (see figure 1).

Figure 1: Foreign direct investment in China, 1980-2020* (millions of USD).

Source: United Nations Conference on Trade and Development, various years. *2020 is an estimate.

After a short-lived ice age between China and the West due to the suppression of the democracy movement in 1989 (“Tian’anmen Massacre”) and the subsequent economic sanctions, FDI in China experienced a real boom from the 1990s onwards.

In the following 20 years, increasingly competitive international production conditions, including comparatively low labor costs, made China the “world’s factory” for low-cost consumer goods and interconnected the country closely with international markets.

In the last decades, western companies and consumers have benefited a lot from this labor division with China, based on comparative advantage. An important milestone in this regard was China’s accession to the World Trade Organization (WTO) in 2001 (see figure 2).

Figure 2: China’s, Germany’s and the United States‘ share in global merchandise export, 1980-2020 (in percent)

Source: Own calculation based on the WTO Data Portal. Data download: May 10, 2021

Great again: economic successes of China’s reform policy

In 2018, the People’s Republic celebrated the 40th anniversary of its reform policy and its considerable economic successes. During this period, China has risen from a comparatively poor and internationally little connected country to one of the most important global superpowers. This is shown by a comparison of key economic indicators for the years 1978 and 2018:

Table 1: 40 years of reform and opening – key indicators of the Chinese economy, 1978 vs. 2018

Source: National Bureau of Statistics, State administration of Foreign exchange, United Nations Conference on Trade and Development, various years

China is now the world’s largest economy in terms of purchasing power parity (see  figure 3).  China has undergone a structural transformation from a rural agricultural country to a more urbanized and service-oriented economy. The wealth of the Chinese population as measured by annual per capita income, has increased more than a hundredfold in both rural and urban areas.

Even though a significant urban-rural wage gap remains. the World Bank estimates that China has lifted more than 800 million people out of absolute poverty since the reform and opening-up policy began. Xi Jinping even declared it eliminated in 2020.

Figure 3: China’s, the European Union’s and the United States‘ share in world GDP (purchasing power), 1980-2020 (in percent)

Quelle: International Monetary Fund, World Economic Outlook Database, download of data: April 30, 2021

China’s international economic ties have played a decisive role in these developments and have also made enormous leaps: Since 2009, China has been the “export world champion” ahead of Germany and, as the “vice-import world champion,” the second-largest importer of goods after the USA.

Its foreign exchange holdings are now the highest in the world. In 2020, in the midst of the Corona pandemic, the country was the largest FDI recipient for the first time, ahead of the U.S. – the undisputed number one for many years. Chinese direct investment abroad, which was initially handled very restrictively, has increased almost 3,000-fold.

Beyond these impressive economic successes, however, China‘s role as the “factory of the world”, combined with phases of double-digit growth rates, has also brought with it major ecological and social challenges.

These include the considerable damage to the environment, but also the widening gap between rich and poor, which is causing growing social tensions. Therefore, the Chinese government aims to transform the Chinese growth model towards a qualitative, more sustainable growth path: The export-driven “factory of the world” is to become the innovation-oriented “research lab of the world.”

This is how the Chinese (re-)ascent is to be completed – a goal which the government wants achieve by the 100th anniversary of the People’s Republic of China in 2049. By then, China shall be an economic and political superpower that has technologically caught up with and overtaken the Western industrialized countries, including the USA.

The impressive (re-)ascent of the “Middle Kingdom” is one of the most important developments for the global economy in the 21st century. China has become an indispensable part of global production processes and value chains.

Western economies have benefited substantially from economic relations with China, they were mostly based on the principle of comparative advantage in the past. In the future, however, China will become more of a competitor or even rival in some areas. At the same time, it will remain an important partner in solving global issues like climate change, which is the topic of the next part of our series.

Part 1-4 of this series are based on a book chapter written by GED team member Dr. Cora Jungbluth, which will be published by the Kohlhammer publishing house in autumn 2021:

https://www.kohlhammer.de/wms/instances/KOB/appDE/Wirtschaftswissenschaften/Volkswirtschaftslehre/Wirtschaftspolitik/Herausgeforderte-Wirtschaft

Lin, Justin Yifu (2008): On China’s Economy – Der chinesische Weg zur Wirtschaftsmacht, Heidelberg, Peking.

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