China is a global contributor, not leader

Tendency to exaggerate Beijing’s influence

Xi Jinping, president of China, began 2017 with a clear defence of globalisation. Speaking on 17 January at the annual meeting of the World Economic Forum in Davos, he said that ‘to grow its economy, China must have the courage to swim in the vast ocean of the global market.’

The Chinese authorities are increasingly playing a part in political discourse, not least in view of the election of President Donald Trump. China is adopting a more prominent regional role in both east and southeast Asia. However, there is a tendency to exaggerate Chinese influence. Although Beijing will undoubtedly increase its contributions to international frameworks, it is a long way from leading the global policy agenda.

China brings a measure of stability through its commitment to the international agenda in trade and investment flows. Beijing also has a role in financial regulation which it may enhance in the coming years. The financial regulatory system is made up of a network of organisations dominated by the US and western European states. As it has done in multinational trade and investment institutions, China should recommend its highly-qualified officials for leadership positions in global financial regulatory bodies.

Trump’s actions during his first 10 days in the White House reveal that his election campaign pledges were far from mere rhetoric. He has withdrawn the US from the Trans-Pacific Partnership trade deal and threatened China with punitive tariffs. Trump’s administration is unashamedly unilateralist. This change in philosophy, in addition to Beijing’s ability to deliver tangible economic benefits to partners, will lead to a gravitational shift towards China.

China’s proposition is that it can contribute to countries’ development by financing and building infrastructure. Through this network of partners, Beijing hopes to create markets for Chinese products. Such is the thinking behind the Belt and Road initiative, which accounts for $900bn in current and planned infrastructure projects in 65 states throughout Europe, the Middle East and Asia.

Though China’s investments are overwhelmingly in the developing world, 2016 was also a breakthrough year for Chinese investment into the US and Europe. Investments into the US have increased by 360% since 2015, while 19% of total Chinese foreign direct investment goes to Europe. China’s direct investments in southeast Asia are also growing rapidly.

Geography dictates that the Association of Southeast Asian Nations must accept a high level of connectivity with China, though these states try to avoid dependence. Deflecting the advances of economic superpowers is not new for these countries. However, it is easier to assuage political influence when those countries are on opposite sides of the globe – China is on Asean’s doorstep.

Beijing has its own domestic preoccupations and China’s burdensome debt-to-GDP ratio is a threat to international financial stability. This weakness has stemmed from state enterprise debt, local government borrowings, shadow banking and a hot property market.

Capital outflows have come from Chinese enterprises repaying foreign currency debt in response to renminbi weakness, as well as from individuals and businesses moving cash abroad in the light of political uncertainty and confiscation risk. The government could address the decline with a substantial one-off devaluation of the currency. But such action could prove economically destabilising for China and fuel Trump’s accusation that Beijing is manipulating its currency.

China must address the fundamentals that are limiting capital inflows, including indebted state-owned enterprises, a fragile banking sector, and volatile property markets. Such extensive reforms could lead to a sharp decline in growth in the short term, but to greater sustainability later.

Many members of the Politburo Standing Committee, the most powerful group in the ruling Communist Party of China, are expected to retire in 2017. Consequently, this autumn’s 19th party congress provides Xi the opportunity to consolidate power and curtail corruption. Xi’s future is certain to be contrasted with Trump’s vicissitudes in the White House.

Adam Cotter is OMFIF’s Head of Asia and Chief Representative of the Asia office in Singapore.


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