We have pointed out in previous blog posts that the global economy is really two economic groups of countries, the East and the West. That is not to imply that these two groups are separated and somehow immune from each other’s problems. The world is increasingly globalised (or inter-connected) so that no important country or group of countries can be an ‘economic island’.
The signs are that the shift in economic power from the West to the East may now be accelerating (The Economist, ‘Special Report’, September 24, 2011). One sign of this new order is that the IMF forecasts the global economy will grow by 3.3 percent this year and Asia’s 27 developing countries will contribute almost 60 percent of this global growth projection. Brand Finance, UK (February, 2012) also reports that 135 Asian banks are now placed in the top 500 most valuable banking brands in the world. Within this group of Asian banks, 30 per cent are from Japan, 17 percent China, 16 per cent India and 10 percent are from Korea.
China is now approaching the cross-roads of a change in leadership whose consequences could have a great impact on both the present Chinese economic trajectory and (therefore) the global economy. Significant changes in important Chinese economic policies are likely to have an inevitable, wider global resonance.
In the latter part of this year, the Chinese communist party will cede power to a younger generation. The question that reformers are posing is whether these younger leaders will be a reforming force. The counterfactual is that a booming economy may have weakened the inherent will to reform by leaders of any generation.
The Economist (March 3) notes that reformers have in recent weeks sponsored two reports. Each of these sets out plans for longer-term changes.
The first of these two reports was on February 23 when the People’s Bank of China (China’s Central Bank) published a ten-year timetable for liberalising by stages the Chinese capital markets. This would help prepare the way for opening up China’s property, stock and bond markets. It would also make buying foreign companies easier for Chinese entrepreneurs.
Following this report, there was a rather unusual occurrence associated with the second report. On February 27, the World Bank, together with China’s Development Research Centre (DRC) [a kind of government think-tank], produced a detailed report that set out the logic for reforms to a wide group of policies. The latter ranged from removing constraints to labour mobility to loosening the grip of state-owned firms. The report warned that these reforms are necessary to prevent China moving into a ‘middle-income trap’ characterised by inflation and instability.
It is unusual for China to link itself in a transparent way with the World Bank in such a high-profile and politically sensitive project. Within China, conservatives are very leery of their central bank (regarded by many as a beacon of non-successful Western liberalism).
Recent history is that it is unrealistic to expect a combination of the central bank, the DRC and the World Bank promulgating reforms that the leadership will adopt. Nevertheless, there are many signs in China that the reformers see the present time as a real opportunity to influence the policies of the incoming leadership. These ‘many signs’ include articles appearing in the Chinese press that argue for faster market reforms.
But there is also a strong realisation that getting these market reforms under way will not be easy. Already the incumbent interests are defending strongly the status quo. It may also be hard this time to motivate the general public in China that further reforms are necessary and desirable. Nevertheless, the reformers are busy and the next few months will be important for both China and the global economy.
So watch this space…
Professor Ted Gardener