x Abu Dhabi, UAEThursday 27 July 2017

China's economy slows but its global influence continues to rise

The pessimists are wrong. China's economy will not collapse anytime soon. A Chinese economic slowdown will only add to the country's influence

Andre da Loba for The National
Andre da Loba for The National

Over the past month, global financial markets have become terrified by the prospect of a Chinese economic slowdown.

In recent weeks, China's money markets have slowed to a near halt, China's stock markets suffered roller-coaster whiplash, and many western fund managers have reduced their China exposure.

Outside the country, pessimists returned to a familiar refrain: Chinese banks' debt loads signal the arrival of an event that doomsayers have been predicting for three decades - a meltdown of China's economy.

A severe slowdown would be catastrophic for China's global power, which is dependent on its high levels of growth, since a fast-growing China serves as a model to other developing nations, allows Beijing to amass vast quantities of US debt, and gives Beijing a far greater say in global institutions.

But although China's economy is slowing somewhat from its years of torrid growth, it is not going to crash: Beijing's government is actually anticipating a cooling down to about 7 per cent annual growth, which would be red hot for any other country. The Chinese economy, the second-largest on Earth, is not going to melt down any time soon, allowing Beijing to continue building up its global power.

Almost since it began reforming in the 1970s, China's economy has attracted naysayers. By focusing too much on export-driven growth, they argue, China has remained too dependent on foreign consumer markets. And China's opaque banking sector has made it hard for outsiders to estimate the total amount of non-performing loans in the country's four biggest banks.

At least since the Asian financial crisis of the late 1990s, sceptics have regularly predicted that China's problems would lead to an economic collapse, one that also would threaten the legitimacy of the government, since the Communist Party's strength comes from capable economic management, and since it does not have real elections to fall back on as another source of legitimacy.

But while China is slowing to its weakest growth in two decades, a real collapse is highly unlikely.

For one, China's state and private companies may be getting too easy credit from state banks, but that does not mean these firms are actually unproductive, zombies doing nothing - like some of the Thai and Indonesian firms caught up in the 1997 Asian financial crisis.

Chinese firms, nearly all of them state-owned, alone occupied 73 of the top 500 slots in Fortune's 2012 ranking of the largest companies in the world by sales revenue.

China's score has steadily risen on the Global Competitiveness Index, the World Economic Forum's ranking of nations' international economic competitiveness; China recently surpassed Japan as the country with the second largest amount of spending on research and development in the world.

In fact, China's forecast growth for this full year is far higher than that of the average developing country, which is projected at 3.3 per cent growth in 2013.

Even with this slowdown, China's urban middle classes, the type of people who have led revolts across the Middle East over the past three years, and who led the 1989 Tiananmen protests, are unlikely to turn against Beijing.

In the most comprehensive recent face-to-face survey of Chinese opinion about the government, political scientists Wenfang Tung, Nicholas Martini, and Michael S Lewis-Beck found that the average person's support for the government in Beijing was about 8 on a 10-point scale.

The three political scientists attributed this high level of support for the government to "political trust - a belief in the legitimacy of the government - [which] appears as the dominant reason for their broad support of the political system".

Since the Beijing government has actually responded to the slowdown with clear direction and economic reforms designed to slowly wean the economy off state spending, credit, and exports, it has won continued support from many Chinese urbanites. As a result, Beijing has ensured that China will remain increasingly influential in the world.

Indeed, top Chinese leaders, realising they retain strong public support, are hardly acting wounded in the global arena.

In the past month, China has stepped up its war of words with Japan over disputed islands lying between the two; shut down any rumours that it would inaugurate a new, softer approach towards the Dalai Lama and Tibet, and essentially rejected any efforts by the US and other countries to address allegations of Chinese state-sponsored hacking and cyber-espionage. When the Chinese president, Xi Jinping, met the US president, Barack Obama, at a summit in the United States, he acted exactly as if they were equals.

What's more, even with a slightly slowing economy, China still has vast sums to distribute as aid in the developing world, support its state companies spreading across the globe, and help build infrastructure everywhere from Thailand to Trinidad.

China retains the world's largest reserves of US treasuries, and still runs massive trade surpluses with much of the world. During a trip in the spring to Beijing, Cambodian leader Hun Sen, whom China has cultivated assiduously over the past decade, picked up US$2 billion (Dh7.3bn) in new loans and grants. In June, during a trip to Latin America, president Xi announced $3 billion in Chinese loans and other aid for Latin and Caribbean countries.

When top US officials, including the vice-president, Joseph Biden, had visited Latin America just before Mr Xi, they handed out no new money and launched no new programmes.

In addition, China continues to boost the number of foreign officials it trains, mostly from developing nations, who come to Chinese research institutes, universities, and Party schools to study China's development strategy.

Many go home amazed by China's model of growth, and vowing to implement elements of it back in their countries. As Beijing engineers a mild economic cooling while averting a meltdown, it may attract even more foreign officials to come to study its management - only adding to China's global influence.

 

Joshua Kurlantzick is fellow for South-east Asia at the Council on Foreign Relations and author of Democracy in Retreat: The Revolt of the Middle Class and the Worldwide Decline of Representative Government