ISSN 2330-717X

China: Brick Batting At Home And Abroad

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China is using the BRIC grouping as both leverage and cover to help ensure that its political and economic rise continues unabated over the course of this decade and beyond. Indeed, whatever economic developments the next decade holds, the international community can expect Chinese-led shaping of the global economy, brick by brick.

By Graham Ong-Webb for ISN Insights

On Christmas Eve last year, China officially announced the admission of South Africa into the BRIC group of countries (Brazil, Russia, India and China). The decision to bring the African state into the fold under China’s rotating presidency of the group affirms China’s desire to establish long-term clout both inside and out of BRIC, and to extract economic benefits from it. Using this emerging politico-economic bloc as both leverage and cover, China’s is striving to ensure that its political and economic rise continues unabated over the course of this decade and beyond.

China’s rationale may not seem immediately clear in the BRIC context. After all, BRIC countries represent the four largest economies outside the OECD, and are the only developing economies with annual GDPs of over $1 trillion. South Africa clearly falls behind the BRIC average. The GDP of South Africa is a dismal $285 billion when compared to Russia or India’s $1,600 billion, Brazil’s $2,000 billion and China’s colossal $5,500 billion. To a large extent, the move is clearly political and strategic. China is South Africa’s largest trading partner, and South Africa is the largest destination in Africa for China’s direct investment. South Africa’s entry into BRIC provides China and the other members with a gateway into the rest of the sub-continent.

However, certain economic dividends can also be gleaned from the move. China’s central, immediate economic policy goal is clearly to achieve internal and external balance – as outlined in its 12th Five-Year Plan (2011-15) unveiled last October – and South Africa can play a role in helping China achieve this. The mainland’s core strength has always been in exports and weakening demand in major OECD markets – brought about in part by the global financial crisis – has compelled Beijing to tap deeper into the markets of the Least Developed Countries (LDC) such as South Africa in its bid to manage dampening export growth.

The Chinese move to formalize economic relations with South Africa through BRIC also likely extends from it desire to use that country as a gateway for wider access to African markets and resources and eventually, both the country’s and sub-continent’s untapped pool of cheap labor. As a matter of forward-planning, Beijing can be expected to manage the inevitability of rising labor (and hence production) costs across the mainland that – like any state moving up the development ladder – will sap some of the competitive edge that it has so far been enjoying. It is likely to do so by relocating low-cost factories to sub-Saharan Africa at some point in the mid-term.

Growing labor and production costs within China are unavoidable if China wishes to boost domestic consumption and steer away from its excessive dependence on investment. Stronger purchasing power among the Chinese is only possible through higher wages, and increased prosperity is now necessary to sustain further popular support for the Chinese government since meaningful political reform will continue to be remote. Chinese economic planners are already trying to facilitate these developments through tightening monetary policy in order to curb inflation, keeping lending rates low, and loosening credit conditions that help working Chinese purchase higher-value consumer goods.

Increased domestic demand for locally produced higher-value goods may be critical in triggering the kind of scientific and technological innovation that China requires if it wishes to compete on par with the big-league economies in the Asia-Pacific, Europe and the US. Beijing realizes that the country will eventually reach the limits of what its low-end manufacturing has to offer to foreign markets. The stakes on establishing a stronger R&D base are rather high for the Chinese government, as they have learned from their American counterparts how innovation in the commercial sector often synergizes military modernization (and vice-versa).

Overall, these measures will be necessary for China to steam ahead into the 2020s as an economic giant, as injections from its 2008 stimulus package designed to stabilize its domestic markets (after the eruption of 2008 financial crisis) come to an end. Though China’s stimulus-related spending may help explain the country’s real GDP growth of 10.3 percent over 9.2 percent in 2009, various economic projections herald the end of the package and slower growth of around eight percent from 2012 to 2015 (Note: Figures are drawn from the February 2011 edition of the Economist Intelligence Unit’s country forecast for China.)

In fact, one might also see a stronger appreciation of the Chinese renminbi that trading partners – particularly the US – have been long expecting. Certainly, the Chinese government is likely to remain highly cautious in the area of exchange-rate policy and will not undertake substantial revaluation. However, being aware of the problem posed by China’s domestic and global economic imbalances, state planners genuinely desire to reduce its disturbingly large current- and capital- account surpluses and hence, overabundant foreign-exchange reserves. Since China abandoned a strict peg to the dollar in 2005, the yuan has risen by an annual average of 4.2 percent. It is plausible for China to appreciate the renminbi in the near term to a value that could blunt the brunt of American pressure; at least that which was generated by the US business community rather than its politicians.

A race in perception management

 

Yet, Beijing remains skeptical that any significant appreciation of the renminbi will actually appease US leaders. Judging from China’s reactions to the policies and behavior of the Obama administration over the last two years, its leadership believes that the US is intent on curbing China’s economic growth no matter what. The only solution for China to beat what it perceives as American mercantilism is to actually reach the economic top as soon as possible. By virtue of its clout as the world’s largest economy, the US continues to wield significant power in controlling much of the global politico-economic game.

Projections that China will surpass the US in the coming years as the world’s economic giant stands to transform perceptions about the Asian giant’s role and importance on the global stage – making it the new primus inter pares. When the Chairman of Goldman Sachs Jim O’Neill first coined the term ‘BRIC’ in 2003 and forecasted the growth of the grouping’s respective economies, he predicted that China would overtake America in 2041 before revising the projection to the year 2027. In December, The Economist forecasted that China would reach the top in 2019, assuming that China’s annual real GDP growth over the next decade averages 7.75 percent in China and 2.5 percent in America (assuming that respective inflation rates average four and 1.5 percent, and that the yuan appreciates by three percent annually). Already, Goldman Sachs predicts that BRIC as an aggregate will overtake the US by 2018.

Both Russia and Brazil have welcomed China’s decision to include South Africa in BRIC, as they are confident that Beijing’s prudent planning and economic rise will also lift Moscow and Brasília to new heights. They would also rather see China leaning toward the emergent politico-economic block than to see the establishment of a G-2 arrangement with the US. Whatever happens, one thing is clear: The international community can expect an interesting decade with China shaping the global economy, brick by brick.

Dr Graham Ong-Webb is a Managing Editor with IHS Jane’s. He holds a PhD from the Department of War Studies, King’s College London. This article was published by theI nternational Relations and Security Network (ISN)

ISN Security Watch

ISN Security Watch

The ISN is one of the world's leading open access information and knowledge hubs on IR and security issues, based at ETH Zürich, Switzerland.

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