China’s belts and roads are new paths to growth

An investor watches an electronic board showing stock information in Beijing.
Kim Kyung-Hoon | Reuters
An investor watches an electronic board showing stock information in Beijing.

The World Bank has a message for China's perennial naysayers. At a press conference in Beijing last Friday, the American president of the Washington-based institution Dr. Jim Yong Kim said that China's economy was "the envy of the world," contributing nearly one-third of the global demand and output growth since the onset of the financial crisis in 2008.

And the praise did not stop there. In the World Bank's view, "China's economy is strong and its fundamentals are sound." The Chinese government was also lauded for its economic and social reforms to maintain the economy on a "more efficient, equitable and environmentally sustainable" growth path.

As a Harvard-trained anthropologist and physician, Dr. Kim might have as well advised those panic-stricken financial experts, claiming that China was about to crash the world economy, to calm down with some chee kung (氣功) exercises. They are free at Bryant Park, just behind the New York Public Library in Mid-town Manhattan.

China's large trade surpluses

Readers of this column know that I have consistently held positive views about the Chinese economy. I, therefore, have no problem agreeing with the World Bank's (or IMF's) upbeat assessments of the Middle Kingdom's growth prospects.

But I do have a problem with the composition of China's economic growth. As it is, with an average current account surplus of 2 percent of GDP over the last five years, the world's second-largest economy continues to live off its trading partners. That's not the way it should be. This big and strongly growing economy should be making a net contribution to world growth by running a much stronger domestic demand and buying more from the rest of the world.

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Here are some of the latest numbers to illustrate that point. China's imports in the first half of this year fell a whopping 15.5 percent from the year earlier – a clear sign that domestic expenditures were weakening. So, even with a relatively feeble export growth of 0.9 percent, the country's trade surplus in the January-June interval was still 1.61 trillion yuan ($260 billion) – an astounding one-and-a-half time increase from the same period of 2014.

This should be a matter of great concern to China's trading partners. Financial analysts might also wish to think of that, too. That could be more useful and profitable for their investment decisions than the unsolicited advising of Beijing policy makers, or harping about "shadow banking," local government debt and real estate vacancies – as if China did not know about that.

Now, in fairness to Beijing, one should observe that its chronic trade surpluses are the legacy of the western companies' "China rush" to build up the country as their formidable export base. That trend is still there. China's inbound foreign direct investments in the first half of this year rose 8 percent from the year before to 420.5 billion yuan ($68.4 billion). And that money was not going into smokestacks, sweatshops and cheap-labor operations. The main recipients of these foreign investments were high-end manufacturing industries, such as communications equipment, pharmaceuticals and electronics.

These foreign investors were apparently attracted by an increasingly liberal regulatory environment, more educated labor force, large domestic markets and modern infrastructure. That clearly means that China will remain an export powerhouse for the foreseeable future.

"They are eating our lunch"

In addition to stimulating its domestic demand, China can only become a net contributor to world economic growth by recycling its large trade surpluses via investments in manufacturing and service industries in the rest of the world. That potential is enormous. Just looking at this year, the pool of China's outbound direct investments could be more that $300 billion.

It seems that this bounty was very much on the minds of BRICS and SCO (Shanghai Cooperation Organization) leaders during their summit in Ufa, Russia on July 9-10, 2015. One of the most important outcomes of that meeting was a Sino-Russian agreement to establish a close cooperation between development programs of the Eurasian Economic Union (Russia, Kazakhstan, Belarus, Armenia and Kirgizstan; Tajikistan is in the process of becoming a full member) and those of the Silk Road Economic Belt (the Silk Road plus the Maritime Silk Road), intended to revive old trading routes between China and Europe.

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Tangible signs of that cooperation are a number of large infrastructure projects in Central Asia and a 770 km high-speed rail line expected to connect Kazan and Moscow by 2018. That will be the first stage of a Beijing to Moscow bullet train (to be completed by 2030), and an important part in the unfolding Silk Road adventure.

China is also working to improve its access to EU's large trade and financial centers. At a China-EU summit in Brussels on June 29, 2015, the two sides agreed on joint investment projects within Europe's planned 315 billion euro infrastructure program. EU leaders apparently want to increase the "connectivity" between these two large economic systems. Expect the heavy lifting to be done by the Chinese, while, as always, Europeans remain consumed in their proverbial indecision and petty squabbles.

Only Germany seems determined to cut to the chase. Sensing juicy contracts in the air, Berlin dispatched its Vice-Chancellor Sigmund Gabriel (a Social Democrat) to Beijing last week -- at the height of the Greek financial crisis -- to remind the Chinese that President Xi and Chancellor Merkel agreed in March of last year to transform their bilateral relations into a "comprehensive strategic partnership." Interesting, indeed. Chancellor Merkel's oft-professed attachment to "European values of freedom, human rights and democracy" – emphatically advocated whenever politically convenient – won't be allowed to stand in the way of this very lucrative connection.

Investment thoughts

China's economy will continue to grow at a steady and sustained pace amid slow and cautious reforms of its financial system and the sprawling state-owned companies. Accidents, such as the recent equity market turmoil, will be part of that process, but that is unlikely to derail this unique example of a command economy with an increasingly expanding private sector.

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The structural features of China's growing trade surpluses will remain a serious problem for the world economy. But that does not seem to worry Beijing at a time of its rising heft in global affairs. China, like the Roman Empire, will adhere to the festina lente – make haste slowly – strategy in its promised attempts to shift emphasis from exports to private consumption and other components of domestic demand.

If Donald Trump -- the "I am so smart" guy -- makes it into the primaries, or beyond, you will hear, again and again, his succinct view (sounding like a scream) of the U.S.-China trade: "They are eating our lunch." That might look like the usual part of the election circus. But don't be fooled. Taken in a larger context of Pentagon's worries about East Asia, America's trade deficit with China -- running at an annual rate of $330 billion in the first four months of this year -- could lead to dangerous complications of an already strained Sino-American relationship.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.