A legacy of crises
Experience over the past 20 years underscores that China should not take global risks lightly. That lesson is all the more meaningful in 2018 — a year that not only marks the 40th anniversary of China’s reform and opening-up but also the 10th anniversary of the global financial crisis and the 20th anniversary of the Asian financial crisis, two singular events that posed enormous challenges both to China and to the world. While China was adept at dealing with the short-term repercussions of these crises,there are enduring strategic implications that are only now becoming evident.While the Chinese economy is a good deal less dependent on the vicissitudes of external demand than was the case before the 2008 crisis, exports still account for nearly 20 percent of the nation’s GDP, or about half the share going into household consumption. With consumer-led rebalancing still in its very early stages and not yet strong enough to buffer unexpected shocks elsewhere in the economy, any disruption in the global climate could prove quite problematic for China.
In the early days of China’s economic development, export-led growth was a powerful antidote to a nation that was afflicted by 20 years of internal instability from the mid-1950s to the mid-1970s. It was hardly a coincidence that as the export share of the economy went from 4.5 percent in 1978 to 37 percent in 2006,Chinese GDP growth surged to 10 percent annually on average for three decades. Two factors were at work — an increasingly powerful Chinese export machine and a major acceleration in global trade. It was a most fortuitous combination — coming at just the right point in time to spark China’s economic takeoff.
While Chinese reforms were an essential ingredient in the successes of this export-led growth strategy, China’s export machine didn’t materialize out of thin air. It required massive investments in productive capacity and infrastructure that pushed the fixed investment share of GDP above the 40 percent threshold by the early 2000s. Unlike other developing economies that borrowed heavily from abroad to fund their investment programs, China’s boom was largely self-funded — supported by a surge in domestic savings that ultimately breached the once unheard-of threshold of 50 percent of GDP in the pre-crisis 2000s.
Yet as President Xi implied in his report to the 19th National Congress of the Chinese Communist Party, there is good reason to doubt the staying power of China’s externally-focused growth gambit. His warning, of course, was very much in sync with concerns originally expressed by former premier Wen Jiabao. In March 2007, Wen famously cautioned of the “Four Uns” — a Chinese economy that had become increasingly “unstable, unbalanced, uncoordinated and unsustainable” .
Ten years later, Xi’s message has sharpened the focus on an“unbalanced and inadequate” system, but the implications of the basic message are very much the same: China can only stay the course if it resolves the contradiction of its imbalances. That underscores the long-standing case for structural rebalancing of the Chinese economy away from exports and external demand toward services, innovation and consumer-led growth.
Like the prescription that followed from the critique of Wen,Xi’s reassessment of China’s principal contradiction is also shaped importantly by the trials and tribulations of the outside world — a world, as Xi put it, that remains “…in the midst of profound and complex changes.” That gets to the second building block of China’s export-led growth miracle — the strength of external demand that supported the all-powerful Chinese export machine.
That support turns out to have been fleeting. The Asian financial crisis of 1997—1998 was a warning of what was to come — a severe and protracted slowdown in global trade that has continued with a vengeance in the aftermath of the global financial crisis of 2008—2009.(https://www.daowen.com)
It was tempting, of course, to ignore the first of these two external shocks, as Asia and the world bounced back sharply from the crisis of the late 1990s. China was particularly adept in deploying what it called “proactive fiscal policies” in order to sidestep the pan-regional contagion back then.
Meanwhile, with another eye on the opportunities of WTO accession that were about to come China’s way, it was hardly a time to doubt the opportunities of export-led growth.
Yet, unfortunately, there was trouble brewing in an increasingly crisis-prone world. The underpinnings of external demand for Chinese exports turned out to be built on quicksand. The bursting of the US subprime mortgage bubble, eventually accompanied by the implosion of global credit and equity bubbles, as well as a virulent European sovereign debt crisis, led to a fullblown collapse on the demand side of the world economy, with lasting repercussions for global trade.
Following the unprecedented 10.5 percent plunge in global trade in 2009, world trade growth since has averaged only 3 percent— literally half the 6 percent pace over the 1980 to 2008 period. China, the world’s biggest exporter, could hardly dodge that bullet.
Global healing in the aftermath of such a wrenching crisis has been a long and arduous process. This resonates with Xi’s lingering concerns about the persistently fragile state of the world economy.
The toughest global lesson may well be that China needs to look elsewhere to resolve its principal contradiction. Quite simply, it can no longer afford to bet on the once seemingly unstoppable momentum of global trade. Recent populist hints of a “de-globalization” only underscore the perils of the external solution to China’s remaining development challenges.