HSBC headquarters in China Education images/Getty Images

The Global Economy’s New Rule-Maker

As China's domestic market continues to grow, so, too, does its economic power and ability to set global rules. With the country fast approaching a position similar to that of the US and Europe after World War II, much will depend on the policies it pursues in two key areas.

MILAN – In a recent commentary for the South China Morning Post, Helen Wong, HSBC’s chief executive for Greater China, shows that China’s rising generation of 400 million young consumers will soon account for more than half of the country’s domestic consumption. This generation, Wong notes, is largely transacting online, through innovative, integrated mobile platforms, indicating that it has already “leapt from the pre­web era straight to the mobile Internet, skipping the personal computer altogether.”

Of course, China’s rising middle class is not news. But the extent to which digitally oriented younger consumers are driving rapid growth in China’s service industries has not yet received ample attention. Services, after all, will help drive China’s structural transition from a middle- to a high-income economy.

Not too long ago, many pundits doubted that China could make the shift from an economy dominated by labor-intensive manufacturing, exports, infrastructure investment, and heavy industry to a service economy underpinned by domestic demand. But even if China’s economic transition is far from complete, its progress has been impressive.

In recent years, China has been offloading its labor-intensive export sectors to less-developed countries with lower labor costs. And in other sectors, it has shifted to more digital, capital-intensive forms of production, rendering labor-cost disadvantages insignificant. These trends imply that supply-side growth has become less dependent on external markets.

As a result of these changes, China’s economic power is rapidly rising. Its domestic market is growing fast, and could soon be the largest in the world. And because the Chinese government can control access to that market, it can increasingly exert its influence in Asia and beyond. At the same time, China’s declining dependence on export-led growth is reducing its vulnerability to the whims of those who control access to global markets.

But China does not actually need to limit access to its own markets to sustain its growth, because it can increase its bargaining power by merely threatening to do so. This suggests that China’s position in the global economy is starting to resemble that of the United States during the post-war period, when it, along with Europe, was the dominant economic power. For decades after World War II, Europe and the US represented well over half (and near 70% at one point) of global output, and they were not heavily dependent on markets elsewhere, other than for natural resources such as oil and minerals.

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Now, China is rapidly approaching a similar configuration. It has a very large domestic market – to which it can control access – rising incomes, and high aggregate demand; and its growth model is increasingly based on domestic consumption and investment, and less on exports.

But how will China wield its increasing economic power? In the post-war period, the advanced economies used their position to set the rules for global economic activity. They did so in such a way as to benefit themselves, of course; but they also tried to be as inclusive as possible for developing countries.

The post-war powers certainly did not have to take that approach. It was within their power to focus far more narrowly on their own interests. But that might not have been wise. It is worth remembering that in the twentieth century, following two world wars, peace was the top priority, along with – or even before – prosperity.

China shows every sign of moving in the same direction. It most likely will not pursue a narrowly self-interested approach, mainly because to do so would diminish its global stature and clout. China has shown that it wants to be influential in the developing world – and certainly in Asia – by playing the role of a supportive partner, at least in the economic realm.

Whether China can achieve that goal will depend on what it does in two key policy areas. The first is investment, where China has moved aggressively by introducing a variety of multilateral and bilateral initiatives. For example, in addition to investing heavily in African countries, it created the Asian Infrastructure Investment Bank in 2015, and, in 2013, announced the “Belt and Road Initiative,” meant to integrate Eurasia through massive investments in highways, ports, and rail transport.

Second, how China manages access to its vast internal market, in terms of trade and investment, will have far-reaching consequences for all of China’s external economic partners, not just developing countries. China’s domestic market is now the source of its power, which means that the choices it makes in this area in the near term will largely determine its global standing for decades to come.

To be sure, China’s current position on domestic-market access is less clear than its economic ambitions abroad. But China will most likely move toward an open, largely rules-based multilateral framework. The lesson from the post-war period is that this approach will do the most good externally, and will thus enhance China’s international influence. At this stage of China’s development, such an approach will have few if any costs, while most likely conferring many benefits.

What remains to be seen is how China’s relationship with the US fares. The US is suffering from non-inclusive growth patterns and related political and social upheavals. And it now seems to be departing from its historical post-war approach to international economic policy. But even if the US is isolating itself under President Donald Trump, it is still too big simply to ignore. If the Trump administration enacts aggressive policies directed at China, the Chinese will have no choice but to respond.

Still, in the meantime, China can continue to pursue a rules-based multilateral approach, and it can expect broad support from other advanced and developing countries. The key is not to be distracted by America’s descent into nationalism. After all, it is anyone’s guess how long that will last.

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