Why China’s economy will continue to grow and attract investment

It is naive to believe that technological decoupling, trade sanctions or forced supply chain changes will end China’s economic expansion. The world has yet to appreciate the significance of China’s inward shift of economic gravity

Prof Zhang Jun

Published: 3:00am, 27 Jun 2020

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Widespread lockdowns and border closures to combat the Covid-19 pandemic have interrupted supply chains and largely paralysed the global economy. Yet its real weakness is not its vulnerable production networks but souring attitudes towards globalisation – and China in particular.

Fear of China’s growing economic clout is increasingly driving many foreign-trade and investment decisions, and not only in the United States. Concerns about manufacturing dependence on China have prompted calls to reshore production and cut the country out of supply chains. The US is even threatening technological decoupling.

But China’s critics are mistaken in assuming that its economic growth depends almost entirely on the maintenance of the global free-trade system and access to Western technology.

China is undoubtedly an important manufacturer but its real economic drivers over the past decade or so have been rapid growth in its purchasing power and fixed-asset investments – including in its thriving technology sector.

The world has not yet fully appreciated the significance of China’s inward shift of economic gravity. This is partly because many economists are too busy criticising China’s investment expansion and highlighting its debt risks. As a result, many politicians still think the most effective way to contain China is to target its position in trade and supply chains.

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To be sure, China is the largest beneficiary of economic globalisation mainly because of its integration into the global free-trade system before and after joining the World Trade Organisation in 2001.

By the late 1980s, Chinese policymakers were advocating that China use global supply chains and international markets to industrialise and accumulate capital. China took advantage of its abundant cheap labour and adopted a “both ends out” approach, importing parts and components to assemble products for export.

But Chinese policymakers have long since understood that this model cannot turn China into a fully developed, high-income economy. In particular, the severe impact of the 2008 global financial crisis on Western economies forced Beijing to accelerate its “change of focus” by developing a more closely integrated domestic market and promoting growth driven by “internal circulation”.

Such efforts have gained momentum in recent years amid growing trade frictions with America and a recognition that China’s economic expansion requires overcoming structural imbalances.

China has taken several steps to correct these imbalances and boost domestic demand. For starters, it allowed the renminbi to appreciate against the US dollar for at least a decade after 2005, and began to open up its protected market to foreign firms in line with its WTO entry commitments.

The government not only liberalised imports, especially of intermediate and capital goods, but also started allowing foreign penetration in financial markets and other non-tradeable sectors. And by establishing more free-trade zones, China has honoured its commitments regarding foreign-portfolio investment and facilitation of cross-border capital flows.

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Second, China has increased physical infrastructure and logistics investments at a rate of over 20 per cent annually over the past 15 years, resulting in new and improved highways, railways, airports and harbour facilities. During the past decade, for example, it built a high-speed railway network of more than 35,000km (21,748 miles).

Third, since the beginning of this century, Chinese authorities have consistently supported the construction of large-scale information and communication infrastructure networks, and encouraged private enterprises to innovate in cutting-edge sectors such as mobile payments, e-commerce, the internet of things, and smart manufacturing.

This has helped to foster the emergence of many locally based international technology firms, including Alibaba, Tencent and JD.com. At the start of this year, the government launched a new round of large-scale investment in 5G base stations.

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Finally, the Chinese government has promoted strategic plans to integrate economic mega regions and generate domestic demand. This includes construction of the Xiongan New Area, where noncore functions of the capital will be moved from Beijing, and which will accelerate the development of the Beijing-Tianjin-Hebei triangle.

In addition, the government is developing the Guangdong-Hong Kong-Macau Greater Bay Area and encouraging closer cooperation among the 16 cities in the Yangtze River Belt. The Yangtze River Delta has been leading the economic integration process among mostly industrialised provinces, headed by Shanghai.

Likewise, two of southwest China’s most important urban centres – Chengdu, the capital of Sichuan province, and Chongqing, the main city on the upstream section of the Yangtze River – have been given incentives to create a “double-city circle” through closer economic cooperation.

Furthermore, the freight railway to Europe from China’s west and southwest, and the “new land-sea channel” to the south, will boost the mainland Chinese economy and help to stabilise global supply chains.

Indeed, despite shifting its economic gravity, China has no incentive to disengage from global technology supply chains. On the contrary, it will remain an active participant and contribute to global trade and investment.

In further opening up its domestic market to foreign investors, China will support globalisation by helping to correct trade imbalances. Efforts to stimulate domestic demand will create further expansion and opportunities for domestic and foreign investors, boosting global economic growth.

It is therefore naive to believe that forced technological decoupling, trade sanctions or forced changes to global supply chains will end China’s economic expansion. If critics are too short-sighted to see this, it will be their loss.

Zhang Jun is dean of the School of Economics at Fudan University and director of the China Centre for Economic Studies, a Shanghai-based think tank. Copyright: Project Syndicate

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