Ask the expert: China Shakes the World

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How can the US, Europe and indeed the rest of the world respond to the emerging giant? James Kynge, author of the recently published China Shakes the World, answers your questions.

Book review: China Shakes the World
As James Kynge notes in his balanced and very readable account of China’s metamorphosis from Maoism into the workshop of the world, the Chinese have a penchant for enumeration – from “the one China” principle through “the two whatevers” all the way to “the stinking ninth category”. Read the full review, by Chris Patten, the last British governor of Hong Kong, here.

For an edited extract from China Shakes the World, click here.

The most thought-provoking online contributions may be published in the Financial Times newspaper. Please supply your full name and location.

I very much enjoyed this book, but it left me feeling very worried about the future of the western world. If we can’t compete with China - even in high-tech industries - how on earth are we going to survive against a country with low wages, working long hours, no welfare and an iron determination to win at any cost?

Justin Pugsley

James Kynge: Thank you Justin. My short answer is that China’s rise is a big challenge, and a bigger potential challenge, to many people and countries in the West. But we should not despair, for a number of reasons, most of which are foreshadowed by the work of David Ricardo, the 18th century Scottish economist who described the principle of “comparative advantage”.

I know it is a clunky, inelegant metaphor, but I tend to think of China as a lobster. Its pincers are well-developed and powerful but its back legs are weak and spindly. The country’s manufacturing prowess (the pincers) is – as you suggest – quite awesome. But in channeling its energies into manufacturing, China compromises its development elsewhere. Herein lies the hope for balanced trade and mutual prosperity from China’s rise. Although China may dominate in manufacturing, it will continue to need the resources, energy and services that either cannot be supplied domestically or are better supplied from overseas.

The truth is that China’s weaknesses – its environment, its creaky financial system, the burden of its population, the shortcomings of single-party rule, a widespread crisis of trust, the lack of a rule of law and others – are almost as profound as its strengths. This may mean that while China will tend to dominate in manufacturing, it may continue to struggle elsewhere, providing opportunities for western businesses.

While some analysts predict China’s rising need for oil will create diplomatic imbalances, especially with the US, others argue that oil security is a “global public good” and China’s growing oil imports are not in themselves fuel for US-China antagonism. In view of President Hu Jintao’s recent visits to Africa to secure oil deals, which view do you espouse, and why so?

Wilson Favre-Delerue, Beijing

JK: I subscribe to the first viewpoint that you offer. China’s thirst for oil and its quest for security of supply will probably bring it bumping up against the US’s strategic agenda in ways that are already clear in Iran, Sudan and Venezuela. Iran provides the clearest example. US exhortations that China join in pressuring Tehran to drop its nuclear ambitions have created an uncomfortable dilemma for Beijing – either it seeks to advance its current and future oil security against the wishes of the global superpower, or vice versa.

Of course, China is entitled to seek oil supply security. The problem lies in the mismatch between geology and geopolitics. Much of the world’s oil is controlled by countries that the US regards as rivals or dubious partners. In addition, much of the oil that China imports must pass through narrow sea channels, such as the Straits of Malacca, that are controlled by the US. Beijing is not comfortable with the strategic vulnerability that this implies; the idea of the US navy choking off access for Chinese oil imports through the straits during, say, a clash over Taiwan is deeply worrying. Beijing, therefore, is seeking to strengthen its alliances, and docking facilities for its navy, with countries all along the sea routes from the Middle East to China. This, in turn, gives the US pause for thought.

Why is the rise of China viewed like it is by the western world that actually tried to colonise China (but failed) a century ago ... What exactly is the West afraid of? Why can’t the West leave China alone?

Leo Liu

JK: Thanks Leo. This question, or variants of it, is one that I often get asked by Chinese friends in Beijing. And it is a tough one to answer well because of the emotions that surround the issues you highlight. On the one hand, I can fully understand the feelings of Chinese people who feel unjustly accused when westerners say that China’s rise “threatens” the West. Most Chinese individuals I know are preoccupied with making a better life for themselves and their families and the last thing they want to do is to threaten other countries.

On the other hand, though, it seems to me that Americans and Europeans who are afraid of China’s rise do have grounds for concern. They remember that China’s post-revolutionary history has not been particularly peaceable – wars or skirmishes have been fought with the former Soviet Union, India, Vietnam and the US/South Korea since the 1949 revolution. They also see the continuing tensions around Taiwan, between China and Japan, and the growing strategic competition between the US and China in the Asia-Pacific. In addition, in an age characterised by the geopolitics of scarcity, many observers wonder whether the US and China can find ways to accommodate each others’ appetites for energy and resources.

What will happen when the day comes when the developed West is totally dependent on Chinese exports, when factories in the west that previously produced the now imported goods from China have closed down and forgotten their hitherto knowhow, and China needs to increase the price of its exports in order to better remunerate its workforce?

Graham Sage, Singapore

JK: As I mentioned in the answer to question one, I don’t think China’s commercial interaction with the world will be one-way traffic, or entirely to China’s advantage.

But the issue of price you raise is both interesting and topical. I think there is a possibility that China’s export of deflation in manufactured goods, which has run since late 1997, is coming to a close. Already the prices of goods leaving the Pearl river delta and other coastal locations are starting to rise. The prices of products manufactured in inland areas, it should be noted, have remained flat or falling.

When China starts to export general inflation in manufactured goods again, then the knock-on effects on the global economy may be profound. Interest rates will tend to edge up, the swollen pool of liquidity that has helped to boost asset prices the world over may tend to drain away and the values of many asset classes (including housing) may decline.

As the US economy shows signs of slowing, yet China continues to invest in excessive production capacity - much of it for export, just how close do you think China is to one of its periodic reversals?

Nigel Prentis, HSBC

JK: Nigel, If I knew the answer to that one, I’d be laughing! Nevertheless, it is a question that I often ponder these days. Many behavioural foibles have begun to look decidedly top-of-the-market to me. A Chinese friend of mine recently attended something called an “M&A speed dating” event, in which private equity and venture capitalists were given five minutes to form an impression of whether they wanted to invest in a particular company sitting in a particular booth, before moving onto the next booth, next company. This type of thing, to me, smacks of too much money chasing too few (accurately priced) opportunities. In other areas too, the harbingers of a cycle shift appear prevalent: brokerage house reports are starting to look more and more like books. Beijing taxi drivers have started to give you stock tips again.

Having said all that, the prime motivators of the Chinese boom – high productivity manufacturing driving rapid urbanisation and infrastructure construction – do not appear to be losing steam yet. Cities all over China are still growing at breathtaking rates. The excess capacity that you mention has been prevalent throughout the recent boom but it hasn’t created a slowdown because the banks, for various China-specific reasons, are still willing to lend.

I think that the slowdown, when it comes, may derive from a subsidence in external demand that exposes a significant portion of China’s current activity as having been precipitated by an excess of money supply rather than more rooted, fundamental factors. (See answer four above.)

What is your reaction to last week’s announcement from China’s government that it will build more than 40 new airports by 2010 and develop 10 new sea port facilities by the same date. Big retailers (Wal-Mart) and consumer product manufacturers (Nike, Toys R Us) seem to us to be moving towards an ever greater reliance on Chinese labour - for finishing, packaging, labelling, sorting and store-preparation, as well as manufacturing goods. Products will arrive at European and North American ports and airports and go directly to stores.

The Chinese government - realising that if this becomes more commonplace their present transport infrastructure would fail to cope - seems happy to invest billions now to keep growth going in the next decade. What grounds do you see for optimism that this will pay off?

Stephen Tierney, Global Institute of Logistics

JK: The infrastructure build-out across China is breathtaking. The secret of the country’s success in many fields, it seems to me, is what I call in my book, “the compression of developmental time”. Workers being paid at pre-industrial revolution levels are operating 21st century equipment and using first world infrastructure. This means that the efficiency gains that have taken centuries or decades to distill in the West are available to China almost off-the-peg.

Whether all of this infrastructure build-out is justified is dependent on external and domestic demand. Domestically, I see no reason why it should not be justified. If 700m people are due to move from the rural areas of China to cities by 2050, then my guess is that the demand for infrastructure will, over time, materialise.

Levels of external demand, however, are less certain. As I mention in my book, one of the biggest uncertainties attending the rise of China is whether the world will let China rise, or whether Europe and the US, facing unbearable competitive pressures, will slowly close their doors to trade and commerce with the Middle Kingdom. Such an outcome could mothball some of the trade-related infrastructure that you mention.

Regarding the comparison between China and India, I notice many western scholars think India has the advantages on the ‘software’ - such as English proficiency, legal systerm, management skills and products design and innovation. I doubt this potential gap is really that significant and think China’s potential in these areas is huge.

Firstly, in the great China region, places like Hong Kong and Taiwan provide skilled workers or services from management, finance to technical design to benefit from and help mainland China’s economic boom. These are the supports that India does not have and are not taken into account by many western scholars.

Secondly, China is eager to learn from the west the skills that it is short of. I have attended universities in the UK and Canada where classes like economics, accounting, business studies and engineering always have a significant proportion of students from China (sometimes they are even more than local students). These students are crucial for China’s next stage of economic development.

Now we already see China starting to shift production to the higher value end of production with a strong manufacturing foundation. Again, this is something that India does not have. What are your thoughts?

Jacky Zhang, Toronto

JK: I tend to agree with your general point. It is too simplistic to think that China does the hardware (manufacturing) and India does the software (services outsourcing). I also observe the changes you describe in China. Great strides are being taken in professional services, technical design, computer software and other areas. And I think that with some 200m people in China learning English (many of these are school pupils at the moment), India’s linguistic lead may also be pared back in coming years.

I think that China and India are set to become “educational superpowers”. Already, they graduate nearly 1m engineering students every year, and the cost of education in both countries is far below that in Europe and the US. Thus, highly qualified and capable white collar workers are going to become available to multinational employers at salaries that are much lower than prevailing levels, I think. This will have a global impact.

I would say, though, that China may suffer in some areas of competition in services from systemic dysfunction in the legal system, a reputation (deserved or not) for widespread corruption and IPR infringement.

Should the EU sign the Free Trade Agreement with China in the long-term? What are the pros and cons of a possible agreement? What are the consequences of a trade war between EU and China (textiles, automobiles etc)? Can you give your opinion about IPR (non)protection in China.

Berat Rukiqi, Brussels

JK: This is a crucial question. If the EU designates China as a “free market economy” it will make it more difficult for EU companies to successfully fight anti-dumping cases against their Chinese counterparts. This may sound somewhat esoteric but given that more dumping cases are launched against China than any other country, it is actually a mainstream problem.

My feeling is that if China meets the criteria of a market economy, it should be designated as one. If it does not, then it shouldn’t. That may sound self-evident, but in fact this issue has become so politicised in the last couple of years that the simple question of entitlement is often all-but lost.

So what are the facts? In my opinion China does not yet qualify for full market economy status because of several subsidies and non-market prices that persist. The price of water is set artificially low, the price of credit is heavily influenced by interest rates that are only allowed to fluctuate within a narrow band, the price of oil is heavily subsidised, the price of electricity is also kept artificially low. There are no independent labour unions, so workers lack the power to bid their wages upward. Some loans, especially those to large corporations associated with the Communist Party, can be rolled over indefinitely.

On the protection of intellectual property, I think this issue is now front and centre in the constellation of trade irritants that threaten to sour China’s commercial relations with the US and Europe. Beijing is starting to take action in certain areas, but in my judgement it could be doing a lot more to stamp out abuses.

Is China now the fourth largest economy in the world or the second largest in PPP terms?

James Ward, Wales

JK: My understanding, James, is that it is indeed the fourth largest in unadjusted terms and the second largest when the figures are adjusted for purchasing power parity (PPP).

How has, and how will, the so-called Chinese diaspora influence and benefit from the direction of mainland China’s political economic trajectory? The material expansion of the Chinese economy has been the story of the decade. Is the unreported story of the decade, then, the utilisation of this material expansion as a means for the self-expansion of the financial (and political) power of this cosmopolitan network of ethnic Chinese businessmen? Perhaps, to a lesser extent, we can say the same of Japanese capital in relation to the material expansion of China. What, then, is the relationship of these Chinese businessmen to Japanese capital?

Peter Queck

JK: Interesting question, and an area in which I may not be as well-informed as you.

I think there are a number of things going on. First, the members of the Chinese diaspora that invested in China in the 80s, 90s and more recently have often reaped handsome commercial rewards, thereby strengthening their financial standing. Second, as China’s cultural footprint around the world expands, the overseas Chinese may find they are in increasing demand to help interpret China to other cultures and peoples and to act for multinational companies operating in China.

There is one aspect of your question that I am not sure about, however. That is the use of the term “network” to describe overseas Chinese businessmen. I expect that there is a network of sorts, or more likely many small, unconnected networks but I often think that outsiders place too much store by the idea that there is a “Lords of the Rim” type alliance of overseas Chinese tycoons working in a co-ordinated fashion to win inside opportunities in China. In my (admittedly rather limited) experience, overseas Chinese businessmen in China tend to work pretty much independently of each other.

Is it possible that instead of witnessing a huge economic success, we are observing the dismantling of the last communist stronghold?

Jose Varas, Aberystwyth, Wales

JK: My guess is that we are witnessing both at the same time. China’s economic success has come as a result of the unravelling of many of the command economy restrictions that inhibited entrepreneurial vigour and kept assets in an inert, non-monetised state.

But it would be a mistake to assume that because China has all but jettisoned ideological communism, it will similarly discard the rule of the Communist Party. The party remains as committed to its survival as the single source of political authority as ever. Herein lies a challenge for the rest of the world. China is the first large economy to emerge in the world created under Pax Americana since World War Two that abides by a very different political system from the countries of the west.

How will the multilateral institutions (UN, IMF, World Bank, etc) built by western nations respond to China’s rise? Specifically, will China - in the words of former US trade representative Rob Portman - become a stakeholder in the international system, or seek to revise significantly the current order?

Jack Ryan, Canberra, Australia

JK: You put your finger on an issue that will help define the way the world works. I expect China will both accept and pursue a stakeholder status in order to forestall opposition from the west. This would be consistent with its current policy of “peaceful development” or “peaceful rise” as it is sometimes called. But once a member of the various institutions that deploy the global agenda, it may try to significantly alter the manner in which they operate. China wants to be a rule-setter in the global community.

China is a typical industrial country which became a noticeable global player by becoming a factory for the rest of the world. That was done at the expense of the ordinary Chinese who struggle for their survival. Do you believe China can make a transition from industrialism to post-industrialism given that there is a huge chasm between being a global leader for conventional manufacturing and producing post-industrial products?

Yuri Baranov, Kherson, South Russia

JK: Thank you, Yuri. In fact, I do see China being able to make this transition, though I agree with you that it will not be easy. China is so large and varied that it may start to take on the characteristics of several economies within one political and geographic entity. In other words, coastal cities such as Beijing, Tianjin, Shanghai, Shenzhen, Qingdao, Dalian and Xiamen may in the future exhibit many post-industrial characteristics.

But at the same time, places like Chongqing, a burgeoning city more than 2,500km upstream from Shanghai on the Yangtze river, will continue to boom and belch smoke as it fulfills the “workshop” role. Chongqing, by the way, is growing at the rate of around 300,000 new inhabitants a year – eight times faster than Chicago grew in the 19th century when the US was following its trajectory to superpower status.

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