It is true that any financial turmoil in China can create turbulence around the world and even hit New York. According to economic analysts, China could have avoided certain obvious mistakes which many saw coming. What the episode shows is how the relative weights are shifting in the world way beyond just trade.
The recent World Bank data reveals that China still accounts for less than 15% of global GDP, but its contribution to global growth last year was in the range of 40%. So when China’s growth slackens, pretty much every one around the world feels it. Not surprisingly, therefore, people all over the world are concerned about China’s prospects.
In a bid to build global-Asia connectivity, President Xi Jinping took an initiative of “One Belt, One Road”. The initiative is of huge importance, not as an immediate plan, but as a long-term approach toward China’s development. To begin with, George Yeo, the former Foreign Affairs Minister of Singapore stated that China has all excess capacity in steel, cement, factories producing rolling stock and so on which can be applied to great use linking China to its neighbors. This growing connectivity of China to its neighbors deep into Eurasia is a story of epic proportions.
Three years ago, China established a rail link to the Persian Gulf via Kazakhstan, Turkmenistan and Iran. With the opening of Iran, the dynamics across a large part of Asia will change. Throughout history, Imperial China and Imperial Persia, two high civilizations, always had good relations maintaining peace in the region. China, ever a comprehensive, long-term planner, is proposing or already executing enormous railroad expansion to the Gulf of Thailand, to the Andaman Sea, to the Arabian Gulf, to the Black Sea, to the Baltic Sea and all the way to the North Sea.
Back in 2016 China and Russia agreed in principle to build a fast train connecting Moscow and Beijing probably through Kazakhstan. The distance between these two cities is 7,000 km, and the journey is supposed to take less than two days. But all these calculations about the economic feasibility change profoundly if, along the way, one builds a belt of cities. This is why the words “One Belt, One Road”, announced by President Xi first in Astana in October 2013, and then in Jakarta in November 2013, are far more than a slogan.
According to George Yeo, they represent a strategic reorientation. “One Belt, One Road” goes way beyond being a plan on paper. It is intended to create a huge flow, a 21st century revival of the old overland and maritime silk roads, and at the end to find all of Eurasia crisscrossed by connections. Using a biological metaphor, the growth of these connections is like angiogenesis in the human body. First the vessels grow, then logistics companies provide the blood circulation and development of organs follows.
George Yeo stated that Eurasia is a large part of the world, and it will, in a few decades from now, be the principal driver of the global economy. China knows that to improve the productivity of its real economy, it must deepen and liberalize its capital markets. Despite the recent financial turmoil, this strategic intent to deepen capital markets will not be deflected. The Chinese are now attempting to create two separate oceans of renminbi, one within China, which is the much larger one, and another outside China of which London is determined to be a major financial center.
An important question here is why can’t China allow the internationalization of other currencies like other major countries? To understand this we have to go back to the long history of China and the difficulty of governing a large part of the world’s population. Professor Jay Ogilvy of Yale University explained that whoever governs China must always be able to exercise some control over its own internal destiny. In the second half of the 19th century, after the second opium war, western customs officers inspected any ship landing on the China coast. Professor Jay Ogilvy noted that by the late Qing dynasty, China had lost control of its monetary system and therefore an important part of its sovereignty. China will not allow this again.
What about fears that China will go into recession? According to Professor Jay Ogilvy, this is not likely. He explained that China’s growth will slow down, maybe to 6%, or even 5.5%, but is now on a very high base of a GDP of about $10 trillion. That the slowdown in China is causing alarm around the world is because of the lack of aggregate demand powering the global economy. Despite easy money in the last seven years, the global economy has still not performed well. Central bankers fear that if they withdraw the liquidity, asset markets will implode, bubbles will burst, and the real economy will spiral downwards.
Fareed Zakaria in his 2003 published book entitled “The Future of Freedom”. stated that China is probably the only major country in the world today which is able to exercise a national will on a range of subjects. This is principally because the economy is still in a late adolescent phase and partly because the political culture over the centuries accepts centralized governance. For example, when President Xi promulgates “One Belt, One Road,” the message percolates right down and funds are allocated. The countries involved know it is credible because it is backed by a strong national will.
There is much talk about the South China Sea becoming a flashpoint. It is true that the South China Sea is important, but it is not the most important issue. It is a trial of strength between the United States and China but one which both sides will be careful not to mismanage. The most important issue is still the global economy, because if we get that wrong, everything else is in danger.