China’s Richer Than It Thinks
(Bloomberg Opinion) -- Almost any foreign official, businessman or journalist visiting Beijing has heard the mantra that China can’t be expected to open up its markets or meet more stringent international standards because it’s still a developing economy. Maybe that argument was valid 20 years ago. Now it’s increasingly tenuous. More importantly, it’s damaging to China and the world.
Pleading poverty ignores the tremendous economic progress China has made in the last few decades. When China joined the World Trade Organization in 2001, it was the world’s sixth-largest economy and at an early stage of reorganizing state-owned enterprises to compete globally. China is now the world’s second-largest economy and its largest trading nation. It’s home to some of the largest globally competitive firms, accounting for 115 of the Fortune 500 largest companies in the world in 2017.
China has moved up the global value chain dramatically, with a world-class export sector bigger than that of any other G-20 economy. It boasts a large domestic high-tech market and technology firms that are fast becoming global leaders. The country has been granted the largest number of patents globally since 2015. Over half its population -- some 700 million people -- use smartphones. As of September 2017, China had the second-largest number of unicorns after the U.S. -- some 98 companies.
True, while China’s per capita income reached $8,830 in 2017, up eight-fold from 2001, it’s still well below the World Bank’s $12,236 threshold for high-income countries. This measure is misleading, however. Already an upper-middle-income nation, China has a high-income country living inside of it. Over 200 million Chinese live in high-income areas, including the cities of Beijing, Tianjin and Shanghai, and the powerhouse coastal provinces of Jiangsu and Zhejiang. Jiangsu alone has a population of 80 million people and per capita GDP of almost $17,000 -- higher than Argentina, Chile and Hungary. Shenzhen’s 12 million residents boast a per capita GDP of more than $27,000 in nominal terms.
China has also become systemically important financially in a way few other countries are. It houses the world’s largest banking system, second-largest equity markets and third-largest bond market, and is promoting a larger international role for the renminbi. In recent years, China has become the world’s largest net exporter of capital; its policy banks have extended more lending to developing economies than all of the multilateral development banks combined.
Ignoring or minimizing all these facts does China more harm than good. Chinese leaders act as though mainland companies still need to be protected from global competition: The country remains the most closed G-20 member, as measured by investment restrictions and ease of doing business. Foreign investment is blocked in many key sectors, such as cloud-computing services, even as China’s three biggest tech firms have all made major cloud-services investments in the U.S. in recent years.
This situation -- where Chinese firms take advantage of open export and investment opportunities around the world but enjoy a significantly protected market at home -- is unsustainable. It’s putting support for the broader global trading system at risk and spurring not just the U.S. but several European nations to consider new barriers to Chinese investment. China has as much to lose as anyone from escalating trade tensions.
As in the global trading system, China has yet to adjust to its newfound importance in financial markets. A recent Bloomberg Economics study found that China’s central bank was among the least transparent in the G-20, with the greatest number of market surprises. A 2016 International Monetary Fund assessment noted that “while data are broadly adequate for surveillance, they are only barely so, and are not commensurate with China’s systemic importance.” Such opacity presents an underappreciated global systemic risk.
Meanwhile, China’s resistance to transparency in overseas lending could prove costly at home. Its insistence on clinging to “South-South” cooperation prevents China from joining groups like the Paris Club to better coordinate with other major official creditors. As China is the largest lender to many highly indebted countries, that could complicate any international efforts to support these economies and leave Chinese taxpayers to foot the bill in case of defaults.
Perhaps most importantly, China’s main challenge now is escaping the middle-income trap -- to become an advanced, innovation-driven economy. That’s going to require a different set of policies than China pursued in its initial development stages. Enhancing productivity will require opening up its largely state-controlled and inefficient services sector. Though China has gotten better about protecting intellectual property rights as it’s ascended the value chain, it still has a ways to go.
Access to global markets will remain essential. To prevent frictions with developing countries along its Belt and Road Initiative, China will need to open its markets more to their goods. Likewise, the “Made in China 2025” initiative will continue to engender a backlash from advanced economies, limiting China’s access to their technologies, unless China loosens its own restrictions.
Chinese leaders certainly aren’t wrong to focus on building a “prosperous society” and improving the lives of all its citizens. The best way to do so, however, is to acknowledge how far along that path China’s already come.
©2018 Bloomberg L.P.