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A reorientation of China’s economic priorities is the order of the day. Photo: Reuters
A reorientation of China’s economic priorities is the order of the day. Photo: Reuters

Change and continuity in China

As it prepares for a leadership change, China can't continue with policies that have enriched it so far

The 18th national congress of the Communist Party of China (CPC), beginning this week, will witness the once-in-a-decade change in the country’s top leadership. President and general secretary of the CPC Hu Jintao and Prime Minister Wen Jiabao are likely to give way to vice-president Xi Jinping and vice-premier Li Keqiang, respectively. Although the new party boss would be instated during the national congress, it will not be until next spring that the current head of state will hand over the reins to his successor.

The new leadership will have to contend with the formidable legacy of the old guard. It has to manage an economy that is an economic powerhouse today. When the last leadership change occurred, China had just stepped into the ranks of lower middle income countries. It had the sixth largest economy, but was considerably smaller than several industrialized countries leave alone Japan or even Germany. The economic expansion that followed was unparalleled, particularly when compared with that of the Western economic powers. While in 2001, the Chinese economy was only 13% of the world’s largest economy, the US, by 2011 it had become almost one-half of the latter. China was thus firmly established as the second largest economy.

What really counted was the emergence of China as a formidable part in the global economy. A decade ago, China had just joined the multilateral trading system, having secured membership of the World Trade Organization (WTO) after a decade and a half of excruciating negotiations. Many had doubted if the Chinese economy could succeed in making a mark in the global markets after undertaking commitments that were far stiffer than those for other developing countries. For instance, China had to agree to lower tariffs well below the thresholds allowed for other countries in comparable stages of development and could provide agricultural subsidies only at relatively lower levels.

China’s trade performance over the next decade showed that it had a clear plan to use the advantages it had secured by joining WTO. The most significant of these was that China could enjoy the most favoured nation (MFN) treatment. In other words, its trading partners could

not discriminate against Chinese products by imposing arbitrary tariffs or use market access barriers prohibited under WTO rules. Furthermore, its partner countries could not prevent it from importing raw materials and intermediate products that it needed to fuel its economic growth. Taking advantage of these favourable conditions, China’s trade soared. While in the 1990s, China’s trade increased by an average annual rate of 31%; in the next 11 years, the annual rate of trade expansion nearly doubled to 61%. On the back of this performance, the country emerged as the second largest trader with a share of 10% of global trade in 2011.

Behind these numbers on China’s engagement with the global economy lies an important reality: its emergence as the largest exporting country. The export thrust most visible in the past decade came on the back of the deliberate efforts at market diversification. While the importance of the Organization for Economic Cooperation and Development countries declined, large markets such as India and Brazil, along with the African region became more prominent destinations for its exports. This trade strategy, led by an explicit export thrust, meant that China was, in essence, pursuing the doctrine popularized by mercantilists in the 16-18th centuries, whose sole desire was to maintain trade surpluses. The results were startling—within a period of four years, between 2004 and 2008, China’s surplus on merchandise trade account saw a nearly 10-fold increase to reach $300 billion. This level of surplus was not recorded by any country in the entire period since the end of World War II.

This achievement attracted a number of controversies, which only sharpened with the onset of the economic downturn. For long, the West was against the artificial exchange rate regime maintained by China that was used to keep its currency undervalued. At the same time, several countries have put Chinese authorities under intense pressure on the issue of export controls with respect to critical raw materials, an issue that has eventually been brought before a dispute resolution panel of WTO. These issues are symptomatic of the challenges the nation’s new leadership will face if they continue to depend on the policies which brought substantial benefits to the country.

There is, therefore, no doubt that the new regime will have its hands full while managing the economy. It will be under tremendous challenge to preserve continuity of economic performance and meet the rising expectations that have been built among its citizens during the past decade of high growth. At the same time, the leadership will be acutely aware that given the opposition from its partners, its expansionist trade policies are unlikely to pay dividends in future and that the economy has to be made less dependent on the external markets. Clearly, a reorientation of China’s economic priorities is the order of the day—whether Xi Jinping and Li Keqiang can provide the trigger for so doing will be watched with interest.

Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.

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