China’s new international growth agenda

by Michael Spence

For most of the past 35 years, China’s policymakers have set their focus on the domestic economy, with reforms designed to allow the market to provide efficiency and accurate price signals. Though they had to be increasingly aware of their country’s growing impact on the global economy, they had no strategy to ensure that China’s neighbors gained from its economic transformation. But now China does have such a strategy, or at least is rapidly developing one. Moreover, it extends well beyond Asia, embracing Eastern Europe and the east coast of Africa.

A key element of China’s strategy is the recently established Asian Infrastructure Investment Bank (AIIB), and to some extent the BRICS’ New Development Bank, established last year by Brazil, Russia, India, China and South Africa. Both banks are obvious alternatives — and so rivals — to the Western-dominated World Bank and International Monetary Fund.

Also vital to the new strategy are two prospective modern-day silk roads: an overland route through Central Asia to the Black Sea and a “Maritime Silk Road” by which shipping will pass from the South China Sea, through the Strait of Malacca, across the Indian Ocean to East Africa, and from there through the Red Sea into the eastern Mediterranean.

Economists sometimes portray the global economy as a huge bazaar. But it is not. It is a network, in which the links are built by expanding the flows of goods, services, people, capital, and — importantly — information. China’s goal is to create these links, and it has plenty of assets that will allow it to act as a catalyst of global growth and development.

The most obvious asset is China’s large and growing domestic market, to which other economies can gain access via trade and investment. China will thus be joining the ranks of the advanced countries in providing an export market (and jobs) for countries at earlier stages of economic development. In addition, because China has built up a capacity to invest that is far larger than its domestic economy can now absorb, it will inevitably seek opportunities abroad, both public and private. Chinese companies, in particular, will increasingly want to establish their brands internationally.

With the involvement of the AIIB and the New Development Bank, China has developed what amounts to a multinational development strategy. While there are skeptics, broad support for the AIIB suggests that the benefits outweigh the risks, and that China’s initiatives may help build a network that is open to everyone. After all, the trade and investment that will follow could not possibly all flow through China.

Meanwhile, by virtue of more than 30 swap arrangements with other central banks (the first was with South Korea in December 2008), China is using its foreign-exchange reserves to help its neighbors and others defend themselves against volatile international capital flows. This is in tandem with the authorities’ efforts to promote the internationalization of the renminbi, which is rapidly expanding its role in trade settlement. There are significant efficiency gains to be had by settling transactions in trading partners’ currencies, without the intermediation of, say, the dollar.

Of course, there is much more to the internationalization of a currency, not least large and liquid domestic financial markets and the establishment of trust and confidence. This takes time, but China is already applying to the IMF to have the renminbi included in the basket of currencies that determines the value of the fund’s unit of account, special drawing rights, with a decision likely in late 2015.

Joining the U.S. dollar, the British pound, the euro and the Japanese yen in the SDR club would be symbolically significant. More important, as with China’s accession to the World Trade Organization in 2001, which required substantial reforms, fulfilling the conditions for joining the SDR promises to speed progress toward full capital-account liberalization — and thus toward a fully convertible renminbi.

China’s policymakers have long time horizons. Their strategy will doubtless face obstacles in the coming years. The question is whether the strategy is worth pursuing now.

The answer almost certainly is yes. The overland “silk road,” for example, will reduce China’s reliance on sea-lanes, which can be blocked or disrupted, especially at the Strait of Malacca. More generally, Chinese investment will ease the constraints on the silk road economies caused partly by slow growth and investment shortfalls in advanced economies. Ultimately, vibrant economies in the region will benefit China’s economy and its stature.

Many believe that public-sector investment is a good way (perhaps the best way) to use the global economy’s productive resources and increase its efficiency and growth potential. But this requires a multinational effort. China’s leaders surely want international recognition of their country’s global stature. But they also want China’s rise to high-income status to occur in a way that is — and that is perceived to be — beneficial to its neighbors and the world. The new external focus of China’s growth and development strategy seems to be intended to make that vision a reality.

Michael Spence, a Nobel laureate in economics, is a professor of economics at New York University’s Stern School of Business and a senior fellow at Stanford University’s Hoover Institution. © Project Syndicate, 2015