How will Australia and the world cope with the re-emergence of China as a great power?
13 Feb 2014|

China Shipping Line vessel in New York harbour.

China’s annual economic growth rate has slowed from double digits during most of the past 33 years to about 7.6%. The slowdown reflects weaker exports as a result of lower growth in the global economy and an unwinding of the aggressive macro stimulus program China introduced during the global financial crisis. The stimulus program led to excessive investment and a large increase in debt. The central bank and the new government now want to deleverage the economy and increase the role of consumption as a growth leader.

A plenary session of the Communist Party Central Committee in November 2013 announced far-reaching reforms to enhance the economy’s performance during the next decade. The plenary communique emphasised that market forces must now play a ‘decisive’ role in shaping China’s economy, whereas previous communiqués said that they’d play only a ‘basic’ role. Under the new plan, China will liberalise its financial system, increase dividends from state-owned enterprises, enhance the role of small and medium-sized enterprises, liberalise the Hukou system (a registration system that determines the citizenship rights of rural people moving to urban centres), terminate the four-year work detention program for criminals or political dissidents, and relax the one-child policy. China needs to increase its birthrate because the labour force is now shrinking and the population is rapidly ageing. The new policy could produce 1.5–2.0 million more babies in two years compared to the 16 million born in 2012.

China displaced Japan to become the world’s second-largest economy in 2010 and could overtake the US to become the largest economy during the next 10 years. China’s now the leading trade partner for 124 countries, compared to 76 for the US. Its stock of inward foreign direct investment (FDI) has risen to $832 billion (current US dollars). Only the US, France and the UK have more. China’s also becoming an importer–exporter of capital. Its outward FDI was $84.2 billion in 2012—a sum exceeded only by the US and Japan. China has $3.7 trillion of foreign exchange reserves, the largest in the world. Japan’s next, with $1.3 trillion.

China is now the world’s largest manufacturing nation. It has the biggest automobile industry, producing twice as many cars as the US. It consumes over half the world’s semiconductor output and produces 75% of global output of mobile phones, 87% of personal computers and 52% of colour televisions.

China had four major advantages in pursuing rapid industrialisation. It had a large supply of low-cost labour. It regulated the financial system in such a way as to guarantee a low cost of capital for new investment. It maintained an artificially low exchange rate to bolster exports. It neglected the environment. All these factors are now reversing. The labour force is shrinking. Liberalisation of the financial system will raise interest rates. The exchange rate has appreciated 26% against the US dollar since 2005. China has severe pollution problems and is now being forced to greatly improve environmental regulation.

Five years ago, China displaced the US and Europe to become the world’s dominant consumer of base metals. It now consumes 40% of global copper output, compared to 13% in 2000. It not only has a voracious appetite for raw materials, but is also making large investments in the natural resource sectors of Australia, Canada, Africa, Latin America, Kazakhstan, Myanmar and other developing countries.

China’s economic take-off has permitted a large increase in military spending. In 2012, Chinese defence spending was $166.2 billion compared to $22.2 billion in 2000. It’s now second only to the US. As a result of its new military power, China has become more belligerent in its foreign policy. It’s made claims over much of the South China Sea, provoking disputes with Vietnam and the Philippines. It’s now disputing Japan’s control over the Senkaku/Diaoyu Islands. It’s announced a new air defence zone over the islands. Japan’s alarmed about these overtures because its defence budget is now less than one-third of China’s, whereas in 2000 it was more than twice as large.

The new president, Xi Jinping, appears likely to be the most powerful Chinese leader since Deng Xiaoping. His faction controls six of the seven seats on the Standing Committee of the Politburo. The recent plenary made him the leader of both the new national security and economic reform committees. There’ll continue to be a free debate on many issues, and the government will carefully monitor public opinion on issues such as corruption and the environment. In pursuing economic and legal reforms, though, Xi won’t tolerate any threat to the supremacy of the Communist Party. The Chinese political system will therefore continue to be an evolving story, combining an authoritarian leadership with a rising middle class demanding more accountability for the government’s actions.

The re-emergence of China as a great power will be Australia’s greatest foreign policy challenge during the 21st century. Canberra will have to carefully balance Australia’s growing economic relationship with China and its traditional alliance with the US. The major threat to this balancing act would be if America’s fiscal problems force it to slash defence spending and withdraw from the East Asian region. In such a scenario, Australia would cease to have a great-power ally and be more vulnerable to foreign aggression than at any time since 1942. The only Asian country with the long-term potential to challenge Chinese hegemony is India. Australia should therefore hedge its bets with the US and China by pursuing better relations with New Delhi.

David D. Hale is is a Chicago-based global economist and the founding chairman of David Hale Global Economics. His recent ASPI Special Report, ‘China’s new dream: How will Australia and the world cope with the re-emergence of China as a great power?’ is available for free download here. Image courtesy of Flickr user Stuck in Customs