China may need to change its economic game plan and take more risks if it is to maintain its gold-winning development, writes JUSTIN LIANG.
To the extent that sporting competition reflects an element of national power, China’s tally of 88 medals in this year’s Olympic Games—second only to the United States—was arguably an accurate reflection of its place among the podium of global economic leaders. And just as the Olympics have frequently been used as an important diplomatic vehicle—an opportunity to not only flex a nation’s physical muscles but also its soft power, as China did when it hosted and won the overall medal count in the Games in 2008—the final standings tell us much about a tactical, precise, and powerful China that does not feel a need to be number one.
While it is tempting to overanalyse the significance of China’s medal count—88 is considered a ‘double fortune’, which some might argue was deliberately engineered by state officials—the Games are in many ways emblematic of China’s unique brand of statecraft. On the international stage China utilises a comparative-advantage strategy that—like its gymnasts and divers—is calculated and results-oriented, meaning it is reluctant to take excessive risks and overstep bounds.
China’s perennial excellence in precision sports—gymnastics, diving, badminton, and table tennis—mirrors a top-down economic policy in which control, balance, and consistency are paramount. Justin Yifu Lin, former chief economist of the World Bank and now director of the China Center for Economic Research at Peking University, has called this strategy zhongyong, a Confucian concept Ezra Pound once translated as “unwobbling pivot,” and which others have described as “the doctrine of the mean.”
Metaphorically, it reflects a commitment to exploiting domestic strengths— cheap labour and a robust manufacturing base, for example—while micromanaging the powerful engine of growth through a calculated combination of state-led policy interventions. From subsidies for national champions (both industries and athletes) to controversial currency and investment practices, China has displayed an impeccable flair for top-down social engineering; what analyst Greer Meisels has rightly described as “policy planning plasticity.”
Sustained Growth Will Require a More Voracious Appetite for Risk
But while China’s unwavering commitment to delivering on its targets has led many to believe it will successfully engineer a “soft landing”—cooling inflation, reining in asset-price bubbles, and avoiding excessive exposure to Western financial fecklessness—sustainable growth in the long-run will require a more voracious appetite for risk, particularly in its external economic policies.
Many reputable pundits, including economist Arvind Subramaniam and journalist Fareed Zakaria, have argued that China missed a golden opportunity by not doing more to bail out Europe amid its debilitating debt crisis. While China did contribute a cool $43 billion to the IMF crisis fund this past June (the third largest contribution after the pledges by Japan and Germany), more direct and magnanimous interventions would not only have revitalised its largest export market and helped retain its own domestic export competitiveness; it would have also served as a powerful act of goodwill, ultimately enhancing its reputation as a responsible international stakeholder. Even if China ultimately found it financially and strategically unprofitable to meddle in Europe’s insidious economic affairs, the message it could have sent—a Marshall Plan with Chinese characteristics, if you will—would have been profoundly powerful, particularly in the eyes of Western skeptics.
Relatedly, China may have missed a chance to strengthen its clout in multilateral organisations like the World Bank and IMF—institutions historically led by the US and Europe, and often said to be used as policy instruments by the developed world. While China has gained much by exploiting its ‘developing country’ status within these institutions, a graduation from these ranks ought to be on the horizon. Investing more of its national coffers in such fora, as Japan seems to have done as a strategic bargaining tool, may also enhance China’s credibility as a mature and respected player in the international system.
Rhythmic Fiscal Gymnastics
To be fair, China has certainly increased its tolerance for risk in many areas, if seemingly just to achieve calculated goals. According to a recent report from the Chinese Ministry of Commerce, China’s overseas direct investment reached over US$380 billion in 2011—up from $3 billion in 2005 and $60 billion in 2010—inlcuding an unprecedented $5 billion to the United States. And its recent US$20 billion-dollar foreign assistance package to Africa—nearly triple the US’s aid to the continent last year—betrays both an imminent hunger for natural resources and a bold desire to be a ‘leading dragon’ in the developing world. Enterprising FDI and aid practices, viewed with suspicion by Western policymakers, should instead be regarded as positive, natural developments for a country trying desperately to diversify its newfound largesse.
With domestic growth rates still high, the Western world in recession, and foreseeable challenges ahead—including the end of China’s ‘demographic dividend’ in 2015—now is as good a time as any for China to let the proverbial pivot wobble. Just as the country has historically pursued countercyclical fiscal policies, strengthening its budget position during boom years by saving, so too might it benefit from a bit of countercyclical risk tolerance, by taking bolder steps in its external economic policies while it has both the political and economic wherewithal to do so.
The recent World Bank report, China 2030: Building a Modern, Harmonious, and Creative High-Income Society, co-authored by the Chinese Development Research Centre (DRC) of the State Council (and said to have been supported by Li Keqiang, who is expected to take over as prime minister later this year), laid out six strategic directives for China to realise its longer-term development vision. While China seems to be making forward progress on the first recommendation of “strengthening the foundations for a market-based economy” by encouraging foreign investment, phasing out the hukou system, and even allowing the renminbi to appreciate against the dollar, it is the second proposal of “accelerating the pace of innovation” that will prove to be more difficult.
Although China now has more scientists and engineers than any country in the world, a more open and enabling environment for inventors, investors, and entrepreneurs will be required to keep its economic muscles from atrophying. Metaphorically, this may mean departing from gymnastics and synchronized swimming and into sports where the country has historically underachieved. It may also require a more tactful and transparent public relations machine to deal with accusations of foul play. Only then will China be able to retain its vaunted position atop the medal stand.
Justin Liang is a graduate of the College's Master of International Affairs. He is currently completing dual degrees at Harvard University’s Kennedy School of Government and MIT, and recently represented the College at the 2012 Global Emerging Voices workshop which looked at the rise of China and its impact on global governance.