Why the World Needs China

 
 

As hope turns towards China as a bastion of economic stability and potential amid the global financial crisis, experts have cautioned that this country is still an emerging economy facing years of financial-sector reforms to sustain its growth miracle.

But despite these reservations, a major finance meeting in Beijing this week has also served to underscore China’s growing importance to the world economy generally, and the United States’ in particular.
The contrasts in China’s economic situation – a developing country with what is now the world’s third-largest economy – were clear during a three-day meeting of the International Institute of Finance. Leading bankers from around the globe converged on the Chinese capital to discuss the global financial meltdown, and much of the talk centered on China’s promise as a bright spot amid a bleak global economic outlook.

While the United States and other established economic powers struggle to dig themselves out of the financial crisis, though with little relief in sight, China is intent on deepening its financial-sector reforms to expand its banks globally, invest more widely overseas and increase its competitiveness outside its borders. In other words, in this global crisis, there are major opportunities for China.

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Jing Ulrich, managing director and chairman of J.P. Morgan’s China equities business, described the current global economic situation as ‘a shift in the centre of financial gravity from the West to the East’.

Yet, ‘it’s very important to note that China is still an emerging economy,’ said Gerard Lyons, chief economist for Standard Chartered Bank.

China’s emergence has coincided with the collapse and decline of America’s financial sector, further entangling the two powerhouse countries economically. But there are signs the relationship has begun to change, with America no longer scolding China about how to properly reform and manage its financial structures.

Instead, some of the scolding is coming from this side. Several Chinese bankers speaking during the conference blamed the global crisis on a lack of proper supervision in the US financial sector and said China must avoid similar mistakes as it moves forward with opening its capital markets and expanding its banks.

Paul Volcker, head of President Barack Obama’s economic recovery advisory committee, talked about those new global economic dynamics in a speech to the gathering on Thursday evening. The US is learning from its mistakes, he said, at a point when China is poised to move forward.

Speaking on the American experience, Volcker said: ‘Powerful compensation practices and complex financial engineering have been introduced into our markets and institutions. Now it is evident that those changes have not protected us from a succession of bubbles and busts; rather they appear to have contributed to them.’

Volcker, former head of the US Federal Reserve, spoke to a crowd during dinner at the Great Hall of the People. He said America’s habit of spending far beyond its means is a major factor in the crisis, and that the road to recovery will be a long and difficult one. Throughout the discussions, bankers and others expressed agreement.

And there is also little doubt now that the idea of the so-called G2, an increasingly common reference to the partnership of the United States and China, will continue and grow through the current crisis. China owns a significant share of the US debt and US dollars remain the safest place for China to invest its foreign currency reserves. So even if trade protectionism emerges, the economic dependence won’t dissipate.

‘The interdependence of the two great nations in the world will continue and they’ll become more intertwined,’ Ulrich said. ‘It’s hard to think of another relationship in the world that’s more important.’

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