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China's economy and its growing influence on Japan

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By Toyoo Gyohten

The current global financial crisis has served as an occasion for the Chinese economy to increase its international significance. There are three factors to consider. These are 1) the probable 8% economic growth for 2009 based on the rapid and massive fiscal-monetary policies; 2) worldwide direct investments in the areas of resource development, finance and manufacturing, and 3) a strong voice based on the foreign currency reserve of more than $2.1 trillion, including U.S. bonds worth about 800 billion dollars.

In the short term, the Chinese economy is expected to continue to develop smoothly, but if I had to, I would say that there are two points of concern. One is the fact the present Chinese economic stimulus measures focus on infrastructure investment, from which we cannot expect much positive impact on employment and consumption.     Another concern regards the rapid increase of bank lending caused by the active monetary easing measures. This will possibly result in an asset bubble and increase of bad loans. If an asset bubble occurs, the expansion of the economic gap and different complications will possibly follow. This might even disturb the goal of the Chinese government to build a harmonious society.

Still, I personally believe that the Chinese leaders will deal with these problems properly.

In the long term, there are six challenges. First, there is concern about what the model for the future development of the Chinese economy will look like. The Chinese economy has developed depending on exports and investment so far. However, as the future world economy is predicted to 1) make only low growth and 2) improve the imbalance, the present market of the Chinese economy will shrink. As a result, the Chinese economy will have to be transformed into one led by domestic demand.

The second challenge lies in the difficulty of making this transformation. In order to realize economic growth led by domestic consumption, China has to meet preconditions such as 1) enhanced social security, 2) secured employment and income increase, 3) growth of the service industry and further privatization, and 4) financial liberalization securing the independence of the central bank, the liberalization of interest, currency exchange and RMB.

Third, there is the concern that the current global financial crisis seems to have increased the role of China’s national major corporations in the economy. If true, this goes counter to the trend of privatization which the Chinese economy has promoted.

The fourth challenge is the measures to meet the will of people seeking judicial independence, protection of individual rights, and freedom of choice. This will is steadily spreading through Chinese society. The Chinese government will have to present to the people a road map toward political and social liberalization in the not-too-distant future.

The fifth challenge is that after the period of continuous double-digit economic growth, China has to increase GDP per capita under such constraints as aging population, limited resources and environmental protection.

The sixth challenge is to build an ideal as a “leading nation.” China will become one of the world’s “leading nations” some time in the future. Each of the “leading nations” should have its own powers in the areas of economy, military matters, diplomacy, technology and culture, as well as its own ideal, or a sort of national ideology.

For the future relations between Japan and China, the key concepts are “opportunity” and “friction.”     First, for Japanese companies, China will transform from a “large factory” into a “large market.” This means that the Chinese economy will become a more important market for Japanese exports and investment than it is at present, but what should especially be noted is the necessity of substantial change of exports and investment.

Although Japanese exports to China have aimed at being manufactured in China and/or re-exported from China, in the future, Japanese companies need to export targeting the Chinese domestic market. In so doing, Japanese companies will meet severer competition with Chinese and other foreign companies in China, and also possible protectionism.

Similarly, investment needs to target the Chinese domestic demand. The areas for investment will also shift from the secondary industry to the tertiary industry.    

Second, in the area of resources and energy, friction might arise between Japan and China as they compete to get them. Some signs of this are already seen. Although this is quite a difficult problem, the aggravation of bilateral relations has to be avoided by a great amount of political effort such as joint development projects.

Third, in the environmental area – especially in emissions trading, there is plenty of scope for further cooperation in various forms.

The fourth point relates to the economic cooperation in East Asia. On the occasions of the Asian financial crisis in 1997 and the current global financial crisis, East Asian countries increased their recognition of the necessity of financial cooperation. However, to succeed, financial cooperation in East Asia needs strong political agreement and the perception to “sacrifice some part of national sovereignty for common interests.” Recently we often hear of the adoption of a common currency in Asia being discussed, but it will also be after long-time efforts that this becomes a reality.    

Fifth, regarding the liberalization of capital transaction, what is important for the time being is to further promote such concrete steps as the conclusion of FTAs among the ASEAN +3, and economic cooperation in the region based on the “Chiang Mai Initiative.” The most important thing to promote financial cooperation and integration is that “major currencies in the region become freely exchangeable and international.” This is why I hope the Chinese government will make further efforts for the internationalization of the RMB, and the liberalization of capital transactions and the market rate.

Finally, I point out that China and Japan, which are the world’s largest and second largest foreign currency (namely U.S. dollars) holders, bear a great responsibility for the stability of the international monetary system. The two countries should stabilize the dollar and the world economy through cooperation between them and the U.S.

The writer is president of the Institute for International Monetary Affairs and special adviser to the Ministry of Finance.

© Foreign Press Center/Japan

©2021 GPlusMedia Inc.

10 Comments
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I think China is going to implode and eventually break up. It is too big and too out of control.

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I think China is going to implode and eventually break up. It is too big and too out of control.

That was the prediction after Tienanmen in 89. Didn't happen, much to the disappointment of some. Unless you want chaos spilling over the borders in a domino effect, better hope you don't get what so many wish for.

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Many people who fear, hate or worse still, pretend to be concerned about China have been predicting the demise and breakup of China for the past few decades. Still remember the book "The Coming of collapse of China" by Gordon Chang. The collapse was suppose to happen sometime before or during the Beijing Olympics. Well it should bear the title of "The coming financial collapse of the American or British Banks.". Despite being confounded and proven wrong, Mr Chang and others (many others) still peddle the doom and gloom mantra about China's unavoidable problems and ultimate demise. The problem with these people is that they have a one track or idealistic mind, almost oblivious to reality and persist in a fanatical hope of seeing China fall. China is certainly not without problems but the fact is this 'communist regime' has been particularly adapt in overcoming the economic obstacles ahead. Much better than many democratically elected countries (e.g. Iceland, UK etc). Contrary to the claims of these China doomsayers, the government DOES listen to the people (not necessarily the mob), is very realistic and does acknowledge the myriad of problems, particularly in a large and diverse country such as China. The country politically, socially and economically is slowly evolving. They are bent on tackling many problems (social unrest, injustice, economic problems, environmental issues, health, climate etc). Preaching idealistic and democratic slogans without practical wisdom is pretty useless.

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vlee29au - great post. a strong/stable china ia pivotal to the world. they played an important role in smoothing out the 1997 asian financial crisis and the current one.

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Yelnats: where will we get all the cheap stuff from?

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Don't envy the rise of China. It's the reality and we have to accept it. The big corporate houses of China and India are purchasing the large share of the US and UK companies. These two country have large manpower that gives the strong stand of domestic market capable to combat any global financial crisis. And we haven't heard any jobless outcry in these country during this historical rescission.

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China and India will be the big players in Asia (and the world) over the next 30 to 50 years.

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given that 90% of people in china are rural workers, whats everyone freaking out about, unless they have some sort of democratic revolution we can still enjoy buying our cheap wares from walmart.

Also, The gov't in China has total control over their economy, its not 100% market based as it is in the west but some sort of quasi mixture of state controlled market economy models and of course they'll tell you how great their system is because they didn't experience the financial meltdowns of America, go communism and all that.

when their one child policy catches up to them in 20 - 30 years, we'll see how that works out for them

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I do not worry about China's economy solely, but also and perhaps more important, China's military power.

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5 million JP, 3 million SK, 2 million US, 2 million Rus... etc people visit China every year, then, how can you expect it to collapse? Only those countries which no people visit like former RUS/ East GER, NK seem to be easily down. Actually, Taiwanese have been waiting for CN to fall down for 60 years, but fail, so we woke up early and went there early.

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