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China’s perspective on globalization and global economic governance
By Professor XU, Hongcai; Deputy Director of Information Department of China Center for International Economic Exchanges;
Presentation for Wilton Park Conference ‘Promoting Rules-based Systems for Global Economic Growth’ in West Sussex, the United Kingdom, on November 5, 2012
Good afternoon, ladies and gentlemen:
It’s my honor to attend this conference and share my views with all of you. Before I start my presentation, I’d likely to give a brief introduction of my organization and myself. I am working with China Center for International Economic Exchanges (CCIEE). CCIEE was established in 2009 and has developed as one of the most comprehensive and influential think tanks in China. CCIEE has three major advantages: close communication with government, wide connection with China’s large corporations and highly experienced economist team. CCIEE has proactively participated in many international strategic and economic events and is playing a unique role in bridging China and the world. I have been conducting research on economics and finance for over 20 years. In addition to my academic research, I also worked with China’s central bank PBOC, China’s securities company and venture capital firm previously. These experiences enable me to establish wide industry connection and government contacts. My academic focus includes international economy and finance, China’s foreign exchange mechanism and capital market development.
The topic of my presentation is China’s perspective on globalization and global economic governance. I’d like to elaborate this topic through three parts.
Part one: China’s entry into WTO: a successful example of China’s integration into global economy system
China's entry into the World Trade Organization (WTO) in 2001 and its consistent efforts in integrating into global economy have proved to be successful and exerted profound impact on China’s economic development. One of the many important progress it has made is the establishment of a primarily market driven economy, which is in line with international practice. Over the past eleven years, China has updated more than 2,300 domestic laws, regulations and departmental rules to meet requirements of WTO rules. It also reduced overall import tariff level to less than 10% by 2011 from 15% previously. I believe that China’s integration into global economy has significantly improved our economic productivity and competitiveness. China, as the second largest economy, has also made much greater contribution to world economy.
Firstly, China has improved its economic competitiveness and impact. In 2001, China was the sixth-largest exporter in the world, with its exports and imports accounting for only 4.3% of the world trade. Today, its international trade has reached 10.4% of total world trade, as such, exports had been one of major economic growth drivers over the past 10 years. Its total international trade surged to $3.64 trillion in 2011 from $509.7 billion in 2001, with exports soaring by 6.13 times and imports up by 6.16 times. In 2009, China became the world's largest exporter and the second-largest importer amid downturn of global financial crisis.
Secondly, sustained FDI and capital inflows have also contributed to China’s economy growth. As of 2011, total FDI in China has reached $116.011 billion and there are a total of more than 730,000 foreign enterprises currently operating in China. During 2002-2011, FDI realized strong compounded annual growth rate at 44.6%. Currently, the number of foreign enterprises accounts for only 3% of the total enterprises in China, but accounts for around 30% of China’s total industrial production and contributes 53% of China’s imports and exports.
Thirdly, China has started its capital exports as well, which should in turn contribute to world economic growth. In 2011, China’s net oversea direct investment (ODI) reached $424.78 billion, ranking 13th in the world. More than 13,500 Chinese domestic investors have set up 18,000 oversea enterprises in 177 countries (regions). In 2011, China’s non-financial ODI reached $68.6 billion, representing 14% year on year increase. Sales revenue of China’s overseas enterprise reached $1 trillion in 2011. These enterprises paid more than $22 billion of taxes to oversea countries, and provided 1.22 million employments.
Fourthly, China has improved its industrial structure over the past 10 years. The R&D institutions set up by multinational corporations have helped Chinese companies to obtain advanced technology and further improved these sectors’ productivity. Due to different situation of economic development in China’s eastern, central and western regions, we have seen that the FDI and capital inflows are gradually migrating to central and western regions in recent years, driven by industrial transferring policies of local government. We have also observed that more and more technology intensive international companies are establishing their R&D and production base in China. In fact, I believe that the service industry and the high-tech industry FDI will continue to achieve strong growth in China over the next 5-10 years, along with China’s economy transformation and industry upgrade.
Lastly and most importantly, China has built its market-driven economic governance in line with international practice, and further opened its financial industry. In general, China has restructured its economy by promoting private investment in many market-driven sectors and achieved significant progress in SOEs’ reform. We have also established a diversified and highly efficient financial system and markets. Now, we have realized an exchangeable RMB under trade account, and established a manageable exchange rate system. I believe that China will steadily open its capital account and make the RMB exchangeable under capital account over the next 10 years. Obviously, RMB internationalization is one of key agenda for China over the next 5-10 years. To achieve this mission, we welcome Hong Kong and London, two international financial centers, to play important roles by establishing regional RMB financial center.
China has benefited from its entry into WTO and has become an important driving force of the world economy. For example, in 2011, China’s imports from the US, the EU and Japan reached $122.2 billion, $211.2 billion, and $194.6 billion respectively, or 4.7 times, 6.2 times, and 4.5 times of the imports in 2001. In 2008, China became the largest export destination for the least developed countries. Also, China has contributed significantly to emerging economies’ development especially to those resource driven economies. In the past eleven years, China's accumulative contribution to the world's GDP growth has exceeded 20 percent, and its imports arrived at nearly $1 trillion on average annually, which created more than 15 million jobs for its trading partners.
Briefly speaking, China’s entry into the WTO accelerated its pace towards an open economy, which in turn contributed a lot to the global economic prosperity and sustainable growth. This has been proven to be a win-win example for itself and the world.
Part two: the global economic governance is facing serious challenges
Firstly, the current multilateral trading system under WTO framework does not fit today’s world economic structure and reality. The GATT and the WTO have been dominated by several developed countries with little representation from emerging countries. The universal consensus required in decision-making is difficult to achieve, which has dragged down the Uruguay Round negotiation process. Under WTO framework, the time needed for dispute resolution is quite long. Insufficient trade information transparency also forms obstacle to developing members to further increase their exports to developed markets. Therefore, international community expects further reforms will be made on the WTO’s mechanism to improve its transparency and efficiency. The establishment of effective management framework for regional trade agreements should be the long-term goal of WTO.
Secondly, growing investment protectionism in developed markets is threatening world trade and world economic growth. Massive hot money flows have posted serious problems to the stability of global financial system. In order to protect domestic financial system, some developing countries have introduced capital control measures and monitored the FDI more carefully. Meanwhile, the mechanisms for international investment governance are facing increasingly complicated situation. As of 2011, there was a total of 3,164 international investment agreement (IIA) globally, including 2,833 bilateral investment agreement (BIT) and 331 free trade agreements (FTA) and economic partnership agreements, regional agreements and other forms of international investment agreements, some of which are overlapping and hence reduced investment efficiency. In addition, corporate social responsibility does not have unified standard cross countries.
Thirdly, the dominance of international monetary system by the US dollar continues to create instability to world economy. It has come to light that a single currency acting as the dominating global reserve currency does not suit the reality of today’s world economy. With sharply fluctuating exchange rates, it is difficult to monitor international capital flows, identify financial risks in advance, and stabilize the global monetary system once a crisis happens. If current international monetary system cannot be successfully reformed, a new financial crisis is likely to return shortly. In my view, the G20’s progress in reforming the international monetary system has not been satisfactory.
Part three: my suggestions
To deal with above challenges, we have made the following suggestions to improve global economic governance.
Firstly, improve effectiveness of the multilateral trading system. Over the past several decades, the WTO played an irreplaceable important role in promoting global trade liberalization. However, the system is facing increasing difficulties along with further complication due to continuous expansion of member states. We need to strictly execute the agreements reached through negotiations to ensure effective implementation of WTO’s dispute settlement mechanism. Meanwhile, the WTO members should start a new round of multilateral negotiations as early as possible, continuously exploring new solutions to solve numerous problems in global economy and trade. The WTO should also pay more attention to international trade problems encountered by developing countries, so as to achieve better balance between the interests of developed countries and developing economies. In addition, the WTO multilateral trading system should enhance cooperation with other international institutions.
Secondly, the WTO should play a complementary role to existing regional trade agreements and strengthen cooperation with regional trade agreements. In recent years, trade conflicts have negatively impacted global economic development. Experience shows that enhancing regional cooperation could reduce, to some extent, trade conflicts and associated risks leading to financial crisis. Therefore, regional trade agreements and multilateral trading systems need to further improve the review standard of regional trade agreements and increase its efficiency. In addition, it is critical to reform the governance of international investment by integrating investment review policy and corporate social responsibility.
Thirdly, we reiterate our stance on the reform of international monetary system including reforming the IMF and deepening the G20-IMF Linkage. The G20 should set up a permanent secretariat within the IMF to improve its policy-making capability and implementation performance. The G20 should discuss and form an executable reform agenda for international monetary system. This agenda should include members’ consensus on guiding the ideology, basic principles, reform objectives, a concrete action plan, and respective responsibilities of each nation. The ultimate goal of such reform is to gradually change the current “single currency” monetary system centered at the U.S. dollar to a diversified international monetary system, which is consisted of multiple major currencies, such as the SDR, the U.S. dollar, the Euro, the Pound, the Yen, and the RMB.
To achieve above objective, we should establish four sub-systems in international monetary system. The first is to build an international supervision system for reserve currencies, with the IMF acting as key supervisor to monitor international reserve currency move. The second is to establish a system for international reserve currencies to compete in an open market. The third is to improve international financial crisis bailout mechanism. The fourth is to improve collaboration and human resource allocation between the Bank for International Settlements (BIS) and the IMF.
Lastly, we should encourage think tanks’ participation in improving global economic governance. The G20 should build a network of think tanks from different member states under coordination of the IMF, as they are able to undertake unique and more important tasks towards improving global economic governance. G20 members could encourage their leading think tanks to initiate and participate in cross country academic communications and research projects. In the case of China, we believe that the China Center for International Economic Exchanges (CCIEE) is able to play a greater role in participating international economics and financial communication given that our institution has established wide connection with China’s policy makers and profound impact on China’s economic system.
I sincerely welcome friends to visit China, and discuss the issues in relation to global economic governance. I believe that such discussion will help us to contribute more to the common interest of international community.
Thank you for your attention. |
