It would be a fallacy to write off China, Asia’s mighty economy, as no longer the prime mover of global growth nor its potential to shake the world economy out of its wits, and send it on a downspin. This must inform our policy-makers who gloat about India having upstaged China as the “fastest” growing economy. A percentage of one or two points above China’s growth may make us seem the fastest growing but have we the power to maintain and translate higher rates of growth into meaningful gains for the common man?
True, China is currently on a slowdown and less buoyant in terms of its contribution to global growth at an average of one-third so far as well as in its mega role in world trade. China is readjusting its sights toward a new normal of stabilising its second largest economy, after the market turmoils and a sharp currency depreciation in 2015, and rebalancing it toward greater domestic consumption, relying less on investments and exports.
There are no quick fixes and it may take some years of lower growth of “around seven per cent” – indeed the aim in its Sixth Plan (2016-2020) as a “sustainable” target. How far China will succeed in this pursuit of stabilisation, however, remains an area of great uncertainty with its potential for disruption of output and trade flows at a global level.
There are indeed some concerns that, with its soaring debt, its slowdown may worsen, and the world watches how China deploys its fiscal and monetary policies in critical weeks ahead in order to be able to avert a hard landing. The China factor looms large among risks and vulnerabilities that all major economies, developed and emerging and other developing countries, have to reckon with.
The global economic outlook, which worsened in 2015, with growth slowing below three per cent from the original estimated 3.5 per cent, is hardly promising for a rebound in 2016, given both the varying levels of performance among advanced nations – USA, EU and Japan –and the ongoing slowdown in BRICs and other emerging and developing markets. Both Brazil and Russia are in recession territory for the second year. Thus, India stands out as a “sweet spot”.
Chinese leaders assert that the “new normal” of shifting focus to consumption and service industries from polluting heavy industries would lead to sustainable and balanced growth and that China would still power the world economy. China claims a growth of “around seven per cent” in the first nine months of 2015. Current IMF and OECD projections are 6.8 per cent in 2015 tapering down to 6.3 per cent in 2016 and 6.2 per cent in 2017. Now a further update of forecasts for the global economy will come by mid-January. India’s growth estimates for 2016 may also see some moderation considering that Government could not get through GST and a couple of “important decisions”, as the World Bank Chief Economist Kaushik Basu said. It remains to be seen whether IMF retains India estimates of 7.3 and 7.5 per cent for 2015 and 2016.
With the steep fall in world commodity prices, chiefly oil and minerals and metals, global demand and supply scenario has drastically changed and resulted in a shrinking of trade flows. It has had more disruptive consequences for developing countries which mainly exported to China.The slowdown in China is hurting the developing world in general and India has had a serious setback in exports even to traditional markets especially USA and EU. Loss of export momentum gets reflected in rate of growth. Against an overall sombre background, what will stand out in 2016 will be the G-20 leadership of China, which takes over from Turkey, and its calculated steps to influence global economic governance, especially with its successful sponsoring of the Asian Infrastructure Investment Bank (AIIB). The Bank to be headed by a Chinese nominee is now established with 57 founder members including major developed nations in Europe and Australia. USA has given a grudging welcome for this infrastructure-financing mechanism.
China has said the establishment of AIIB marks a milestone in the reform of global economic governance and would complement the existing international financial system. The AIIB will be operational after the board of directors and executive council meet for the first time. These meetings are due to take place from January 16 to 18 in Beijing. The bank’s president will be officially appointed and the management team will be in place at the meetings. AIIB loans for infrastructure building will cover the Asian-Pacific region against an estimated requirement of eight trillion dollars.
No doubt, once AIIB starts extending loans, likely from early in 2016, to countries seeking access for funding infrastructure, it would seem to detract the dominance for 70 years of IMF and the World Bank, the post-war Bretton Woods institutions (1944-1945), with relentless advocacy of neo-liberal
policies for borrowing countries
Additionally, China has also enhanced its global stature with the IMF agreeing to include its currency, Renminbi, in the SDR basket of reserve currencies, hitherto comprising the US dollar, the euro, the Japanese Yen and the British Pound.This is expected to take effect toward the end of 2016. Also, at long last, the US Congress approval, after a delay of five years, of IMF’s 2010 Voice and
Representation Reform, would raise the economic weights of China, India, Brazil and Russia to be included among ten largest quota-holders giving them greater voice and representation in decision-making.
As a result of the 2010 reform coming into force, IMF’s total quota (subscriptions of 188 member countries) would be doubled to SDR 477 billion (about $659.67 billion) from about SDR 238.5 billion (about $329.83 billion). SDR, as the principal reserve currency, is the unit of account for IMF. The reform would also make the IMF Executive Board a fully elected body. The way opens also for a possible end of the convention by which an American and a European headed the IMF and the World Bank all along. The quota shares and voting power of the IMF’s poorest member countries will be protected.
IMF Managing Director, Christine Lagarde welcoming the US ratification of reform said it would strengthen the IMF in its role of supporting global financial stability. With significantly increased core resources, “it would enable us to respond to crises more effectively” and also improve the IMF’s governance by better reflecting the increasing role of dynamic emerging and developing countries in the global economy, she said. IPA