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More Than a Market Correction: China in Transition

Denis Bright invites responses about the long-term significance of the structural changes in China’s economy and its global financial outreach. Future implementation of such changes can be steered by Chinese leaders themselves or imposed from outside by joining the Trans Pacific Partnership (TPP) on terms that are not completely acceptable to China. The latter option would require a more corporate-led style of economic development. Evidence of the significance of the forthcoming structural changes in the Chinese economy is far from complete. The author is open to feedback on the issues raised in this article.

Chinese financial market jitters (FT Online 28 August 2015)

Chinese financial market jitters (FT Online 28 August 2015)

As global financial markets stabilise after recent volatility, news services have rushed to offer explanations of the recent downturns in Chinese financial markets.

There is little doubt about the extent of China’s market correction. The People’s Bank of China (PBOC) and the Chinese government were ready to use up a tiny portion of accrued foreign currency reserves to prevent a free-fall in the market.

News networks around the world tried to explain the significance of China’s market correction.

Germany’s DW News on 29 July 2015 sought clarification from Dr Sandra Heep of the Mercator Institute for Chinese Studies (MERICS) in Berlin on the significance of China’s market corrections for both China and the wider global economy.

The extent of the potential market volatility put Dr Sandra Heep on the spot as the eye of a financial storm was approaching. With her expertise in longer-term economic analysis, Dr Sandra Heep was careful not to join in the guessing game to predict tomorrow’s financial markets.

 

Seeking longer term perspectives for China

Months before in 2014, Dr Sandra Heep in her prior research position at the Institute of Chinese Studies at Freiburg University was able to be more forthright about the structural changes needed to complete China’s successful transition from its current status as a developmental economy.

Dr Sandra Heep’s broad interpretations of China in transition as the world’s second largest economy are readily endorsed by the news releases from China’s leaders themselves and economic data from independent sources.

More high tech future and global financial outreach for China? (Financial Times Online (London) 25 August)

More high tech future and global financial outreach for China? (Financial Times Online (London) 25 August)

Although China is now the world’s second largest economy, it may be reaching the limits of its sustainability as a global workshop for the supply of a full array of goods and services.

China’s current status comes with great social and environmental costs as noted by Dr Sandra Heep in her interpretation of China’s capacity as a developmental state with a considerable degree of state planning in its economy.

As a developmental state, China is still identified with the suppression of the purchasing power of lower paid workers, arrested improvements in environmental quality and the sheer cost of living challenges in congested cities.

Long Island, New York: Property haven for Chinese elites? (FT Online 31 August 2015)

Long Island, New York: Property haven for Chinese elites? (FT Online 31 August 2015)

Ironically, many other developing countries within the TPP network share similar problems which are excused by advocates of the market model as a necessary transitional phase.

Mexico is a prime example despite its long-standing free trade agreement with Canada and the US under the North American Free Trade Agreement (NAFTA) since 1994.

China also lacks a fully globalized banking system on the scale of financial operations in the US and some Western European countries.

A section of Chinese economic elites are able to distance themselves from the real life problems of a transitional economy. The situation was similar in the earlier generations of industrialization in Britain, Germany and the US.

Prestige property investments in US or Australia are staked out by these economic elites as appropriate hedge assets.

The challenges of economic diversification and global financial outreach

The leaders of the real world China are probably enthusiastic about steering the economy in new directions. However, questions must remain about the appropriateness of the TPP’s market model.

China’s vast foreign currency reserves can be used to foster more dynamic forms of social market capitalism with an outreach into finance, infrastructure investment, environmental sustainability and development assistance.

Pragmatic neighbours like Russia as well as the countries of Central Asia and the Middle East are usually prepared to take advantage of China’s expanded international outreach.

Official Chinese investment could also bankroll longer-term projects in both the Australian private sector and future government sponsored sovereign wealth infrastructure funds along the lines of Temasek Holdings in Singapore.

To Australia’s credit, our support for China’s diversification is evident in the presence of Treasurer Joe Hockey at the inauguration of the expanded Asian Infrastructure Investment Bank (AIIB) in Beijing on 29 June 2015.

The extent of Australia’s role in the bank will be determined largely by the commitment of the next incoming government. AIIB will not be fully operational until 2016.

Significant for China is the presence of countries from Central Asia and the Middle East along the Silk Road Land Bridge to Europe.

Europe itself is represented by all the key economies, including the UK.

Israel has also joined the AIIB. This country has benefited from the investment of Chinese technology in urban transport.

The positive implications for peace and stability in the Middle East from this investment by Chinese infrastructure firms are immense.

There is no long-term reason for the exclusion of strife-ridden countries like Iraq and Syria from this investment outreach after UN-sanctioned peace initiatives.

Proposed Silk Road infrastructure for Central Asia (World Bulletin 2014)

Proposed Silk Road infrastructure for Central Asia (World Bulletin 2014)

Such positive commercial changes might be thwarted if China was forced to drift back to a pure market oriented financial system. Such infrastructure investment is always a long-term commitment.

This cannot be assured in a financial system which is preoccupied with short-term futures with a trickle-down capacity to benefit legitimate investment.

In this sense, the current negotiations to finalise the TPP present a dilemma for China.

While undoubtedly well informed of the TPP negotiations, China is not one of the core partners of an avowedly market oriented investment and trading network.

The challenges posed by the Trans Pacific Partnership (TPP) for China

It is for the China’s current leadership to decide just how to respond to the current TPP drafts which will greatly empower business corporations by internationalizing competition laws.

TPP drafts contain embedded assumptions about the superiority of the market model of development and of the carrots available from the trickle-down benefits of new corporate investment in each of the participating countries.

The hegemony of rogue elements in global financialization processes is also a temptation for China to take a similar path to economic diversification along the pure market model.

Professor Gerard Epstein of the Political Economy Research Institute (PERI) at the University of Massachusetts in Amherst explains the mechanisms of these financialization processes which have become the ground rules for successful international finance.

In the aftermath of the Global Financial Crisis (GFC), the late Professor Peter Gowan of the International Relations School at London Metropolitan University gave a similar but more detailed synopsis of the challenge of rogue capital flows in Crisis in the Heartland. This article is readily available online. (http://newleftreview.org/II/55/peter-gowan-crisis-in-the-heartland).

Changing the protocols for China’s global outreach

The US sponsored Trans Pacific Partnership (TPP) and a proposed Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU impose a fundamentally different style of economic development and global outreach for China.

China’s key financial institutions must operate within the prevailing rules for international finance. The more interventionist approaches of China’s Asian Investment Bank (AIIB) and the BRICS Group of Brazil, Russia, India, South Africa and China itself are still minor players on a global scale.

China’s hesitancy to join the TPP negotiations has its parallels across the Pacific Rim where the internationalization of competition laws and intellectual property rights has its own detractor in most countries.

Without the release of the TPP negotiation drafts by Wikileaks in 2013, most political leaders would still remain silent about the implications of the voluminous chapters on intellectual property rights and investment protocols.

Wikileaks Press Release (https://wikileaks.org/tpp-ip2/)

Wikileaks Press Release (https://wikileaks.org/tpp-ip2/)

In the words of WikiLeak’s Editor-in-Chief Julian Assange, “If instituted, the TPP’s IP regime would trample over individual rights and free expression, as well as ride roughshod over the intellectual and creative commons. If you read, write, publish, think, listen, dance, sing or invent; if you farm or consume food; if you’re ill now or might one day be ill, the TPP has you in its crosshairs.”

While China’s leaders might hesitate about the benefits and costs of future participation in the TPP, the proposed internationalization of competition laws in favour of business corporations across the Asia Pacific Rim has also been a divisive issue within the Obama Administration which depends on the support of organized Labor in key swing states like Ohio and Pennsylvania.

In order to gain approval for current drafts of the TPP Treaty, President Obama needs to rely on the support of conservative Republicans for endorsement of the treaty in the senate.

Writing in The National Interest on 6 July 2015, Sean Mirski with a background at the Harvard Law School made the following observations about the impact of the TPP.

At first glance, the Trans-Pacific Partnership (TPP) looks much like any other trade deal. By increasing trade and investment among its partners, the TPP sets out to stimulate a higher rate of economic growth in the United States and among many of its Pacific friends. As with similar treaties, the TPP has been the subject of controversy in the U.S. Congress, which very nearly killed a key piece of legislation necessary to America’s ratification of the agreement. But while American lawmakers attacked and defended the treaty largely in narrow economic terms, they appeared to disregard its main strategic promise.

Besides creating jobs, the TPP may also alter the balance of power in the Asia-Pacific. The treaty will increase the rate of economic growth in the United States and in an array of friendly nations while simultaneously diverting trade flows away from Washington’s greatest competitor, China. More important than any of these absolute changes in economic output, though, is the relative change in national power, itself the product of economic might. Whereas trade is often discussed in absolute terms, relative gains are more important in the often zero-sum world of international politics. If the TPP can change the trajectory of American power relative to China’s, it may be the single most important factor in whether the United States retains its “indispensable” role in the 21st Century.

The National Interest 6 July 2015 available at (http://nationalinterest.org/feature/the-trans-pacific-partnership-china-america-the-balance-13264)

These comments from an articulate writer with close links to the US intelligence community provide justification for further discussion about the geopolitical role of the TPP as a vehicle for the return of old balance of power strategies for the containment of China.

With China outside the current TPP draft deals, its business and investment agencies must ultimately compete on the terms of investment protocols decided by the TPP across the entire Pacific Basin.

Taiwan’s potential membership of the TPP provides an additional twist to the current economic diplomacy and has security implications for the stability of the Pacific Rim.

The Ministry of Foreign Affairs in Taiwan strongly endorses its unilateral participation in the TPP without reference to China:

The TPP aims to establish a comprehensive, next-generation regional agreement that liberalizes trade and investment and addresses new and traditional trade issues and 21st century challenges. It currently has 12 members, including the US, Japan, Canada, Australia, New Zealand, Singapore, Malaysia, Vietnam, Brunei, Mexico, Chile and Peru. Most of the TPP members are Taiwan’s major trading partners, accounting for over 30 percent of our foreign trade. Thus, the significance of joining the TPP cannot be overemphasized. President Ma Ying-jeou has announced our resolution to join the TPP and we have won support from the US and Japan, with both countries publicly welcoming Taiwan’s interest in joining the TPP. The Ministry of Foreign Affairs and its representative offices overseas have taken bilateral relations as the cornerstone and are making every effort to garner the support of other members pursuant to our accession to the group (Ministry of Foreign Affairs Republic of China (Taiwan) 2014)

Data from the Center for East Asia Policy Studies shows the vast economic capacity within a TPP that included Taiwan. South Korea is likely to be added to the matrix.

Center for East Asia Policy Studies 2014

Center for East Asia Policy Studies 2014

Thwarting the economic diversification of China on its own terms through the formula proposed by the TPP investment in the Pacific Rim would be a triumph of short-term politics over international peace and stability if Chinese leaders continued to be shut out of the negotiation processes.

Added to the challenges of future economic diplomacy are the separate but near identical territorial claims by both China and Taiwan over sections of the East China Sea and the South China Sea.

Under current co-operative arrangements between the ruling Kuomintang (KMT) Government in Taiwan and China, the Taiwanese proposal to resolve territorial disputes and fishing rights might gain some traction within China itself.

Such claims would be taken more seriously if both Taiwan and China presented a joint submission as part of a One China Additional Systems Approach as with the resolution of Hong Kong’s closer association with China almost 20 years ago.

The window of opportunity facing the TPP Negotiators and Australia

The window of opportunity is closing on this pragmatic arrangement with Taiwan. Local opinion polls are highly favourable to the opposition right-wing Democratic Party in Taiwan as the presidential elections approach on 16 January 2016.

President Ma Ying-jeou of Taiwan inspecting US made military hardware

President Ma Ying-jeou of Taiwan inspecting US made military hardware

President Obama will go down in history as one of the greatest of negotiators if a Win Win Win can be developed during President Xi Jinping’s visit to the US in September 2015. This trifecta would have to be a deal which is totally acceptable to China, Taiwan and the US.

Meanwhile it is in Australia’s interests as a responsible middle power to maintain an independent voice in the resolution of the problems posed by the TPP and the sensitivities of China towards the resurgence of Taiwan as a nation state.

Prime Minister Abbott’s support for the prevailing texts of the TPP is hardly Whitlamesque.

Opposition to the current draft of the TPP comes from both sides of the political spectrum across the Pacific Rim.

1973 Postcard from Beijing: A precedent for a constructive role for Australia

1973 Postcard from Beijing: A precedent for a constructive role for Australia

Rural lobbies in New Zealand and Japan are delaying the final draft from the political right.

Organized Labor in the US fears job losses in key swing states which must be won by the Democratic Party to keep the Republicans out of office in 2016. In these states, Democratic representatives and senators are cautious about opening up the domestic economy to more overseas competition.

The exclusion of China from the TPP negotiations also hinders its financial outreach across the Pacific Rim as a major economic superpower.

This locks China into its current workshop of the world status. Forcing compliance from China with TPP protocols can contain this economy’s sustainable growth rate and build-in a lower potential threshold for future Australian exports, service agreements and financial ties with a weaker than necessary China.

In this context, Australia can afford to be more proactive in seeking more Whitlamesque amendments that bring China into the TPP on fair terms and conditions. Given the pockets of discontent with the current TPP negotiators, Australia can win goodwill in most countries across the Pacific Rim by becoming a more independent player in both economic diplomacy and the containment of security concerns.

denis brightDenis Bright (pictured) is a registered teacher and a member of the Media, Entertainment and Arts Alliance (MEAA). He has recent postgraduate qualifications in journalism, public policy and international relations. His specialist interest is the impact of contemporary globalization on the delivery of progressive public policies.

 

 


26 comments

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  1. Theresa

    Not very smart of the Australian Government to want China to remain the low cost supplier of goods and services when other options are available as noted in this fine article. China definitely needs to be part of the confidential negotiations to amend the text of the Trans Pacific Partnership Agreement for the sake of China, the Pacific Basin and the future of the Australian economy

  2. Patricia Ryan

    Thank you Denis – well researched and insightful!

  3. Galway Ryans

    Good article for discussion over a Guinness: Gradually all this corporate power will fade away and the Chinese market will become brighter without the TPP as it is currently drafted

  4. mark delmege

    China china china hmm you don’t think it has anything to do with a pop (and a well timed play) in the quantitative easing bubbles created by cheap Yen, Euros and US dollars? As for China it is building strategic and economic partnerships elsewhere and you can’t blame them.

  5. Matters Not

    Denis, I’ve only read your article three times and before I’ll make any comment I think it wise for me to read it a few more times. The concepts you employ are, in many ways, outside of my usage and understanding.

    Nevertheless, I find them very useful in the sense that they seem to have ‘substance’ and are thought provoking. But I need to reflect further before responding in any ‘useful’ way. Even then, it may be beyond me.

  6. Catherine

    Australia should stand up for peace and inclusive development – not more corporate power .

  7. Ricardo29

    No mention of the ISDS provisions which for me are reasons to reject the TPP, that and evidence which seems to point to no significant benefits from FTA’s and isn’t the TPP a sort of multilateral FTA?

  8. stephentardrew

    Arguments for the TPP assume that capitalism has somehow reached a level of stability and that is manifestly not true. If the fundamentals of capitalism are unequal, unjust and exploitative then the TPP, for all its lauded benefits, will only reinforce a cyclical financial system that is wrought with endless trauma and failure.

    Think of the US intervention in the Middle East as they blindly follow The Project for the New American Century (PNAC) while their foreign policy is falling in around their ears. US style neo-conservative trickle down cyclical boom bust economics is another grand failure and now they are trying to band-aid a basically dysfunctional system with a corporate driven process for undermining national sovereignty and handing over local powers to corporations by being able to challenge, for example, environmental protection laws due to loss of profitability.

    This is a wolf in sheep’s clothing. For starters trickle down neo-con supply side economics is a complete failure built upon primitive market models that conservatives cling to because it provides them with massive wealth alongside abject poverty. This is just more of the same.

    Those who have discussed Modern Money Theory on this site clearly understand this however the self interested mainstream are going to fight all the way to protect a completely dysfunctional status quo.

    Center for the Advancement of the Steady State Economy is a group of economists who challenge economic rationalism and endless growth. Economic growth, with all of its downsides, is clearly unsustainable in the 21st century. Long-term recession is no panacea either. A steady state economy is the sustainable alternative to perpetual economic growth.
    http://steadystate.org

    Capitalism is a system built upon greed and redistribution of wealth upward to the very few and is completely undemocratic as well as socially and culturally irresponsible and environmentally destructive. A balanced economy is not one without debt it is an economy in equilibrium that provides adequately for all.

  9. MBA Student

    Our most affable conservative teachers at high school held out the hope that trade and investment would change the world for the better.

    A kindly teacher with LNP views told us in class that after trade and investment would come enlightenment, democracy and a world at peace.

    She would become nostalgic in reciting poems from the Victorian era about the spirit of hope.

    Indeed, our Year 12 classes were her hope as it gave her a break from very rowdy junior forms.

    I had to use my search engine but I soon found one of her favourite extracts from Long Tennyson, Queen Victoria’s poet laureate about the future of Great Britain and indeed Australia within a peaceful empire:

    From Locksley Hall by Lord Tennyson (written in the grimmest years of the industrial revolution in 1842)

    Till the war-drum throbb’d no longer, and the battle-flags were furl’d
    In the Parliament of man, the Federation of the world.

    There the common sense of most shall hold a fretful realm in awe,
    And the kindly earth shall slumber, lapt in universal law.

    Alas, Britain could not apply this lesson to accommodate the rise of Germany in the 1900s.

    I noticed in my search that Tennyson had moderated his optimism by 1886 when he penned Locksley Hall Sixty Years On. He warned of the real dangers of political populism and its capacity to warp political judgments.

    You that woo the Voices–tell them ‘old experience is a fool,’
    Teach your flatter’d kings that only those who cannot read can rule.

    Let’s not support more militarism as a substitute for real diplomacy. It didn’t work in 1914 and it won’t today in the containment of China when the risks are higher.

    And do we have flatter’d kings in Australia who specialise in double speak and populist rhetoric?

    Of course, not.

    Tony Abbott must surely be ruled out for completing his successful Rhodes Scholarship to Oxford?

  10. Ian

    This is a very well researched article. Chinese economy at the moment undergoes a significant change and as it is still developing the market is unstable. Investors should be more conscious when they enter the Chinese stock market.

  11. mark delmege

    I thought this was a typical western centric piece which made far too many incorrect assumptions about everything.

  12. Lalnama

    Thank goodness for Denis Bright in providing an excellent article on the the rise of China & the place & future prospects for Australia in a new era.
    We must be ever vigilant about how we can contribute to the global community whilst maintaining and enabling growth of our own economy
    Keep up the research & the analysis for all,of us Denis

  13. Planning Student: University of Sydney

    The mainstream media is not adequately reporting the significance of this TPP issue.

    Audiences are focused on the free trading agreement with China. Bill Shorten’s concerns about the employment implications of this deal are worthy of close consideration.

    The TPP is far more significant both for Australia and China as it will impose changes on the way business is done in both the financial and public sectors in both countries if China finally joins up to the TPP Agreement.

    To have China outside the negotiating team for the delivery of the TPP is an omission which our national government should address immediately by taking it up with President Obama. He has his own problems at home with the TPP and might welcome Australia’s concerns to assist in broadening the base of the TPP in relation to investment protocols and copyright law.

  14. Ali

    Well-said Danis about the consequences of China’s economic growth on its environment. The TPP though will be so detrimental for countries given that it leaves the sovereignty of nations and the destiny of it’s population to multinational corporations, there should be more balanced view over TPP I think

  15. Paul

    A very interesting article to consider in light of the interesting economic times ahead. The writer is correct. The times of China being the workshop of the world are fading as it evolves into a much more sophisticated and robust economy.

  16. Ryan

    Let’s tolerate all varieties of trade and investment within contemporary globalization. Wanting to impose the market model on China is a return to Napoleon I and worse! Ireland indeed tried to make the market model its saviour but it left that country in ruins with bank failures and real estate crashes. Fortunately, Ireland is not involved in the global military alliances which seem to follow commitment to the market style of development. Is the US really wanting to topple the government of China, I say using economic diplomacy as its first weapon?

  17. Fair Trade

    Thanks Ryan. Free trade is not necessarily Fair Trade. Ireland was once exporting fine foods to Great Britain whilst people beyond the Pale starved. Mexico is much the same today and has become a major part of the narco-economy. So much for the free trading model.

  18. Mathew Nielsen

    That is a awesome article denis 🙂 keep up the good work. Very insightful.

  19. oneworld

    Hopefully all these trade negotiations will result in improved, environmentally sustainable living standards for all humanity and that all the leading states will increase their co-operation through the G20. As a mercantilist economy China seems to be modelling itself on Singapore, with overall co-ordination of its SOEs through capital allocation state investment funds. This model may continue regardless of whether China joins the TPP.

  20. Fair Trade

    China’s huge economy will operate at a disadvantage as a mercantilist state if the TPP becomes a reality. The USA and its close commercial allies such as the UK and Canada benefit from highly lucrative but financially risky financialization transfers as explained in the late Peter Gowan’s article. Either China joins in this Casino brand of global capitalism, or its overseas investment activities operate on terms set by the TPP across the Pacific Rim and later in EU, now on the target list for the extension of an exclusively market model of development.

  21. Elizabeth

    Great article Denis. Will be interesting to see how the corruption crackdown in China plays out too

  22. Fair Trade

    The anti-corruption campaign in China is definitely important, Elizabeth.

    Insider traders in crony-ridden state industries are of a similar ilk to the rogue traders on Wall Street as portrayed by Leonardo DiCapricio in the character of Jordan Belfort.

    But the latter are a more significant threat to Australian living standards through the fine print controls in the TPP with a capacity to erode wages, working conditions and essential government services in the name of competition law.

  23. Patrick

    Good coverage of the links between economic diplomacy and other aspects of defence and foreign policies

  24. Abri

    Very insightful article on China’s economy and how it impacts the rest of the world as it becomes a mature dominant economy of the world. Looking forward to reading more of your articles.

  25. Denis Bright in Brisbane

    DW News from Germany has reported the mass rally in Berlin on 10 October 2015 against the threats to Western Europe’s social market system which are embedded in the Transatlantic Trade and Investment Partnership (TTIP) which is being negotiated with the US.

    “Tens of thousands have taken to the streets to demonstrate against a free-trade agreement between the EU and the US. TTIP, activists fear, would erode labor and environmental standards. Naomi Conrad reports from Berlin.” (From the DW News Report)

    “Campaigners are particularly concerned about a provision in the deal that would allow companies to sue governments in special tribunals. Such an arrangement, they fear, would lead to an erosion of labor and environmental protections . TTIP’s supporters dismiss such thinking and argue that the deal would boost the EU’s economy by removing tariffs and creating common standards.” (DW)

    http://www.dw.com/en/thousands-take-to-berlin-to-protest-eu-us-ttip-accord/a-18774685

    Commitment to the market rather than the social market is a key element of both the Trans Pacific Partnership (TPP) and the TTIP.

  26. Lalnama

    Definitely achievable environmental commitment for households and the wider Australia community in its international context. This includes our neighbours in PNG and the Pacific Islands which are threatened by the frontier market development model.
    I am appalled by Australia’s continued involvement in mining and logging operations in our region.

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