China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

China’s Responsibility for the Global Environment

December 5, 2012

Currently, the UN Climate Change Conference is taking place in Doha. The objective of this conference is to make plans from the Durban meeting one year ago concrete. This means more detailed that a global climate treaty should be set up by 2015 and be implemented by 2020. The whole issue of the deteriorating global environment is getting more urgent each and every year. In fact, there is no time to lose.

However, the situation still seems to be paralyzed after the failing climate summit in Copenhagen three years ago. In the meanwhile, carbon dioxide (CO2) emissions continue to increase rapidly. China’s CO2 emissions are now almost twice as much as those of the U.S. which means an increase by almost 300 percent since 1990 (the U.S. +9 percent during the same period, India and Indonesia +200 percent, Germany and the UK -20 percent). According to most calculations, China stands now for 25 percent of all global CO2 pollution, mainly related to the rapid industrial expansion and the predominant use of carbon for energy production (75 percent).

Just looking at this very brief statistical summary points at the ongoing environmental conflict between China, other emerging countries and most Western interests (but the U.S. never ratified the Kyoto agreement). Emerging countries are – in line with their term – expanding their economies quickly, and actually more quickly than the rest of the world. Since these countries consider the West / Western countries to have a kind of historical debt for their lagging development, the group of emerging countries – informally led by China and India – does not consider their absolute volumes of pollution as the decisive reduction indicator – but the pollution or GDP per capita.

Regarding historical or emotional dimensions, this kind of approach may look understandable. But relative calculations tend to be misguiding when absolute numbers become really high. This is why China’s role in the long way to better global climate conditions has to be regarded as both decisive and morally important, particularly since China can be supposed to remain a rapidly growing economy also in the foreseeable future – even in the case of temporary growth distortions. In other words: China’s responsibility for the global environment will continue to increase. Thus, calculations based on per-capita measurements will become more and more obsolete. However, Western interests should negotiate with China on fact-oriented levels – and not with arrogant and superior attitudes!

Finally, it should be said that also China itself would benefit from a clearly improved environmental outlook at home. Its people will be happier, more healthy and more productive – which certainly will add to economic growth in the longer run.

Summary: It will be one of the most important strategic decisions of the new Chinese political leadership to give the long-term objective of a substantially improved environment enough priority compared to short-sighted growth considerations.

 

Hubert Fromlet
Professor of International Economics
Editorial board

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Re-considered: The Competition between Brazil and Mexico – and China’s Role in this Competition

November 7, 2012

Summary in English

Competition between the two Latin American giants, Brazil and Mexico, has been fierce for many years. Joining the North American Free Trade Area (NAFTA) in 1994 gave Mexico a couple of very successful years. In 2000, expectations of more fundamental economic reforms were high when president Vincente Fox took over after 70 years of leadership by the Institutional Revolutionary Party (PRI). However, reform expectations were not met since Fox did not have a political majority in parliament – a situation which his successor Felipe Calderón from PRI is confronted with as well. Ironically, the new Mexican leaders now support the reforms that they critically rejected during the 12-year presidency of Fox.

Contrary to Mexico, Brazil entered the new century with a lot of doubts and question marks. In 2001, Brazil was hit by the Argentinian crisis. The South American free trade area Mercosur moved on very slowly. The business climate worsened further when the former leftist union leader Lula Da Silva won the presidential elections in 2002. But Lula changed style in time and went visibly for economic stability and reforms, well supported by parliament – contrary to Vincente Fox in Mexico. Lula was even re-elected in 2006.

Statistics give an obvious answer on the results of Mexican/Brazilian economic competition (GDP growth 2000-2009, average: Mexico 1.7 percent and Brazil 3.3 percent). Apart from domestic political conditions, one external factor contributed a lot to the different performance of Mexico and Brazil: the rapid rise of “manufacturing China” which very sharply turned out to be a main competitor to the “manufacturing Mexico”, particularly what concerns exports to the U.S. During only one decade, China more than doubled its exports to the U.S., much at the expense of Mexico. At the same time, Brazil was very much favored by China’s commodity import boom. Last year, China absorbed 17 percent of all Brazilian exports which means that China has advanced to number one of all Brazilian export markets.

During this ongoing decade, growth perspectives may again change pattern. Chinese total import growth may weaken somewhat on trend in the forthcoming years. Mexican competitiveness may be supported by the peso depreciation in the past years. So far, the GDP growth numbers of Mexico and Brazil are quite similar since 2010, around 4 per cent, with Mexico a little bit in the lead.

The relatively dampened or weak global growth outlook should lead to the conclusion that domestic demand in Mexico and Brazil may play a somewhat larger role for economic growth in the forthcoming years than in the past. In this context, Mexico may have a little better cards because of its substantially lower public debt in relation to GDP, slightly above one third compared to more visibly above 50 per cent in Brazil.

Read the whole analysis (in German)

 

 

 

 

 

Mauro Toldo
Head of Emerging Markets / Country Risk Analysis, Deka Bank

 

 

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Global Financial Reform and Cross-Border Integration: Is Asian Leadership Needed?

Before 2007–08, most global financial reform initiatives were based on a near-consensus about the benefits from the free circulation of capital across jurisdictions and from free cross-border competition among financial services firms. As a consequence of the financial crisis in the United States and Europe, however, this near-consensus can no longer be taken for granted. One implication is the increasing possibility of a fragmentation of the global financial system.

Such a trend could take many forms. Rating agencies were unregulated in most of the world outside the US before the crisis (South Korea being one exception). But the G-20 recommended that they be regulated and supervised by all major jurisdictions. Implementing that recommendation raises the risk of incompatible or inconsistent regulatory frameworks and supervisory practices among different countries. Rating methodologies could vary even within the same rating agency. Another example of fragmentation could arise for over-the-counter (OTC) derivatives. Trading has until now been cleared bilaterally among market participants. The G-20 has mandated central clearing in regulated clearing houses starting in 2013, however. Many investors fear a division of corresponding markets along the borders of country or currency areas. A third new development would flow from the new standards at international financial institutions, particularly the International Monetary Fund (IMF), governing the adequacy of capital control measures under certain conditions. But these new standards could potentially run counter to the previously received wisdom of the so-called Washington consensus.

Across the globe, supervisors have nudged banks to separate and protect assets and maximize lending in their respective jurisdictions, in some cases pushing for subsidiarization of activities previously conducted through branches. In countries that have run into fiscal difficulties, domestically headquartered banks have been pressed to increase their purchases of national sovereign debt. “Financial repression,” an expression long reserved to economic historians, has reentered the mainstream financial vocabulary to describe the possibility of such pressure. These developments have been striking in the euro area, where countries are in principle committed to total openness to capital flows but where an abrupt U-turn from financial integration to financial fragmentation has been identified by policy authorities, including the European Central Bank (ECB). They are by no means unique to Europe, though, and variations of the same themes have been observed in most if not all main economic regions.

Simultaneously, the pre-crisis momentum for harmonization of global financial standards has run into setbacks in crisis-affected countries. The United States has delayed any decision about the adoption of International Financial Reporting Standards (IFRS), which it had endorsed for US-listed foreign firms in 2007 and had seemed on the verge of extending to US-listed issuers in 2008. In another example, the European Union, after championing the global use of the Basel II Accord on capital standards during the 2000s, now seems set to adopt legislation that the Basel Committee has deemed materially non-compliant with the new Basel III Accord adopted in 2010. For all the G-20 talk about global solutions to global problems, financial reform often seems more driven by politics in the post-crisis context than in the previous period. And as the saying goes, all politics are local.

This new reality poses an unprecedented challenge for Asian policymakers. Asia has gained from dynamic financial development in the past two decades, and is entering a new phase in which cross-border financial openness could improve the allocation of capital and make financing mechanisms more efficient. Asians generally are likely to benefit from the continuation or even the acceleration of global financial integration. Until recently, Asians could take such integration for granted, counting on the commitments to financial openness of both the United States and Europe, which dominate the global financial order as embodied by such institutions as the IMF, the International Accounting Standards Board, or the Basel cluster around the Bank for International Settlements.

But the assumption that the West will continue to champion further cross-border openness of the global financial system can no longer be taken for granted. As a consequence, Asians may have to take more leadership in global financial reform discussions to make sure that global financial integration is not reversed. This would be a new situation. Some Asian policymakers may feel ill-prepared for such a trend, but they could find its implications difficult to escape.

Nicolas Véron
Senior fellow at Bruegel, Visiting fellow at the Peterson Institute for International Economics, Washington DC


Nicolas Veron gave us his kind permission to include this contribution in our blog chinaresearch.se  The article was initially published last week by Bruegel and Peterson Institute for International Economics.
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