China Research

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

The AIIB and How Not To Repeat Historical Mistakes

May 6, 2015

Old hero looks on bad temperedly as would-be new hero launches his idea for a new global financial order. Old hero tries for all he is worth to prevent the new idea from gaining currency among his erstwhile followers. His efforts are to no avail. The new hero manages to amass overwhelming support for his proposed institution.

Ah you might well say. This is all about the Asian Infrastructure Investment Bank, new hero being China and old hero being the USA. Right? Yes indeed. But there is actually another answer which could be considered equally as correct. It is the case of the creation of the IMF. On that occasion the new hero was the US with the UK being the grudging old hero. At that point, not even an alternative idea put forward by none other than John Maynard Keynes was able to prevent the dollar based international structure from being born.

The IMF was created in 1945. And now it is 2015. 70 years is a long time in economics, perhaps. Yet surely not that long for the American memory not to be stirred and to recognise the irony of the turn of events. Well may be not. But it is certainly an indication that people react in pretty much the same fashion when the same kind of shock hits them.

That said it is difficult to envisage the renminbi acquiring the position that the US dollar did in the immediate postwar years. In passing, it should also be noted that the US dollar’s reign itself did not last that very long. The dollar’s convertibility to gold was terminated in 1971 after all, thereby effectively ending the dollar’s position as unchallenged international key currency. Nevertheless the Chinese currency is even more disadvantaged than the dollar of those days in that China’s economic supremacy of today is nowhere near that of the US in the immediate postwar years. At that point, everyone else was struggling with postwar redevelopment. They desperately needed dollars to finance that endeavour. The renminbi is so clearly not in that position.

In Japan we have the saying “acorns comparing heights” indicating competition among contestants who are not that different from each other in terms of ability. There is no outstanding winner with undisputed might. This is very much the case now that we live in a highly globalised world in which people, goods and money flow so effortlessly over borders. No single nation or region can boast of being the oak tree rather than an acorn. China may be an extremely super large acorn but it remains an acorn nonetheless and not the tree.

Moreover, the dollar of pre-1971 years was the only currency that was convertible to gold at a fixed price. The renminbi enjoys no such exceptionality.

All this being said, one can understand China’s motivations behind the AIIB initiative quite well. It needs access to the infrastructure development market of Asia. In needs some big projects on which it can use up its vast excess production capacity. Having run out of investment opportunities inside its own economy, it is now looking for space elsewhere. It is also looking for a way out of dollar-dependency. It wants access to global finance in its own right without having to rely on the dollar as a gateway.

So the new kid on the block is trying to grow up in a workable fashion. The US should look back on its experience of 70 years ago and try to avoid the British mistake of attempting to block the newcomer’s way. Begrudging new people access to club membership is never a very sophisticated thing to do. They will sulk, become defiant and go on to create a club of their own. This will more often than not lead to unproductive squabbles and pitch warfare.

It was refreshing to watch the British manoeuvre on this occasion. To be the first to stand up and be counted as a member of the AIIB club was a stroke of piratical genius. It seems that the country’s buccaneer spirits have not died down completely. A completely different performance to 70 years ago. Much more sensible. It is a typical case in point which shows you that when you are no longer the old hero whose position is being threatened by youthful rivals you can relax and come up with some impish ideas about position taking.

Most pitiful in this context has been Japan’s response to the AIIB idea. It would have done better to try to outdo the British. If a young and upcoming very large Asian acorn is trying to boost infrastructure development in the area, a more mature and more experienced Asian acorn of not at all negligible size should welcome the opportunity to lend a hand. Or even both hands. Having secured the position of wise old advisor, Japan could have gone on to mediate between old hero and new hero. Alas no such luck. Japan just keeps looking on with scared stiff eyes for the new comer and apologetic diffidence for the old timer. Pathetic.

 

 

 

 

 

Noriko Hama
Professor & Dean at Doshisha Business School, Kyoto

 

Back to Start Page

Survey on China’s new economic and social reform policies

April 2015

1. Do you think that the main economic and social reforms that were set up by China’s political leaders at the Third Plenum in November 2013 can be implemented roughly successfully by 2020 – the officially announced evaluation year?

Yes: 54 % No: 46 %

2. Which three envisaged areas will be the most difficult ones to reform (ranked)?

Financial markets

Institutions

Environment

3. Where do you see the three major challenges to the reform policy come from (ranked)?

Politics

Slow moves of institutions

Lack of understanding through the whole system of decisions makers

4. Considering your answers above on the importance of better quality of growth – as stressed repeatedly by the government – what kind of GDP effects do you expect in the forthcoming years

GDP-growth rates will improve until 2020
compared to current growth rates –

GDP-growth rates will stabilize at a level
of 6-7% in the years to 2020 73 %

GDP-growth rates will decline considerably
until 2020 compared to current growth rates 27 %

The quality of data will in the forthcoming years

improve: 27 % deteriorate: 9 % remain unchanged: 64 %

The transparency of data will improve

Yes: 45 % No: 55 %

5. As how important would you grade a relatively successful Chinese reform policy by 2020 for the

(scale 1-5; 5 = very important)

European economy (generally): 3.7 European corporate sector: 3.5

American economy (generally): 3.7 American corporate sector: 3.8

Asian economy outside China: 4.8 Asian corporations outside China: 4.7

 

Comments:

The results of our little survey should be interpreted cautiously since only 11 experts sent their answers to us. But we think that some indications are given all the same.

The respondents are really divided on the future results of the reforms plans (as it was the case one year ago).

Not very surprising: Financial markets, institutions and the environment are considered as the most difficult areas to reform or to improve.

More than 70 percent of the panel participants believe that China’s GDP growth rate will stabilize between 6 and 7 percent in the forthcoming years; this would be quite a satisfactory development with (probably) improved quality of growth at the same time. Regrettably, no major progress is expected what concerns the quality of statistics.

A relatively successful Chinese reform policy is regarded as quite important to the European and American economy – but also to the corporate sector of these two continents. In our view, the Chinese impact will be even higher beyond 2020 if Chinese reform policy were to fail. Understandably, the rest of Asia will be even more dependent on developments in China, the panelists conclude.

 

 

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

Back to Start Page

Russia’s Economic Growth will be much Slower in the Future

April 1, 2015

During the boom years between 2000 and 2008, Russian GDP grew by almost 7.5% per annum. This boom was caused by two interlinked factors: The global economy was growing at a very rapid pace, and the price of crude oil rose throughout the period. When the financial crisis hit major parts of the world, Russia’s economy was badly affected along with everybody else, but subsequently Russian growth has been slower than before the crisis. In addition, Russian GDP growth has decelerated almost continuously from 2011 onwards. (Figure 1)

Figure 1 Russia’s GDP growth

Source: Rosstat and own calculations

There was no obvious single reason for this slowdown, but some important factors should be noted. First, Russia’s working-age population had started to decrease, which automatically slows down GDP growth, ceteris paribus. Second, Russia’s fixed capital investment remained low, between 21% and 22% of GDP after the global financial crisis. While this would not be problematic for a country like, say, Germany, Russia’s investment ratio remained much below rapidly growing emerging market countries. Third, growth in productivity had become much slower already before the global financial crisis (Voskoboynikov and Solanko, 2014). Last, the price of oil remained high, but it did not increase as it did between 2000 and 2008.

Deryugina and Ponomarenko (2014) use a large Bayesian VAR model to assess the relative importance of various macroeconomic factors in explaining the evolution of Russia’s GDP. They find that the oil price together with demand from the EU are enough to forecast and explain most of the short-run movements in Russian GDP. Rautava (2013) notes a similar dependence on the price of oil. Even more interestingly, he notes that Russia’s trend growth halved to approximately 2% after the global financial crisis.

Role of oil

It is difficult to overstate the importance of energy prices for the Russian economy. Crude oil, oil products and natural gas brought 70% of Russia’s export revenue in 2014, and the energy sector provides the Russian Federation with more than 50% of its tax intake. Figure 2 illustrates the tight connection between the price of oil and Russia’s exchange rate.

Even after the introduction of sanctions in July, the Russian currency and financial markets remained relatively calm, but the rouble started its steep depreciation when the price of oil plummeted. Connection works in the other direction as well, of course. When the price of oil stabilized and recovered somewhat in February and March, 2015, the rouble reacted in the same direction as well.

Long-run growth slower than before

Unfortunately, Russia’s long-run growth prospects are not very rosy either, especially in comparison to the development in the recent years. We know very well about the evolution of the working-age population during the next 20 years, as almost all people coming into working-age have already been born. According to the UN prediction, Russia’s working-age population will decline from 90.7 million in 2015 to 78.7 million in 2035, which translates into -0.7% change annually on average.

Figure 2 Price of crude oil and the rouble

Even if one assumes that the capital stock will grow somewhat – say by 0.3% per annum, which is higher than recently – for the next twenty years, and total factor productivity also rises at a relatively rapid – but decelerating – pace, Russia’s GDP growth will be below 2% for the next twenty years (Table 1). This is clearly below what Russians have become used to in recent years. Also, Russia’s share of global GDP continues to decline. Moreover, Russia’s growth needs to be driven by total factor productivity. Voskoboynikov and Solanko (2014) estimate that it grew by 2.5% per annum between 1995 and 2008. Therefore, keeping Russia’s growth relatively fast at higher income levels might be difficult.

Table 1 Baseline scenario for Russian growth

 

 

References

Deryugina, Elena and Alexey Ponomarenko (2014). A large Bayesian vector autoregression model for Russia. BOFIT Discussion Paper 22/2014.

Rautava, Jouko (2013) Oil Prices, Excess Uncertainty and Trend Growth – A Forecasting Model for Russia’s Economy. Focus on European Economic Integration. Q4/13, Oesterreichische Nationalbank.

Voskoboynikov, Ilya and Laura Solanko (2014). When high growth is not enough: Rethinking Russia’s pre-crisis economic performance. BOFIT Policy Brief 6/2014.

 

 

 

 

 

 

 

 

Iikka Korhonen
Head of Bofit (Institute for Economies in Transition) at the Bank of Finland

Back to Start page