Baltic Business Research

Speech by Hubert Fromlet, Linnaeus University, at the annual conference “Baltic Sea Region and China Day” at Linnaeus University, Kalmar, October 22, 2012

Summary

1. China has within two decades developed from a very lagging economic nation to the second largest economy in the world. This is an impressing performance. And it will take less than the above-mentioned period to become the world’s largest economy measured by total GDP (not GDP per capita).

2. This very fast step forward means increasing responsibility in global developments – in line with responsibilities that the U.S. and the EU have. China must regard itself as a global partner of the other two economic blocks – and vice versa. This must be clearly seen despite all harsh competition that is going on between these superpowers on the international trade arena.

 

3. Global responsibilities covers a number of areas – from the environment (pollution) to financial markets. More and more of these areas with wrong developments and negative outlook cannot be combated without active and constructive participation of China (and of the U.S. and the EU).

 

4. Institutions and transparency belong to the main fields where China as soon as possible should make visible progress. Global responsibility assumes that the rest of the world is allowed to know what’s really going on in the Chinese economy, particularly when implications may become international or global.

 

5. I said it before, I say it again: There is an urgent need of improved and enlarged (economic) statistics. Foreign and domestic research on China’s macroeconomy and the corporate sector cannot be improved without substantially more advanced statistics and more reliable accounting systems.

 

6. Clearly, improved transparency is also an important precondition for sizeable improvements of China’s financial sector. This concerns both the Chinese banking sector as such and the further opening of Chinese cross-border financial transactions (where a lot of reforms and deregulations still have to be made). The internationalization of the yuan (renminbi) so far is just a very small move compared to all the other future challenges and necessary changes – changes that should be cautious and gradual all the same in line with what the economy can work through.

 

7. China is working for the internationalization of its currency, the yuan. Future co-operation with the USD or EUR block induces, however, that China also will accept (occasional) co-operation that includes the currently largest reserve currencies, the U.S.dollar and the euro. (Sometimes) China should think in global currency terms already today; despite the absence of Chinese CNY as a tradable and fully convertible currency.

8. China has been supporting the euro at several occasions during these difficult times. China wants the survival of the euro and its fundamental position as a well-working reserve currency.  China has appreciated its currency against the buck by more than 25 percent since July 2005 which is not negligible. Thus, a certain degree of global solidarity and responsibility can be observed already today.

 

9. Another kind of global responsibility that both China and the U.S. has to face is more long-term oriented, i.e. the avoidance of a fatal future collision of negative financial developments in these two powerhouses more or less at the same time, may be around 10 years from now. The risks come from both sides: an ever increasing American public debt – maybe up to 125-150 percent of GDP – and uncontrolled developments on Chinese financial markets which may include policy mistakes.

10. Unpleasant financial developments in China could be related to bad loans, wrong sequencing in financial deregulation and premature steps to make the yuan convertible on international exchange rate markets. Full convertibility of the Chinese currency will most probably come one day, may be in 10-15 years (no prediction is possible). If this is going to happen, world financial markets will be changed dramatically. This would mean over time a much more limited participation of the U.S.dollar on internationally markets and an increasing role of the CNY, and also of the euro (let’s assume that it will survive). If the U.S. at the same time still should be suffering from major government debt problems, things could really become very complicated, in the worst case resulting in a big global financial crisis.

We can summarize that global economic responsibility should not only be a commitment to China. But China will be playing an increasingly important role in this context.