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Go Global: China’s new growth regime and why the Cotton Route makes sense

, October 24, 2017, 0 Comments

19-national-congress-china-marketexpress-inOn the occasion of the 19th Chinese Communist Party Congress Go Global: China’s new growth regime and why the Cotton Route alternative to the New Silk Road makes sense.

The end of the Chinese super cycle in 1990-2010 was sometimes announced as the end of the emerging countries as an engine of global growth and China’s entry into a phase of uncertainty and financial crisis risk.

While it is true that a slowdown in emerging economies occurred between 2010 and 2015, marking the end of the myth of decoupling from Western economies, the common phenomenon of significant crises with contagion from one region to another, as in 1997 for example (Asian crisis), did not take place. The primary role played by China in managing monetary, financial and trade tensions during this period cannot be underestimated, in particular through a massive domestic stimulus policy from 2009 onwards and the fine-tuned management of its macroeconomic slowdown and the yuan exchange rate.

Above all, a set of signals seem to show that the emerging world is currently undergoing a transition to a new growth regime in which the transformation of the Chinese model appears to be decisive in all respects. Most of the 2017 economic indicators point in any case in this direction and in particular the resumption of south-south trade and the faster-than-expected upturn of the Russian, Brazilian and South African economies.

Rather than refocusing on domestic demand, as the official Beijing doctrine often states -undoubtedly to satisfy Western requirements for a “rebalancing of the world economy”. We can, on the contrary, affirm that the Chinese model that is emerging is that of a genuine globalization of its economy centred on South-South relations and inspired by the official doctrine of the 4i. Which appeared recently in the President Xi’s entourage: innovation, integrated, interelated and inclusiveness.

This programme has become the de-facto official doctrine of the last BRICS summits and is apparently the backbone of the economic doctrine of the 19th Chinese Communist Party Congress. The previously announced growth target of 6.5% by 2020 to double national income, probably just before the grand celebrations of the CCP’s centenary in 2023, cannot apparently be achieved by China’s domestic demand alone.

The aim is both to promote technological innovations for a slower but more intensive organic growth regime, and to seize the opportunities to accompany an original Marshall plan for the emerging world, propelling the major Chinese groups into these markets and recycling the formidable financial surpluses accumulated during the era of the super commercial cycle.

The concept of New Silk Roads or OBOR (Yi Dai Yi Lu in Chinese) expresses the geography of China’s expansion in all directions, with its large state-owned and provincial companies around a vast infrastructure and equipment program in emerging countries. Its two axes and six corridors now cover 68 countries and two-thirds of the world’s population, and most Chinese financing and investment. According to Thomson Reuters, the latter reached USD 33 billion in August 2017 compared to USD 31 billion for the whole of 2016.

If China expects a lot from this locomotive of global demand, what can the emerging countries expect? Probably white elephants and bad debts as we can see in Angola today. But overall, however, they should suffer less from the deindustrialisation caused by the triumphant low-cost China of the 1990s, and the better managed could find a self-sustaining organic growth regime thanks to the necessary and cheaper upgrading of their infrastructure. Admittedly, it will be financed in part by the recycling of China’s financial surpluses, often conditioned by the imperatives of the rising superpower. But it is also already funded by the enormous amounts of liquidity accumulated during the lax monetary policy period post-crisis 2007, as illustrated by the explosion of non-sovereign EM bonds.

The new growth cycle for emerging countries will, therefore, be that of new debt and the return of country risk, to which corporate risk will now be added as the largest conglomerates in the south attract more and more Western investors.

While all emerging countries are far from being on a stable and robust trajectory, they are clearly writing a new chapter in their economic history as China prepares to mature. What she calls a “win-win” strategy, a bit like in the bees’ tale of economist Mandeville. There is certainly honey at the key, but above all, there is a lot of the fable of Adam Smith’s butcher who warned already in 1776:”For our dinner (…) we do not rely on their humanity but on their selfishness”. The virtuous circle is not guaranteed. It depends on the institutional strength of Southern partners and China’s competitors to force her to be virtuous. On that, the proposal made recently by India to open an alternative Cotton route makes sense.