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AB 2000 studies

Alain Boublil Blog


CHINA: The New Way

"Where there is a will, there is a way," said the sage Lao Tzu. What does China want today and where does it go? Most of the commentators focus nowadays on the growth slowdown and the impact of the debt accumulated by real estate promoters and local governments on the financial and social stability of the country, which could threaten the global economy. This is not what is at stake.

First, comparing the growth rates over a long period of time is not relevant. In 2005, China had a GDP equivalent to that of France or the UK. Ten years later, its GDP is almost four times higher. China produces in a quarter as much as France in a year, and its estimated growth rate in the first quarter 2015 still reached 7%. The Chinese authorities have agreed, as the next Plan for 2016-2020 will show, that in the future priority will be given to the rebalancing of the growth model. The key is no longer whether its GDP will reach 6 or 7%, but to understand the meaning of this rebalancing and its consequences on the role that China plays in the global economy.

The project of Chinese leaders basically consists in redrawing the map of world trade in order to give China a central position. This is worth noting and we need to get ready for it. In France, it usually takes us ten years to understand what is going on in China and that is too bad. Alain Peyrefitte’s comments are a good example. In December 1973, he published a piece called "When China awakes...". He did not hesitate to acknowledge the "Mao tour de force that is giving the Chinese the feeling that they remained faithful to the best of their heritage while abolishing the past in so many areas." And he concluded by promoting the Cultural Revolution without any hesitation and describing it as "the most amazing experience of our times, perhaps of all time."Ten years later, while the reforms initiated by Deng Xiaoping, began to produce their effect and the major French banks, located in Hong Kong, are in the vanguard, the denial continues. France waited until the mid-90s to start looking at the economic development of China. Let us not repeat these mistakes and try to identify both opportunities and risks for our businesses that the "new Chinese Way" offers.

China's successive leaders have understood that their model needed to evolve. Visible and excessive inequality, unsustainable environmental damage and the emergence of a middle class that aspires to consume, have required in-depth reforms of both the production system and the living environment. This led to the choice of urbanization development, displayed in 2010 at the Shanghai World Expo, which broke this time with centuries of history. Prime Minister Li Kequiang, formerly Minister of Finance, also understood that the "low-cost" model that made China the main industrial subcontractor of developed countries, is neither compatible with the political project based on rising living standards and wages nor with the consumption needs of the middle class and even less with the aspirations of a youth that is acquiring more and more skills. The time of "imperial Contest" where a small minority had access to leading positions is gone: millions of young people now graduate from Chinese universities.  This is not to manufacture sports shoes or plastic toys. But it was necessary to redefine the place of China in the global economy in order to meet these new demands. This is the project that the "New Way" aims to implement.

Its first component is monetary. The internationalization of the Yuan was initiated at the end of 2008 – amidst general indifference – when the governor of the People's Bank of China, Zhou Xiaochuan, concluded the first currency swap agreements with neighbouring countries and promoted Yuan-denominated trade. Then clearinghouses opened in Hong Kong, Singapore and Taipei to facilitate transactions. Because of its growing trade surplus, China accumulated foreign currency, mainly dollars, and became dependent on its debtors. The aim is now to give the Yuan a role equivalent to that of the dollar in the US economy and thus to facilitate trade with China’s neighbouring countries. French leaders misunderstood this strategy as they were still asking, in 2012, for the internationalization of the Yuan, as if this was not already happening.

The second component is China’s new international economic strategy. President Xi Jinping made it its priority when he took his position in 2013. Until then, the Chinese presence abroad was dictated by its procurement strategy, as in Africa, with farm products. Everything changed in 2014: China is now strengthening its economic relations with its close and distant neighbours on a bilateral basis. This explains the new partnerships that have been concluded in order to develop and finance the construction of transport infrastructure or energy projects such as the giant gas agreement concluded with Moscow. These partnerships help accelerate the development of the countries involved and provide opportunities to Chinese companies that see them as a source of growth and jobs for its qualified employees. As for the partner countries, they will then become China's customers. Everyone will benefit from these agreements. The highlight of this strategy will be the establishment of the Asian Development Bank Infrastructure, which will be supported, despite the anger of Washington, by most European and Asian countries, except for Japan. The huge currency reserves of China will be much more useful in contributing to the realization of these projects than in funding US deficits. The new institution will compete – even if it has not acknowledged it yet – with the World Bank and the Asian Development Bank. Its creation significantly puts into question the world's financial organization and the status of the dollar, defined at Bretton Woods in the aftermath of the war.

 The spectacular number of trips made abroad by President Xi Jinping, from the second half of 2014, reflect this turn. The successes of the APEC summit in Beijing where the leaders of partner countries in Asia will meet, and of the ASEAN summit, will confirm the current strategy. The G20 meeting in Brisbane, at the end of the year, will then allow China to assert its economic power and political stability before the other leaders who are weakened by the difficulties they have to face: Economic stagnation in Europe, the conflict between Ukraine and Russia, Japan’s isolation in Asia, electoral defeat in the United States. This strategy must be named. China’s history is a source of inspiration. This will be the "new Silk Road", with reference to the trade that lasted over a thousand years between merchants who travelled a long way to carry silks and porcelains to the European courts. This road sometimes borrowed the ocean to reach Africa and the Mediterranean costs. The new road will also imply a maritime route.

The New Way results from an observation: Chinese future economic successes will rest at least in part, on a redefinition of the country's relations with the outside world. It is also greatly consistent with the country’s development: industrial change, necessary to meet the domestic aspirations, also corresponds to the world’s market needs; the internationalization of the currency provides the country with monetary sovereignty and gives it the financial means it needs; the new institutions will support economic projects and diplomatic strategy will serve these objectives. Consistency and will, for where is the will, there is the way. Alain Peyrefitte was right for once: China likes historical continuity.