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The choices China makes will have a big impact on the rest of the world

By Professor Jean-Pierre Lehmann - November 2012

China is in the dawn of a new era. Politically, it is saying farewell to outgoing president Hu Jintao and ushering in new leadership under Xi Jinping. Mr Xi will strive, like presidents before him, to nurture economic growth while maintaining political stability. But this task is becoming increasingly difficult amid growing concerns within China over a slowing economy, corruption and social problems.  

China's impending changes are not limited to its new leadership. Several fundamental shifts are taking place, creating great challenges in its demographic, social, environmental, economic, political and geopolitical landscape. How China addresses them will inevitably have a profound impact on the rest of the world. In seeking to project where China is heading, it is vital to understand from where it has come. As Winston Churchill famously said, "The farther backward you can look, the farther forward you are likely to see." This saying is especially applicable to China.  

A brief history: From isolation to globalisation  

In the 15th century, China was the great global maritime power. That is, before the Ming Court banned all foreign maritime travel and forced coastal populations to move inland—a move that led China into splendid isolation just as Western Europe began looking outward. Having turned its back (quite literally!) on the sea, China exclusively focused on the development and consolidation of the Chinese Empire to great success until the Industrial Revolution.  

With the Industrial Revolution came entrepreneurs and traders from the West, who viewed China during that era as a land full of possibilities. What ensued brought about a fundamental shift for China and for the world. No country has experienced such rapid decline as China did in the 110 years from the first Opium War in 1839 to Liberation in 1949. China was humiliated.  

Following the Liberation in 1949, sovereignty was regained and China became a respected (even occasionally feared) member of the international community, though economically it remained stagnant. By 1976, China's 23 percent share of the world's population accounted for less than 4 percent of global GDP. The rise of globalisation was forcing nations to make the decision to join or retreat. This time China did not isolate itself as it had in the past. As Chinese intellectual and reformer Zheng Bijian said, "embracing globalisation was the most important strategic choice the Chinese made."   

Though not without its challenges, including rampant inflation and fears of "foreign spiritual pollution", China's decision to join the global market economy yielded startling results. Between 1978 and 1990, the Chinese economy expanded 26 times, and in 2010 China overtook Japan to become the world's second largest economy.  It was becoming increasingly clear that China had really gone global, with a presence everywhere from Africa, where a flurry of investments in infrastructure, mining and land was taking place and continues still, to the US, where China has purchased over $1 trillion in US treasury bonds.  

Six challenges  

Due to China's remarkable recent progress, it is becoming clear that another significant shift is occurring. By no means am I implying that China will succeed the US as the global economic hegemon or that other economies pale in comparison to China. I'm simply noting that the choices China makes will have a rippling effect. In 2002, a former Director General of the World Trade Organisation, Supachai Panitchpakdi, explained how China affects the rest of the world, and ten years later his words still resonate:    

"How the world's most populous country handles the many developmental challenges it faces, will go a long way toward determining what kind of world we inhabit. . . . If China makes the wrong decisions, the result will be chilling. . . . Conversely, a China that successfully makes the transformation to a relatively affluent, open society will be both an inspiration to other countries and a locomotive that will help to power the world's economies."   

China needs to confront six interrelated challenges to ensure a smooth transition into the next stage of its development. Tackling these successfully will help China to avoid falling into the middle-income trap, prevent massive social unrest (à la Tahrir Square), and evade foreign conflict altogether. These six challenges are:  

1. Demographic—China's once abundant labour force filled with young, cheap workers no longer exists in the same way as the population ages rapidly.  

2. Social—hundreds of millions in rural areas are still living in poverty with the emerging, urban "middle class" becoming increasingly disillusioned by poor governance, corruption and rampant inequality, which increases pressure on China's leadership to be more accountable.  

3. Environmental—China is emitting more CO2 gases than the US, and is also reaching US levels in per capita terms, posing an immense threat and potential disaster.  

4. Economic—the former model has proven unsustainable in light of these emerging concerns, driving China to develop a new model based more on consumption, social services, and higher value-added production and innovation.  

5. Political—the current system cannot function effectively in the face of such sophisticated challenges, which is increasingly being recognised as an impetus for political reform.  

6. Geopolitical—"China's peaceful rise" appears increasingly doubtful as the country has become embroiled in a number of quite serious spats with its neighbours and has strained its relations with the US.  

Still, China's rise continues. Even if the rate of economic growth appears to be slowing, China's growth stands in stark contrast to the declining economies of the EU, Japan and the US, not only in global trade and investment, but also in relation to global finance. This is the "dawn" of the new era for China politically, but likewise demographically, socially, environmentally, economically, and geopolitically. No one knows what the coming years under new leadership will bring. Nonetheless, we can be assured that China and the world in 2020 are likely to be as different from what they were in 2010 as they were in 2000.

Jean-Pierre Lehmann is Emeritus Professor of International Political Economy, IMD, and Senior Fellow, Fung Global Institute, Hong Kong. He teaches in the Executive MBA (EMBA) and the Orchestrating Winning Performance (OWP) programs.

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