Still Pulling Its Weight
Despite recent market turbulence and prolonged slowdown, China is still the backbone of global growth
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UPDATED: August 31, 2015 NO. 36 SEPTEMBER 3, 2015
Leveling Out Prosperity
Despite uneven world economic growth, a modest rate looks set to prevail, with China being one of the twin engines
By Chen Fengying

Affected by the expectations of a rate hike in the United States, currencies of emerging markets have depreciated, their stock markets plunging and capitals flowing out, intensifying the turmoil of the financial markets.

Since the 2008 global financial crisis, the world economic recovery has been weak and uneven; developed economies have resumed steady growth, while emerging markets have been growing slowly.

In the post-crisis period, the most significant change in the world economic growth pattern is that the world economy is driven by twin engines—U.S.-led developed countries and China-led emerging markets, instead of the single engine of emerging markets before the 2008 global financial crisis. The twin engines will better guarantee sustainable development of the global economy.

Whether the economies of the United States and China can develop sustainably will decide whether the world economy can maintain growth momentum under complicated conditions. The United States has the fastest growth rate among developed economies, while China maintains highest growth rate in the world. On the other hand, the United States has made the most powerful economic restructuring and achieved the greatest results in financial reform, while China is now strengthening its reform comprehensively, with the greatest resolution for reform and innovation. Currently, only the two countries can influence world economic development.

In the developed world, if the U.S. economy is not confronted with big trouble, the adverse impact of weak economic growth in the eurozone and Japan will be offset.

The emerging markets as a whole will not face big troubles if China's economic growth can maintain medium-to-high speed, even though some emerging economies are in recession. The huge demand from China can avoid sharp decrease of bulk commodity prices in the global market, and the outbound investment China makes will help alleviate the adverse impact brought by capital outflow due to the U.S. rate hike.

China should accelerate economic reform and industrial upgrading, develop low-carbon and green economy and address its "new normal." This will be the biggest contribution it can make to the world economy.

Favorable factors

This particular financial crisis differs from previous ones, but we are still not necessarily pessimistic about the future of the world economy, because favorable factors still exist.

First, economic globalization has not been reversed, and regional integration is still rising, which will push international trade and investment to continue growing.

Second, investment in infrastructure and connectivity will also be a new highlight for the world economic growth.

Particularly, the establishment of multilateral financing platforms, including BRICS' New Development Bank and the China-initiated Asian Infrastructure Investment Bank, will provide more financial support for emerging markets and developing countries.

Moreover, the implementation of China's Belt and Road Initiative will offer various opportunities for the countries alongside, so cross-border infrastructure construction will become a new impetus for the economic and trade development of the countries along the Silk Road Economic Belt and the 21st Century Maritime Silk Road.

Third, developed countries are undergoing re-industrialization and emerging markets are accelerating the development of manufacturing industries, which will encourage science and technology revolution.

Fourth, flouring new industries and the Internet-based economy are also likely to bring revolutionary changes to production and people's life.

After three to five years of worldwide structural adjustments, scientific innovation and new industries will be new highlights pushing forward the growth of international trade and, in turn, the world economy.

Mild growth

The world economy may not grow robustly in the future, but a worldwide recession is also unlikely.

There are multiple reasons for the slow potential economic growth rate in the post-crisis period. The aftermath of the 2008 financial crisis has not yet been eliminated, especially the high debt ratios, high unemployment rates and high deficit rates in developed countries. Currently, emerging economies are facing another financial turmoil caused by expectations of a U.S. rate hike, with Russia, Brazil and Turkey already being trapped in the crisis.

Population aging has become a common problem for both developed economies and emerging markets, which is causing the slowdown of world economy. Moreover, a major science and technology revolution is unlikely to take place in the short term, so that productivity will not be raised significantly.

Therefore, in the future, the world economy may grow only at 3.5 percent, with developed countries and emerging markets rising by 2 percent and 4.5 percent, respectively.

Unless there are global breakthroughs in technology progress or major world economies make marked progress in economic restructuring and industrial upgrading, the world economy will not resume the growth rate it held before the financial crisis. In the 1997-2007 period, the world economy grew at an average annual rate of 4 percent.

The biggest risk

The biggest risk the world economy is faced with is the possibility that the U.S. Federal Reserve will raise interest rates, making the U.S. dollar stronger. The uncertainties are disrupting the international financial, capital, resource and trade orders.

It is predicted that the rate hike in the United States will be a continual and complicated process. During this process, the U.S. dollar will continue to rise, bringing more risks into the international financial market and causing fluctuations at the world stock and foreign exchange markets, capital backflows to the United States, high international financing costs and low prices of bulk commodities. As a result, global wealth will flow from resource producing countries back to resource consuming countries.

Since the U.S. Fed ended quantitative easing last October, international oil prices have plummeted and world capital fled from emerging markets back to developed economies and currencies of emerging markets have depreciated, plunging Russia, Venezuela, Colombia and Brazil into a deep economic recession.

It can be predicted that for quite a long period, any interest rate hike by the U.S. Fed will cause unexpected financial turbulence. This is the biggest risk emerging markets will face in the post-crisis period, as well as the biggest uncertainty affecting the stability of world economy.

The author is a research fellow with the China Institutes of Contemporary International Relations

Copyedited by Kylee McIntyre

Comments to yushujun@bjreview.com

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