7 minute read

Amid the fallout from Donald Trump’s ‘America First’ approach and the rise of nationalism across the Western World, China has emerged as an unlikely champion of globalisation. But suggestions it is set to replace the US and assume global dominance are misplaced.

On January 27, Xi Jinping arrived in the snowy Swiss town of Davos to deliver a speech at the World Economic Forum (WEF). The first Chinese president to attend the August gathering of financiers, businesspeople and policymakers, Xi launched a robust defence of globalisation against its critics.

“Economic globalisation has powered global growth and facilitated movement of goods and capital, advances in science, technology and civilization, and interactions among peoples,” Xi said.1

While the Chinese president conceded that globalisation has brought political challenges, he rejected protectionism as a dead end: “Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air. No one will emerge as a winner in a trade war,” Xi continued, drawing enthusiastic applause.

The target of Xi’s speech was clear: Donald Trump. The new US president has threatened tariffs on Chinese imports and raised questions over the viability of established multilateral organisations such as the United Nations and Nato. By contrast, Xi used his historic Davos appearance to present himself as the defender of a rules-based global trade system, free markets, and international co-operation in the battle against climate change.

Xi’s speech led many to argue China is manouevering to replace the US as the world’s dominant economic and political power. But while China is already taking a more prominent role in certain areas – trade, development and renewable energy, for example – talk of a new era of Chinese global domination and American decline is premature.

Trading up      

China’s growing influence in world affairs is in part a matter of simple resources. In 1950, the US generated almost 30 per cent of global GDP; now that figure is less than 16 per cent. Meanwhile, China’s share has grown from 4.5 per cent to 17.2 per cent in purchase-power parity (PPP) terms over the same period.2

Given the momentum behind China’s growth, Trump’s apparent desire to contain the rising power through a trade war may be futile. “The fate of China, and its role in the world, is now in the hands of the Chinese and their leaders,” wrote Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University, and a former chief economist of the International Monetary Fund. “If the Trump administration thinks it can reset the clock by starting a trade war with China, it is as likely to accelerate China’s economic and military development as it is to slow it down.3

Trump’s staff have – with some justification – scorned the idea that China is the new bastion of free trade. US commerce secretary Wilbur Ross told his confirmation hearing on January 17 that China was the “most protectionist” major economy in the world. And, in reference to the higher tariffs improsed on US goods by China relative to those placed on China by America, he said  that it was “one thing to talk about free trade. We would like our trading partners to practise more free trade”.4

Nevertheless, there are signs China could indeed be leading the way in pushing for more global economic integration as the US mulls trade barriers. On January 23, President Trump withdrew the US from the Trans-Pacific Partnership (TPP), a 12-country agreement designed by the Obama administration specifically to exclude China and cement US economic leadership in the region.

China has been quick to take advantage by touting a rival to TPP, the Regional Comprehensive Economic Partnership (RCEP); an even more extensive free-trade agreement to which Xi pointedly referred in his Davos speech.

Without the US, TPP consists of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam; covering 6.7 per cent of the world population and 13.2 per cent of output. By contrast, RCEP, which would include the ten-member Association of Southeast Asian Nations (ASEAN) bloc plus trading partners China, India, Japan, Australia, South Korea and New Zealand, would account for 48.2 per cent of the population and 32.6 per cent of output.5

There are signs the demise of TPP may expedite the ratification of RCEP. After the US rescinded its TPP membership, Thai commerce minister Apiradi Tantraporn said the ministers from ASEAN and their six trade partners were set to accelerate wrapping up trade modalities and “meet in Vietnam in the middle of 2017 with final talks aimed at concluding the RCEP due to be held by the end of 2017”.6

One belt, one road

China has also become more influencial as a source of financing for development projects; challenging the US’s traditional role as the leader in development finance and facilitating more efficient trade across Asia.

In January 2016, China launched the Asian Infrastructure Investment Bank (AIIB), widely seen as a rival to the US-led World Bank. Several US allies, including the UK, Germany and Australia, signed up to the initiative, despite Washington’s refusal to join. In total, the AIIB has 57 signatory countries from Asia and elsewhere and is developing productive infrastructure across the continent.7

China has also been pressing ahead with two other infrastructure initiatives, known as ‘One Belt One Road’ and the ‘Maritime Silk Road’. The former covers central Asia and the latter Southeast Asia.

The One Belt One Road push involves 65 countries, accounting for 29 per cent of global output and 63 per cent of the population. China expects annual trade with the countries along the One Belt One Road routes to exceed $2.5 trillion by 2026.8

Non-financial direct investment abroad by China grew 54 per cent in the first nine months of 2016 to $134 billion, surpassing the $121 billion for the whole of the previous year. Indeed, overseas direct investment (ODI) exceeded foreign investment into China for the first time in 2015. China also overtook Japan to become the world’s second largest provider of overseas investment that year. And, while China has traditionally largely focused on infrastructure deals, outsourcing of manufacturing more than doubled in 2015.8

Will Ballard, Head of Emerging Markets and Asia Pacific Equities at Aviva Investors, believes the ODI and AIIB initiatives are encouraging developments. “Chinese ODI has increased dramatically, aided by initiatives like One Road One Belt. ODI can be seen as a starting point for China increasing its involvement with the global economy. Investment is being focused on developing countries; for instance, setting up shared manufacturing facilities. This is a big change to what was seen a decade ago.”

China’s overseas investments are also giving it greater political clout in the region, enabling it to defuse tensions and cement alliances, sometimes at the expense of the US. Take Rodrigo Duterte, president of the Philippines, one of America’s most important allies in Asia since the signing of a security treaty in 1951. In 2016, Duterte turned away from Washington and towards Beijing. Duterte used a diplomatic visit to China in October to announce his country’s “separation” from the US, dropping a complaint lodged by his predecessor against China’s military presence in Filipino waters.9  Xi and Duterte signed trade deals worth $13.5 billion during the state visit.

Climate change

As well as working with international partners on infrastructure development schemes, China has pledged to play a leading role in the battle against climate change – another area in which Beijing could have increasing influence as Washington turns away from the global consensus.

During his presidential campaign, Trump vowed to revive the fossil fuel industry, scrap Barack Obama’s environmental protections and cancel the Paris Agreement, which commits governments to hold global temperatures at less than two degrees Celsius above pre-industrial levels. Before he ran for president, Trump even claimed climate change was a Chinese hoax concocted to damage US manufacturing, although he has since said he has an “open mind” on climate change.

If climate change is indeed a hoax, China appears to be taking it very seriously. Xi cited climate change as one of the world’s foremost challenges at Davos, and affirmed his commitment to the Paris Agreement: “We should honor promises and abide by rules,” Xi said. “The Paris Agreement is a hard-won achievement which is in keeping with the underlying trend of global development. All signatories should stick to it instead of walking away from it as this is a responsibility we must assume for future generations.”

Trump’s scepticism on climate change could open the way for China to play a greater role in the global renewable energy industries and green finance worldwide. China now spends $32 billion on renewable-energy infrastructure abroad – far more than the US – in addition to over $100 billion on domestic investments in clean infrastructure, according to a January report published by the Institute for Energy Economics and Financial Analysis (IEEA), a US-based think tank.

“Building on the staggering scale of its domestic growth in low-emissions energy, China is accelerating its commercial expansion overseas. As the U.S. owned the advent of the gas age, so China is shaping up to be unrivaled in clean power leadership today. In years to come, the U.S. may look back in regret,” said Tim Buckley, lead author of the report.10

World domination?

While China is enjoying growing clout in specific areas, however, it is far from a hegemon, even in its own region. The depth and breadth of US military, political and economic influence is still unmatched. In part, this is due to the fact that, while the US has traditionally underpinned its trade alliances with security guarantees – hence its extensive network of military bases in the Pacific – China has shown little appetite for deploying its army abroad. China already spends a great deal of time and money maintaining security within its own vast borders, particularly in restive provinces such as Xinjiang and Tibet.

China has even less interest than Donald Trump in shaping political outcomes in far-flung corners of the world, setting it apart from Russia, which is economically weaker than China but more ambitious in geopolitical terms.

“I’m not a huge buyer of the idea that China wants to be a global superpower or police the world,” says Mary Nicola, Investment Strategist and Senior Asia Economist at Aviva Investors. “China is more focused on Asia. China has not been active in many political initiatives globally, such as brokering peace in the Middle East.”

Moreover, China is still a developing country, hungry for raw materials to propel its growing economy. That means it will continue to prioritise trade links with emerging economies, such as those in sub-Saharan Africa, that can provide these resources, rather than seeking increasing influence at the diplomatic top table – despite Xi’s gladhanding at the WEF.

Ballard notes the composition of China’s trade makes it very difficult for the country to completely fill  a void left  by US protectionism. “China is a big country, but remains a poor one. And that shapes its demand. Meanwhile, the US is a big country and a relatively rich one. Around three-fifths of Chinese imports are in crude commodities – like soya beans and iron ore – fuel and machinery & transport equipment. By contrast, around two-fifths of US imports emanate from the same sectors.”

Indeed, while the Chinese economy accounts for 14.8 per cent of global output, “over three-fifths of the global imports of iron ore arrive in China”, says Ballard. For instance, China imports 64 per cent of the world’s iron ore and concentrates, 51.9 per cent of its unmilled cereals (excluding wheat, rice, barley and maize), 19.3 per cent of stone, sand and gravel and 36.5 per cent of its pulp and waste paper.11 Unless this basket of imports changes to a more diversified mix, China will not  be able to replace the vast network of trade relationships maintained by the US.

While China is taking the opportunity to assume a more central role in various international spheres under the Trump presidency, it is unlikely to replace the US as the global hegemon in the short term. At this stage of its economic development China is focused on domestic issues like employment, infrastructure, and food security for its nearly 1.4 billion people. It’s presence in Africa and South America is a means to achieving that goal. In the meantime, China will continue to focus on expanding its regional influence in Asia through the AIIB, Silk Road initiative and RCEP. But Xi’s confident and statesmanlike appearance at Davos suggested China’s path towards pre-eminence is only a matter of time.

Source 1: World Economic Forum, ‘President Xi's speech to Davos in full’, January 17, 2017

https://www.weforum.org/agenda/2017/01/full-text-of-xi-jinping-keynote-at-the-world-economic-forum

Source 2: World Bank; ‘The world economy: a millennial perspective’, OECD, 2001

http://www.oecd.org/dev/developmentcentrestudiestheworldeconomyamillennialperspective.htm

Source 3: ‘Why Trump can’t bully China’, Project Syndicate, February 9, 2017

 https://www.project-syndicate.org/commentary/trump-trade-war-china-by-kenneth-rogoff-2017-02

Source 4: ‘Ross escalates Trump trade criticism against Beijing’, Financial Times, January 18, 2017

https://www.ft.com/content/0cae0c78-dda5-11e6-9d7c-be108f1c1dce

Source 5: The World Bank, February 15, 2017, based on population and gross domestic product data for 2015

http://databank.worldbank.org/data/reports.aspx?Code=NY.GDP.MKTP.CD&id=af3ce82b&report_name=Popular_indicators&populartype=series&ispopular=y

Source 6: ‘RCEP members ramp up talks as TPP flops’, Bangkok Post, February 6, 2017

http://www.bangkokpost.com/business/news/1193469/rcep-members-ramp-up-talks-as-tpp-flops

Source 7: Asian Infrastructure Investment Bank, February 16, 2017

https://www.aiib.org/en/about-aiib/index.html

Source 8: HSBC, ‘China widens the Silk Road’, November 17, 2016

http://www.rmb.hsbc.com/?WT.mc_id=CIBM_rmb_survey_132

Source 9: ‘Philippines’ Duterte backs ‘new order’ led by China and Russia,’ Financial Times, November 17, 2016

https://www.ft.com/content/5e51dd92-acaf-11e6-9cb3-bb8207902122

Source 10: IEEFA, January 6, 2017

http://ieefa.org/ieefa-report-china-set-dominate-%E2%80%A8global-renewable-energy-boom-expands-lead-u-s/

Source 11: International Merchandise Trade Statistics, UN Comtrade, February 16, 2017. Data as at December 31, 2015

https://comtrade.un.org/pb/CommodityPagesNew.aspx?y=2015

Important Information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at March 2, 2017.  This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.

Aviva Investors Global Services Limited, registered in England No. 1151805.  Registered Office: St Helen’s, 1 Undershaft, London EC3DQ.  Authorised and regulated by the Financial Conduct Authority and a member of the Investment Association.  

This article is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited and its subsidiaries Aviva Investors Securities Investment Consulting Co., Ltd. and Aviva Investors Pacific Pty Ltd (“Aviva Investors Asia”) for distribution to institutional/wholesale/professional investors only. Please note that Aviva Investors Asia does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Asia in respect of any matters arising from, or in connection with, this document.

For use In Singapore

Issued by: Aviva Investors Asia Pte. Limited, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and is an Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1 Raffles Quay, #27-13 South Tower, Singapore 048583.

For use in Taiwan

Issued by: Aviva Investors Securities Investment Consulting Co., Ltd., a company incorporated under the Company Law of the Republic of China with registration number 53097616, holds a valid Securities Investment Consulting Enterprise (SICE) License to carry out Securities Investment Consulting Service and other relevant business permitted by Financial Supervisory Commission, Executive Yuan, R.O.C. and provides permitted liaison and co-ordination services only. Registered Office: Room D-1, 24F, No. 7, Section 5, Xin Yi Road, Taipei 110, Taiwan.

For use in Australia

Issued by: Aviva Investors Pacific Pty Ltd, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 50, 120 Collins Street, Melbourne VIC 3000, Australia.

Compliance code: 20170308_01