Post-pandemic power and China's new role
"The experience of trade tensions with the United States may have helped prepare Asian trade for the challenges of the pandemic. It forced exporters to identify new resources and alternative supply routes, testing the resilience of supply chains and acting as a catalyst for many trends". Chinese inventors created the first paper and printing presses, the gunpowder and the compass. Each invention found its way to Europe along the trade routes that opened the way for many of the historical developments in the Western world.
As the rest of the world prepares to follow China's lead in lifting the blockade with the slowdown in COVID-19 infections, differences in national responses to the pandemic, as well as different economic and geopolitical views, are being tested. Last week, we discussed some of the long-term economic trends that we expect to manifest globally. In this article, we take a closer look at the possible consequences.
Today's decelerating world economies are increasingly dependent on growth in Asia. Gross Domestic Product growth is expected to slow this year by -6.1% in developed markets, according to the International Monetary Fund, and by -1% in emerging economies. Overall, the global economy will experience an average contraction of 3%, the IMF said last week.
China's economy may be struggling to get back on track, but it has the advantage of starting from a higher growth rate than the United States and Europe. The IMF expects China to contract by 3% this year, and expand by 9.2% in 2021, approaching its long-term average. The Purchasing Managers' Index (PMI) already pointed to an expansion for March from a record low in February. At the same time, the Chinese economy is changing its character as it continues the transition from a manufacturing and export-based economy to a demand-led import economy.
As Asian economies expand, it seems likely that demographics will become the main catalyst for changing consumption trends that may dictate a shift in the balance of demand and development. Consumer spending in the Asia-Pacific region will surpass that of North America and Europe by 2025 and reach $35 trillion by 2030, according to the Brookings Institution. From cloud technology to health care, manufacturing and logistics automation to artificial intelligence, Asia's intense urbanization and consumer demands are likely to drive innovation. China's size will also mean that it will be the leader in these changes, as it works to keep up with its internal infrastructure needs while supplying those of the region.
An example for understanding the dimension of urbanization, China now has 39 cities with populations of over 3 million people, including city centers. In the United States, there are only two urban centers of that size, New York and Los Angeles, and in Western Europe only three; London, Berlin and Madrid (excluding the Paris region, the largest urban area in the EU, as the city itself totals 2.2 million). China's booming middle class, a population with an annual income of more than $10,000 a year, is expected to reach 850 million people and account for two-thirds of the country's population within ten years, according to World Bank data. This is larger than the total population of Europe and North America combined. At the beginning of this century, China's middle class was less than one million people, or no more than 0.1% of the population.
China's political class recognizes the need to reduce overcapacity, decrease inequality and strengthen social safety networks, as well as to pursue long-term economic development. This idea has inspired the "One belt, one road" initiative that will connect nearly half of the world's population and strengthen the infrastructure that accounts for one fifth of the world's GDP. This will inevitably impact on the balance of global economic and political power. The "One belt, one road" project is often described as a new "Silk Route". For at least a millennium and a half, trade, technology and plagues travelled the Silk Routes from China through Central Asia, the Middle East and Europe. From ancient to modern times, spices and textiles, as well as invasions by Greeks, Huns, Arabs and Mongols, flowed along their land and sea routes.
Obviously, focus on China overlooks the huge disparities between the economies of Asia. The poorest economies throughout the region, from Kazakhstan to Bangladesh, India and Thailand, are struggling to impose closures because their populations cannot afford to be unemployed. Some governments are resorting to food deliveries.
A UN survey released this month estimated that the Asia-Pacific region could see its GDP fall by 0.8 per cent, or $172 billion in exports alone, as a result of the COVID-19. In addition, investors are fleeing from emerging markets, withdrawing some $90 billion in recent weeks, further hurting the region's economies as many less developed countries already face a debt crisis.
Ironically, the experience of U.S.-China trade tensions through 2018/19 may have helped prepare Asian trade for the challenges of the pandemic. It forced exporters to identify new resources and alternative supply routes, testing the resilience of supply chains and acting as a catalyst for numerous trends. Exporters have learned to bypass existing routes and concentrate shipments through third countries and seek alternative suppliers. China's exports to other ASEAN members increased by up to one sixth last year, as its shipments to the United States fell by about 12.5%.
In 2017, the Chinese Communist Party congress invited other economies to copy the country's economic policies. China's "One Belt, One Road" multilateral trade and investment initiative illustrates this ambition. When China joined the World Trade Organization in 2001, it was assumed that the country would begin to follow Western growth patterns. Clearly, that hasn't happened. Instead, this century may witness forces pulling in the opposite direction.
The period after World War II is often referred to as the American century; a period of US global power with aspirations for universal values. In November, American voters will decide whether to support a presidency that has spent the last four years putting "America first" and undermining multilateral solutions. China is using its response to the pandemic to project "soft power". But the obstacles to any shift in the balance of power are numerous, starting with a political system that clearly ruined its initial response to the crisis by trying to contain news of the outbreak first, rather than the virus itself.
However, as China tests the resilience of its economy and its vision of projecting trade power through the modern "Silk Route" network, it is tempting to wonder whether the axis of economic and geopolitical power is shifting towards China in the 21st century.
Stéphane Monier is CEO of Lombard Odier