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Saturday, Nov. 24, 2007

ASIA-JAPAN-U.S. SYMPOSIUM

China needs to clean up its act to stay on economic growth track


Staff writer

Despite its continuing rapid growth, China faces a host of domestic and international challenges that — without adequate reforms — might derail it from the widely forecast path to global economic pre-eminence, said Elizabeth Economy, senior fellow and director for Asian studies at the Council on Foreign Relations.

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Elizabeth Economy Akira Kojima
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Masahiro Kawai Brad Setser

And while Chinese leaders clearly recognize these challenges — ranging from environmental problems to corruption among Communist Party ranks — they appear reluctant to take the necessary steps to ensure good governance and the rule of law, the expert told the Nov. 12 symposium.

Forecasts abound that China will replace Japan in the coming years as the world's second-largest economy and is on course to overtake the United States as the biggest economy by 2040 or 2050.

However, Economy said this may not be the image of China seen by the Chinese leadership led by President Hu Jintao and Premier Wen Jiabao.

"It is a China that has achieved enormous economic success over the past few decades. But it is also a China that is beset by a raft of economic, social and political problems that threaten to derail this very positive economic trajectory," she said.

These problems, she noted, include the sharp rise in the number of social protests amid the widening rich-poor gap, doubts over the Communist Party legitimacy due to endemic official corruption, skyrocketing environmental pollution and energy inefficiency that threaten to impinge on the country's growth.

In response, the Chinese leadership has set ambitious goals — to rebuild the social infrastructure, including a social welfare net, education and public pension system, and carry out the massive urbanization of its population. On the environment front, it has spelled out a set of numerical targets to improve energy efficiency, cut back on emissions of pollutants and reduce water consumption, Economy said.

The leadership has also set out to "clean up the way China does business," she said, as illustrated by how President Hu placed emphasis on an anticorruption drive, intraparty democracy and re-education in his speech to the party congress last month.

But what appears to be lacking in the effort, she said, is a move toward real accountability within the system. "A method of achieving transparency . . . and a rule of law are not, it seems, the direction in which the Chinese leadership is quite willing to move," Economy said.

In addition to these domestic pressures, China is confronted with a challenge to its international image due to the recent problem of product safety, its record on climate change, and its dealings with countries such as Myanmar and Sudan, she pointed out.

"I think the Chinese leadership has become very concerned about the damage that has been done to its (international) reputation," which undermines its years of efforts to publicize the country's "peaceful rise," she said.

Akira Kojima, chairman of the Japan Center for Economic Research, concurred that more attention should be paid to the weaknesses and problems of China's gigantic economy — whose possible derailment from the growth path, he warned, could trigger political confusion and even security repercussions.

While debate on China tends to focus on its "extraordinary strength," more discussions should be held on what is needed to ensure its smooth and sustainable development, said Kojima, who served as moderator of the symposium.

Other panelists discussed the prospect of monetary cooperation among Asian economies.

Masahiro Kawai, dean of the Asian Development Bank Institute, acknowledged that cooperation among Asian economies in this area has lagged behind their close ties in terms of trade and direct investment, due to various obstacles.

Since the 1997 currency turmoil, Asian countries have made progress toward cooperation in financial stability in the past decade, as exemplified by the Chiang Mai Initiative for currency swaps and efforts toward local currency-denominated bond markets, Kawai noted.

However, currency exchange coordination among Asian countries remains difficult because they have widely divergent exchange-rate systems, ranging from Japan's pure float system to China's tightly managed regime, he said.

Kawai said that although full monetary policy coordination will be difficult because of the different levels of development among countries in the region, Asian economies should at least pursue an informal coordination by, for example, creating a common basket of local currencies and using it as a reference.

Brad Setser, a Council on Foreign Relations fellow, noted that the traditional arrangement in Asia — whereby countries in the region have managed their currencies against the U.S. dollar to ensure a degree of stability among themselves — has increasingly become costly and problematic.

However, various obstacles remain for a major change in the Asian monetary architecture — much less a possible monetary or currency integration, he pointed out.

Setser cited what he described as the lack of monetary policy independence of many central banks in Asia, noting that it is difficult to foresee, for example, how China's State Council — unwilling even today to delegate monetary policy independence to the People's Bank of China — would be willing to delegate the power to a regional institution.

What also makes Asian efforts to increase currency regionalism difficult, he added, is that such efforts are not tied together with a broader political project — like the monetary integration in Europe was to the creation of the European Union.



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