A new world order?

By Nicholas Consonery 

Stinging criticism by People’s Bank of China vice governor Zhu Min over the Greek debt crisis rattled markets on Friday, leading the Wall Street Journal to conclude that signs of a new world order were emerging, a "testament to how much the world has changed since the global financial crisis."

But Zhu Min’s comments actually reflect how much the pre-financial crisis economic thinking simply persists. To the extent that China acts on this thinking, it will threaten continued weakness in the global economy and make the need for the world’s major economies to rebalance ever more urgent. As a new economic order emerges, the fear is that China transitions from a source of dynamism, to a source of risk. 

In this regard, Zhu Min’s criticisms were emblematic of a long-running pushback from Beijing against western governments (especially the U.S.) who have in recent months harangued Chinese policy makers to implement a more serious strategy to bolster China’s domestic consumer economy and diminish its export of subsidized goods to global markets. The concern is that the historically strong consumer markets in the U.S. and Western Europe have been weakened significantly, meaning there might not be a buyer-of-last-resort for many Chinese-made goods.

This is a theme that was most elegantly highlighted by Martin Wolf in the Financial Times last week, when he bemoaned the dedication of the world’s largest exporters (he called them "Chermany") to maintaining their export-focused orientation, while criticizing consumer nations for persistent fiscal deficits. Should Zhu Min’s advice be followed, the result, argued Mr. Wolf, would be an "altogether negative role in the search for a way out from the global slump in aggregate demand."

But things look different from the Chinese perspective. Beijing refuses to accept any responsibility for the massively unbalanced global economy, preferring to apportion the blame on profligate Western economies that spent their way into oblivion. And though the Chinese leadership certainly wants their economy to be much more reliant on sustainable domestic demand, they believe these changes must occur over a decade or more.

So, even though the market impact of Zhu’s comments reflects growing influence by China, they also suggest a preference by Beijing to return to the status-quo — ante the financial crisis. My concern is that the Chinese government intends to perpetuate a swath of preferences for its export-focused industries, anxiously awaiting the day when the global economy rebounds and Beijing can again rely on the export sector to rectify its seemingly unsolvable dilemma in drawing down production overcapacities in strategic, heavy industries (like steel).

The consequences of the Greek debt crisis for the value of the euro are another difficulty for China; one that the PBoC has been particularly attuned to because of the significant upward pressure on the values of the dollar and the yuan. On the surface, the PBoC is struggling to tame the inflows of speculative foreign money and the resulting rise in asset prices within China. But at the same time, a falling euro might allow China’s major export competitors, especially Germany, to make up some of the export market share that was lost during the financial crisis. The result would be a marginal weakening of China’s export sector, which will amplify top-level concerns in China about small and medium-sized producers and their vital role in driving employment.

Nicholas Consonery is a China analyst at Eurasia Group.