This is the 11th and last installment in a series of interviews with scholars and experts on China as a resurgent Asian power that is changing the regional order. This installment looks into China’s economic issues. -- Ed.

If the Trans-Pacific Partnership is ratified, it will spur the movement of the world’s manufacturing center from China to countries in Southeast Asia where the labor cost is cheaper and investments will flow in, China expert Jee Man-soo said.
Jee, a research fellow of the Korea Institute of Finance, said that Malaysia and Vietnam -- members of the TPP -- are likely to emerge as the world’s new fulcrum of manufacturing as China will struggle to keep its erstwhile advantage in the labor-intensive industries.

“Within the TPP framework, there are manufacturing hubs like Malaysia and Vietnam, and there are also countries like Japan that can invest in these hubs and provide components. Also in the TPP, there is a huge U.S. market,” he told The Korea Herald. 

“That said, the TPP platform offers good conditions for countries like Malaysia and Vietnam to emerge as the new center of manufacturing.”

The TPP is a free trade agreement involving 12 nations including the U.S. and Japan. The negotiations over the largest regional trade deal were concluded in October. Its member states represent nearly 40 percent of the global gross domestic product.

Touching on the recent inclusion of China’s yuan into the International Monetary Fund’s special drawing rights reserve currency basket, Jee said its meaning is “largely symbolic,” and that by itself it would not have an immediate effect on China’s real economy.

The following is the interview with Jee.


Korea Herald: Given the slowdown in China’s economy, pessimism and growing investor anxiety, the new normal appears to be much slower growth than the explosive growth of the past. Do you think China is far from reaching 7 percent economic growth this year, or is it still doing well?
Jee Man-soo: In the third quarter of this year, China’s economy posted a 6.9 percent growth. Its economic slowdown began in 2011, and its growth has been steadily slowing since. 

In the last two to three years, the slowdown seemed to have stabilized a bit. But the fact that growth slipped to the 6 percent range came as a shock. Given that the slowdown has continued for the past years, the decline from the 7 percent range is not of great concern for China. What matters more is how China views the downturn.

The Chinese government is aware that its slowdown is highly likely to continue, and it does not take the slowdown itself seriously. China is pushing for a shift in its growth strategy and has moved beyond the position of taking the growth rate itself as a central policy goal. Therefore, instead of talking about the growth figure, we need to look at whether China’s pursuit of a structural shift or restructuring is proceeding well.

The structural shift refers to a transition toward a consumer-driven economy from an export-led one, and a change of the economic growth engine from government-led investments to growth driven by consumption. Over the last five years, China has tried to boost consumption by increasing wages and thereby the overall household incomes. But the latest economic indicators do not suggest that consumption has rebounded. It is rather slowing down. There is still no evidence that China’s structural shift is successful. That is what worries China -- not the growth rate itself.

China’s per capita income has increased to $8,000. But the savings rate is higher than expenditure in proportion to the increased incomes. This is because China is facing social problems that advanced nations are experiencing. One of them is the aging population. As they are apprehensive about their future expenditures on health care, education and so on, they tend to save. Thus, China’s consumption is not expected to be readily revived.

One of the reasons why China’s slowdown drew keen global attention is that it concerns not just China’s economy, but also the recovery of the world economy. During the global economic crisis, China’s growth accounted for some 50 percent of the world’s growth. Even today, it accounts for a big proportion of global economic growth. So, the fact that its economy continues to slow has worried the world, particularly those that export oil, steel, copper and other mineral resources to China. 

When China’s economy was export-centric and investment-centric, it imported massive raw materials, but its demand has now decreased, dealing a blow to countries including those in the Middle East and Latin America, and Russia and Australia. Countries in East Asia including South Korea, Taiwan, Japan and Singapore are also affected as they have maintained a close business partnership with China through the global value chain.


KH: What do you think about the impact of the Trans-Pacific Partnership on China’s trade and the overall regional economy?
Jee: China’s basic position is that trade issues should be handled within the framework of the World Trade Organization -- a regime to strengthen the global free trade -- and that an exclusive economic bloc should not be created. China sees the TPP as an attempt to forge a U.S.-led economic bloc that excludes China, and thus it does not welcome it -- although Beijing, on the surface, claims to support moves to foster global free trade.

It may take time for the TPP to be ratified (by each member of the pact). Personally, I am not optimistic about the domestic ratification process. But if it is ratified, chances are high that the structure of the global manufacturing base, which has hitherto been led by China, will change. 

In the past when China pursued growth based on exports, it purchased raw materials or components from countries in East Asia and used its cheap labor to produce finished products. China then sold them to advanced nations. But its per capita income has risen to $8,000. Particularly, the income in China’s eastern coastal regions -- its manufacturing hub -- is much higher than the average as the regions have become more affluent than their counterparts. Thus, China’s advantage in the labor-intensive industries has been weakening. 

This trend is in sync with the TPP. Countries like Malaysia and Vietnam that joined the TPP could emerge as the center of manufacturing. Within the TPP framework, there are manufacturing hubs like these countries, and there are also countries like Japan that can invest in these hubs and provide components. Also in the TPP, there is a huge U.S. market. This said, the TPP platform offers good conditions for countries like Malaysia to emerge as a new manufacturing center. To sum up, the TPP would accelerate the movement of the manufacturing center from China to other countries, and it would encourage the growth of Southeast Asian nations.

China is not thinking of avoiding this trend, as it can’t stop the labor-intensive industries from moving out of the country. What China wants to see is that the movement of the manufacturing hub to Southeast Asia is carried out not under the TPP framework, but under its own leadership. So the possibility is high that China, Japan and South Korea would be competing intensely over the establishment of the manufacturing center in Southeast Asia. The push for the Asian Infrastructure Investment Bank and the Regional Comprehensive Economic Partnership can also be seen as strategic moves made with the looming competition in mind.


KH: What will be the fallout if China continues its devaluation policy?
Jee: In August, China devalued its currency, renminbi, by some 2 percent temporarily and then things had stabilized. But recently, it started to devalue it again. Some say that the devaluation is intended to boost exports. However, to understand China’s devaluation, we need to correctly understand what is taking place with regard to the exchange rate system.

As we have witnessed the outcome of Tokyo’s weaker-yen policy, the alteration in the exchange rate does not really help exports. Nowadays, the decline in exports is not because of the price competitiveness, but the shrinking demand worldwide. Even though you make your goods cheaper in the world market, your exports may not increase. If a new market emerges, then yes, the price competitiveness would be important.

I think China’s devaluation policy indicates its strong intention to alter its exchange rate regime. In the past, its regime was pegged inordinately to the U.S. dollar. After the global financial crisis, the dollar strengthened, so did the yuan, which was quite burdensome for China. But now, China believes that as its economic capabilities are strong enough, its exchange rate regime can go independently rather than being tied to the U.S. dollar.


KH: What will be the impact of the yuan’s inclusion in the International Monetary Fund’s special drawing rights reserve currency basket?
Jee: The inclusion of the yuan in the SDR was China’s long-cherished dream. It had pursued the SDR inclusion since 2010. It is meaningful for China as the inclusion recognized the yuan as an international currency and further strengthened the foundation for the internationalization of the Chinese currency. It is also a feat for China considering that it has been seeking a greater voice within the IMF, commensurate with its rising economic power.

However, the inclusion does not mean that there will be a sudden surge in the use of the currency to have any short- or long-term positive effect on China’s real economy. Rather, the meaning of the inclusion is largely symbolic. The SDR inclusion will help the internationalization of yuan. But for China’s currency to be genuinely internationalized, China should open its capital market to ensure the free float of the yuan. So we’d better watch how China’s capital market will change after the SDR inclusion.


KH: How strong is the link between China’s stock market and real economy? We saw that the collapse of the stock market affected the economy, but some experts still think the link is very weak.
Jee: In 2015, China’s stock market crashed. People seem to focus only on the collapse, but there was also an upsurge from November 2014 through June 2015. So, there was both a collapse and a surge. 

Now, the question is whether the stock market conditions will be reflected in the real economy. I would say no. When the stock market rose, the economy was in a downward spiral. The period of the market’s rise was also too short.

The problem here is that the stock market and the real economy do not align. The fundamental principle is the stock market should be a conduit through which China’s enterprises secure private investments. But China’s stock market has failed to serve the principle. Due to the market crash and rise, investors’ confidence in the market stability has dissipated and China’s stock market is far from functioning to serve its fundamental principle.


KH: Do you think China will hurry to wrap up the Free Trade Area of the Asia-Pacific and RCEP after the conclusion of the TPP negotiations?
Jee: What is interesting here is that Japan is involved in all three deals: the TPP, FTAAP and RCEP. This means Japan’s stance on the deals is crucial. I heard from a person from the Japan External Trade Organization that Japan basically thinks that a very high-level free trade agreement should be forged in this region. This means it wants others in the region to join the TPP to create a regional network of the high-level FTAs.

In fact, the RCEP and FTAAP are far from reality considering that it would take much time to conclude the deals due to the large number of participants, and given that there is no major country that is leading the deals to create high-level FTAs with vigor. Thus, the RCEP and FTAAP could likely become low-level FTAs that would not bring about the great economic effect that Japan has hoped to foster. This is why Japan is not active in concluding the deals other than the TPP.


KH: How serious is the aging population problem in China?
Jee: China’s abolition of its one-child policy indicates that China is facing the demographic issue that advanced nations have been grappling with. We can think of the two aspects. One is about the lack of labor force on the production side, and the other is about the increasing social security burden caused by the aging population.

Some people say that the abandonment of the one-child policy came late as the working age population has started to shrink since 2013. But China has sought to ease the one-child scheme for several years. It remains to be seen whether the abolition of the one-child policy will succeed in boosting the birthrate. It may work in the beginning, but there are limits in entrenching a higher birthrate for the long term.

As for the issue of the lack of labor, we can take into account the fact that in China, there is still the constant flow of rural people into urban areas, and this will continue to happen for a long time. This means, regardless of the demographic changes, urban areas will continue to obtain new workers from the rural areas. So China will not immediately face a labor shortage issue.  

Another notable thing is that China plans to gradually increase the retirement age to 65 by 2045 from the current 60 for male workers and 55 for female workers. This is a plan to address the potential labor shortage. 

This plan is also linked to the issue of the social security net. The plan could help delay the emergence of social security issues. By raising the retirement age, China does not have to offer the pension to female workers from age 55. Female workers would have to pay more for their pension plans for another 10 years due to the retirement age extension. 

Regardless, given the long-term trend vis-a-vis its demographic structure, China is aware that its economy cannot maintain the high growth rates.


KH: How do you assess the economic impact of China’s anticorruption campaign?
Jee: We have so far understood the campaign as a move to crack down on briberies, public servants receiving excessively lavish treatments or people’s extravagant spending. But the campaign has also targeted the collusion between provincial civil servants and businesses. 

During China’s high-growth era, massive investments have been made through the collusion between local government officials and businesses. Now that the anticorruption campaign targets the collusion, it is dealing a blow to the very structure that has created large-scale investments. Thus, for the short-term, the campaign would have a negative impact on the economy. Despite this, China has pushed for the campaign for some three years -- quite a long time.

China appears to approach the corruption issue as being linked to the issue of moving toward a market-led economic model. So far, the economic boom has been created through the corrupt practices. But China appears to believe that to create a market-driven, sustainable economic structure, it should remove the collusive ties even though the process itself will be grueling. 

So what we should watch is not the people who are imprisoned through the campaign, but whether the campaign will help China transition to a new economic model led by market principles. That is the key.

By Song Sang-ho (sshluck@heraldcorp.com)


**Jee Man-soo

• Jee, research fellow of the Korea Institute of Finance, is noted for his expertise in the Chinese economy, economic relations between South Korea and China, and other world economic affairs.

• Before joining KIF in August 2012, he taught in the department of international studies at Dong-A University for a year. He also served as a visiting professor of the U.S.-Korea Institute at Johns Hopkins University in 2009.

• He also worked as a researcher at the Korea Institute for International Economic Policy from 2002-2011 and at the LG Economic Research Institute.

• He has written many book chapters and monographs. They include “Korea’s Dynamic Economic Partnership with a Rising China: Time for Change” (2012), “Assessing China’s Economic Catch-up at the Firm-level and Beyond: Washington Consensus, East Asian Consensus and the Beijing Model” (2011).

• He obtained his bachelor’s, master’s and doctorate degrees in economics from Seoul National University in 1989, 1992 and 2000, respectively.