謝國忠:Driving the world

The financial crisis presents an opportunity for China to seize the leadership baton for globalisation and become its centre for goods, services and capital, while catalysing a new China boom that could last a decade or longer. That boom could turn China into the world's largest economy - and a developed country - within two decades.
China has been a bottom feeder in the global economy. Keeping costs low and making labour-intensive products have brought it safety and growth. Australia, Brazil and Russia sell natural resources to China in return for cheap manufactured goods. Japan and Germany sell expensive cars and technology to China in exchange for cheap manufactured goods. And America just hands over dollars for goods and services, and gets them back by selling derivatives like collateralised debt obligations, backed by inflated US house values, to foreigners.
The global economy has run like a motorcycle, with American consumption as one wheel and China's savings as the other, with everyone else piled up on top. The sustainability of this world depended on foreigners believing in the Wall Street debt instruments that paid for America's imports while keeping inflation at bay. Inflation came three years ago with surging oil prices. The tightening that accompanied it burst the US property bubble in 2006. It took another year for the subprime market, and still another for financial derivatives, to blow up. The resulting crisis has destroyed Wall Street's credibility. The motorcycle economy has fallen over.
The US now offers the world, in particular China, a plan for recovery: you buy my treasuries, Uncle Sam gives the proceeds to American people to spend, and your exports and your economies may recover. The recovery plan tries to put the motorcycle economy back on its wheels by replacing American households with the federal government.
Accepting this offer is not in China's best interests. First, the plan may bring modest growth for a few years but will be followed by another, bigger crisis centred on the US treasury market. Second, instead of taking America's offer, China can start attracting investment as part of its trade-led development model. In short, it can start competing with the US for money rather than just rasing dollars by selling goods to the US.
China has been attracting foreign capital for some time. But this has been mainly to improve its production capacity, especially in the export sector. The new strategy calls for foreign capital to fund China's capital formation in anticipation of earning profits from richer Chinese consumers in the future. It would help China to shift its economy to consumption without sacrificing growth.
China is in a good position to replace the US as the centre for globalisation: with little debt, enormous savings, and its sheer size, its growth potential is vast. Current per capita income of US$3,300 could be raised to US$10,000 within two decades through a combination of growth and currency appreciation. At the same time, gross domestic product could rise from today's US$4.3 trillion to US$13 trillion in today's dollar terms. Such an increase would offer plenty to investors who bet on China's future. This is why China can succeed in changing its growth model.
To engineer the transition, China must create a first-world environment for capital flow and pursue an aggressive urbanisation strategy to anchor domestic consumption. First, China should fix a date, preferably within five years, for floating the yuan; that is, forgoing accumulating foreign exchange reserves, and making the capital account freely convertible.
Such a change would require the economy to modernise in many ways. As money could travel freely, only a first-world environment for investment would attract and keep money at home. The rule of law would need to be strengthened enormously to make the new system viable. A corollary is that arbitrary administrative power would have to be severely limited. Fixing a date for currency convertibility would be similar to joining the World Trade Organisation a decade ago: it would set in motion a new wave of reforms.
Second, as China succeeds in attracting foreign money, it must have a strategy to turn it into efficient economic growth. Otherwise, the money would be used for blowing bubbles, which could bring down the country. The anchor for domestic demand must be urbanisation. To become a developed country in two decades, China must aim to increase its urbanisation to 75 per cent by then. Moreover, urbanisation must be viable in the long run; the system needs to change so that migrant workers become rooted in cities.
China's urbanisation strategy should focus on building 30 mega-cities of more than 20 million residents each. These cities would have the right to issue bonds to fund their development. Because they would have the size for economies of scale in building infrastructure, protecting the environment, and creating jobs, they would have tax revenues to pay off their bonds. When money was plentiful, they would have easy financing and could accelerate urbanisation. When money was scarce, they would face high funding costs and could slow down in response. Basically, China should turn its urbanisation into a sponge for global capital. Shifting the rural population into big cities is the only way for the nation to modernise.
The global financial crisis is casting a shadow over globalisation. Developed economies may resort to protectionism to keep jobs at home, leading to a vicious cycle of recession and more protectionism. China is in a position to carry the baton for globalisation. This is a unique chance to become a developed nation in a generation.