China has key role in world economy

While much anxiety is attached to what Beijing does, it can lift competition, trade and productivity through reform

China has rolled out its 13th Five-Year Plan (2016-20) at a time when there is growing uncertainty about the direction of the global economy. China is at the center of world economic anxiety.

The country, an economic powerhouse that has made huge contributions to global growth in the past years, has as its current trajectory a structural slowdown, where the rates of economic growth decline while the source of growth is intended to shift from investment to consumption, or from manufacturing to services.

China's transition, however, both influences and is influenced by the global economic environment. While some observers suggest China's slowdown is unique and a consequence of local factors, it is equally obvious that China shares some of its core economic challenges with other leading economies.

Macroeconomic imbalances extend beyond China's borders and involve especially the large economies of the West. They are still weighed down by the crisis in 2008-09 and the forces that caused the crisis, especially the rapid build-up of credit.

The US economy has pulled itself up from the crisis, but its growth is still highly dependent on expansionary fiscal and monetary policy. In Europe, the European Central Bank has just geared up monetary stimulus by adding an extra 20 billion euros ($22.9 billion) per month in its program for quantitative easing.

As with other central banks in Europe, interest rates in the eurozone are negative, as threats of deflation still hold a tight grip on the economy. Expansionary programs still substantially affect major currencies in the world.

Global economic anxiety reflects how the underlying strength of the economies has weakened over time. China is faced with one set of challenges. Its economic transition is based on a greater role for markets and competition in its economy. But the transition is happening at a time when macroeconomic problems sometimes demand policies that slow the transition.

There is a similar problem with Western economies. While expansionary policies are seen as necessary to boost demand, it has been clear for some time that the West's problem is about failing competitive strength rather than insufficient demand.

The West, too, needs a radical program to reinvigorate markets and competition, leading to far better rates of productivity growth. Its passage to such a policy, however, is slowed by macroeconomic imbalances and policies to reduce them.

While the world economy will hum along for the next couple of years, there will be increasing headwinds in the medium term because of demographics that push up the number of retirees vis-a-vis the number of working people.

The medium-term forecasts for productivity growth suggest that the underlying weakness of key economies will remain.

Despite much talk about the end of the debt supercycle, China and a good part of the West are still expanding debt - but it is a trend that will have to radically decelerate over the next decade, leading to less financial fuel for the economy. Given the current trend, therefore, the global economy will grow more slowly in future.

Breaking that trend is imperative. The health of the global economy can be restored only if key economies like China, the United States and the big European countries release themselves from current macroeconomic burdens by boosting the economy from the bottom up through reforms that lift competition, trade and productivity. National reform programs should be accelerated and be focused at market regulations that shield incumbents from competition.

Efforts to privatize state assets in the real economy need a new shot in the arm. It is necessary to return the investment economy back to the world of industry and enterprise, where markets and investors determine investment decisions and their distribution, not the macroeconomic policies that are set by governments and central banks.

Moreover, key economies would also get a boost from trade agreements that make it far easier and less costly for businesses to cross borders into new or other markets. In its current capacity as chair of the G20, China can take a critical leadership role in boosting current efforts to liberalize trade and investment.

There is a new foundation to build on from the outcome of the World Trade Organization's ministerial conference in Nairobi, Kenya, in December. What is needed now is a push for a new type of trade agenda that focuses on key areas of the world economy, including services and the digital economy.

There are laggard sectors in China as well as in Europe - and they need better conditions in order to grow. Globally coordinated actions, through trade agreements, would act as a multiplier for national reforms that sooner or later will be delivered.

The author is director of the European Centre for International Political Economy, a think tank in Brussels. The views do not necessarily reflect those of China Daily.