China, the Next South Korea?
How China has chosen the South Korean growth model for its future
The thesis of this post is quite simple. China has picked its growth model for the next ten years -- South Korea -- and we can know this based on the dismissal of Bo Xilai, a number of boring-but-important changes in how China behaves in financial markets, and the retooling of its export-oriented growth strategy. China, to simplify, looks a lot like Korea circa 1990.
I haven't commented at all on the Bo Xilai situation until now because, honestly, I didn't know what to make of it. I'm not an expert on China, although longtime readers will know that I'm deeply suspicious of the apparent consensus view that China will continue to grow at 9 or 8 percent for the next decade, as demographics and historical growth trends work against it.
Then sometime yesterday I had a revelation about what Bo means. (I still think China has an under-appreciated downside risk.) The flag-bearer for the Chinese "New Left," which seeks a return to more state socialism and Maoist values, and an avid opponent of political corruption, Bo was an enemy of the Chinese Right, which more or less sees Deng Xiaoping as the best thing to happen to the country in modern history.
I don't read his dismissal, in other words, as a failed coup attempt, or as political infighting between China's ruling families -- I grant that those are the stories which "stick" best to the particulars of the news, but I think that there's a broader story here. It's that China realized it faced a fork in the road: market reforms which will cut deep and make it effectively converge with capitalist economic models, or an alternative, which Bo represented, to "turn back" and reaffirm older values of egalitarianism and state-led development. The choice has now been made decisively. It wants to be South Korea.
China's leadership will undergo change this year, with the exits of Hu Jintao and Wen Jiabao for (presumably) Xi Jinping and Li Keqiang, respectively. You should know that both Xi and Li are seen as substantially more free-market than their predecessors; this is both a generational thing in China and their particular political orientations. (See here and here.)
Furthermore, there's been a lot of very important quiet stuff going on; the sort of change-the-world news that gets somehow put in the back of the news section. For example, today the Chinese government has decided to liberalize currency trading significantly, according to The New York Times:
The People’s Bank of China, the country’s central bank, said that effective on Monday it would allow the renminbi to fluctuate up or down in value by as much as 1 percent against a fixed benchmark with the dollar during daily trading...Increasing the allowed range of daily volatility could increase the renminbi’s role in international financial markets.Another thing you probably missed was the relaxation of capital controls, reported in late March. This is a very big deal because it shows how these reforms are beginning to pile on top of each other -- there's very much a point-of-no-return in liberalization (barring turmoil or outright regime change), and China is nearing it.
I call this the Korea model. Why? It's because the Jinping-Keqiang wing of the Chinese Communist Party is looking more and more like the story of the South Korean "Grand National Party," recently renamed Saenuri. Like China, this Korean party began with state-led export-oriented growth under Park Chung-hee, and Park's successors have clung to this strategy. (I've done some reading up on this.) Since then, Korea has liberalized economically and politically, and I expect China to do the same, slowly. Although China has pursued the former more than the latter, I think this is going to begin to change, as it did in Korea, as the forms of liberalization begin to require each other to continue. That has not been true, but it will become increasingly so.
I also call it the Korea model because China's economic development strategy, in the nitty-gritty details, is looking more and more like South Korea's two decades ago. That's immediately what I realized when I was reading this Bloomberg BusinessWeek piece this morning:
China’s export business, which increased 17 percent a year over the last three decades on plastic toys, cheap shoes, and electronics assembled by companies such as Foxconn Technology Group, is changing fast, Bloomberg Businessweek reports in its April 9 edition. Rising labor costs, up 15 percent annually since 2005, plus the yuan’s 30 percent gain since a peg to the dollar was scrapped that year, are putting new pressures on the nation’s cheap manufacturing model and driving textile, shoe, and apparel factories to close or relocate to Vietnam, Cambodia, or Bangladesh...That last paragraph is especially important. These are the industries which South Korea picked during the stage of development (looking at it by per capita income figures) that China is now entering. Notably, China and South Korea are aggressively pursuing a bilateral free-trade agreement which will precede the very-big-deal arrival of a larger free trade zone, the Trans-Pacific Partnership.
Overall, the portion of China’s exports made up by heavy industry, about two-thirds of which is machinery, has grown from 29 percent in 2001 to 39 percent last year, surpassing light industry and electronics, according to Beijing-based economics consultants GK Dragonomics...
Policy makers have made upgrading industry a national priority. Equipment manufacturing, shipbuilding, and cars are among the industries slated to receive $2.5 billion from the government this year to improve technology and product quality. Mergers and acquisitions inside China and overseas are also being encouraged.