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Daunting Challenges Ahead for 2016

By He Yafei (former Vice Minister, State Council Office of Overseas Chinese Affairs)

As we look ahead into the year ahead, the world seems full of uncertainties and challenges.

Firstly, “it's the economy, stupid” as usual. The year 2016 will witness continued global slow growth and accumulation of financial risks. The world economy is still on the bottom of an L-shaped groove. According to Consensus Forecasts, global growth is expected to be 2.8%, slightly up from 2.6% in 2015. Aside from the US and UK, advanced nations face a bleak picture with GDP growth all below 2% in 2016.

There are a few key things to watch closely in global economic landscape this year:

1. With the Fed's rate increases and a strong dollar, some debt-ridden developing nations are experiencing capital flight, credit crunches and fiscal tightening that can break their economies. A debt crisis also seems imminent in Euro-zone and some resource-exporting countries. Systemic financial risks and contagion still exist. Since 2009, major central banks have created cheap dollar liquidity in the amount of $12 trillion, and as a result global debt has risen an additional $57 trillion since 2007. The Bank of International Settlement calls this level of debt “frightening”.

2. Prices of bulk commodities will keep falling, especially that of petroleum, as global demands remain depressed with weak growth. This will adversely impact resource-exporting countries like Brazil, Russia, South Africa, Indonesia, Australia and Canada. Brazil and Russia were already in negative growth of -3.5% and -3.8% in 2015, and the trend is expected to continue.

3. Global investment and trade will shrink again as economic uncertainty mounts, which will further dampen an already depressed world market. World trade is growing at an average of 3% in the last few years as compared with 7% before the 2008 financial crisis. The uncertainty that lies in wait includes any potential Fed rate increase, the Euro-zone's weak demand and high unemployment, and possible systemic financial risks spreading from debt-ridden countries to the whole world.

Secondly, geopolitical turmoil persists in regions like the Middle East involving ever-deepening rivalry among big powers, which will not only worsen regional conflicts but also deal heavy blows to global economic growth. With the US presidential election in sight, election-year fever will make any regional conflict much more complex and difficult to resolve.

Let us take a panoramic view of trouble spots worldwide:

1. The Ukraine crisis continues to fester with no sign of an end to the military conflict, producing a strategic stalemate between Russia and the US that affects the future security of Europe as well as Russia's relationships with the European Union and the US. The four-prong conflict among Ukraine, Russia, the US and EU will be with us for some time to come.

2. There is no “light at the end of the tunnel” for the complex and dangerous situation in the Middle East. With the recent severance of diplomatic ties between Saudi Arabia and Iran, with Bahrain and Sudan following the Saudi lead, the conflict and “proxy wars” between Sunni and Shiite Muslims in the region and beyond will get even worse. The recent years' US strategic retrenchment cycle involves a retreat from the Middle East and a refocus on Asia with more determined efforts to implement “rebalance in Asia”.

But the Iranian Nuclear Agreement touted by the US Administration as a major foreign policy score seems to be a catalyst for worsening relations between Sunnis and Shiite as represented respectively by Saudi Arabia and Iran. US allies in the region including Israel and Saudi Arabia are less sure of America's commitment to them. It seems that direct military confrontation can't be ruled out in this situation.

Another aspect of the regional conflict is the spread of IS and its terror campaign all over the world. Though IS suffered a few losses of land in Iraq recently, it is certainly not in retreat and there is no telling how it can be defeated even if many experts are predicting its demise this year.

3. The South China Sea and the Western Pacific will witness rising tension and possible military skirmishes in the year ahead as the US moves more aggressively to enforce its sacrosanct rule of the freedom of navigation worldwide, as defined by itself. Recent “mistaken entry” into airspace over the island under Chinese sovereignty is a typical example of American adventurism. With American support, Japanese warships and fighter planes patrolling in the South China Sea is in the pipeline, and the Philippines seems determined to place its bet on the upcoming ruling of the Maritime International Court, no matter what the outcome is for its presidential election.

Geopolitical turmoil and upheavals are getting more acute and complex day by day and they are bound to affect global economic environment negatively.

Thirdly, global governance and rule-making enters a substantive period this year, with greater involvement by big powers, which will continue to shape the world political and economic order in the 21st century.

The year 2015 saw much evolution in global governance, with developing countries as a whole and China in particular gaining ground by proactive actions in improving its architectural reform.

Just take a few examples.

China moves up in the scale of assessments for the United Nations regular contributions at close to 8% and those for peace-keeping operations at over 10%, taking the 3rd and 2nd positions respectively.

The Asia Infrastructure Investment Bank (AIIB) was fully operational by the end of 2015. This new addition to the global financial system represents both China's contribution to global governance and her determination to provide an alternative to the developing nations that need financing for infrastructure-building. The over-subscription to AIIB by so many economies, both advanced and developing, indicates that the existing global financial governance structure is definitely over-burdened and needs supplements and reinforcement. It also tells us that global governance is in critical need of new ideas like “the Belt and Road Initiative” as proposed by China.

China's RMB was officially listed as part of the SDR basket of currencies by the IMF late 2015, effective October 1, 2016. This demonstrates once again that the global monetary system is undergoing reforms to make it more robust and effective. The long-overdue implementation of decisions by the IMF and the World Bank to increase the shares of voting power for developing nations was finally settled late last year, giving the world much hope that global governance reform is indeed the common aspiration of all nations.

All above advances reveal movement from “governance by the West” to “co-governance by both East and West”, figuratively speaking. This mega-trend in global governance will no doubt continue in 2016 as China will chair the G20 Summit in September in Hangzhou. China is expected to propose new ideas on how the world economy should be restructured to bring about new momentum for growth.

Fourthly, big power co-operation and friction will both increase in the year, an interesting development of interaction reflecting the reshaping of big-power relations. There are at least three areas where big powers should co-operate closely in order to make the world a better place for all.

Needless to say, the G20 must do a better job of macro-economic coordination. The global economy has lost steam with the outdated mode of growth and has been desperately seeking new paths for economic development. In this transition, almost all countries are engaged in structural adjustments. Without close co-operation and policy coordination, the global economy will teeter and fall down again. The G20, with over 80% of world GDP under its belt, has replaced the G7 as the primary platform for global economic coordination and its members are duty-bound as major stakeholders in the global economy to make it work again. The need to avoid negative spillovers of national economic policies is obvious. The timing of the Fed's rate increases is a case in point.

The next critical thing is the close co-operation and consultation by big powers to reduce tensions in various hot spots and to fight terrorism, most notably in the Middle East. The role of the UN needs to be enhanced and greater support be given to its efforts both in making peace and keeping peace.

China has taken the lead in proposing building “new type of big-power relations” based on co-operation and consultation. In this connection, both the US and China, being permanent members of the Security Council and core members of the G20, should play a leadership role in shaping their relationship along these lines.

It is easy to list problems and difficult issues that need to be solved. It is quite another to put all of our wits and determination together in offering feasible solutions to these problems. This is exactly what should be done at the beginning of the new year!

Please click to read the full article on the website of China-United States Focus.

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