NEW YORK – China’s exports to the largest economies of the Global South have nearly doubled from pre-Covid levels to a seasonally-adjusted US$70 billion in June 2022 from $38 billion in June 2019.
Several factors have impelled the surge in Chinese exports, but the most important impulse comes from China’s strategic investment in digital and physical infrastructure, ranging from broadband networks in Indonesia and Brazil to power plants in Turkey and railways in Southeast Asia.
As Western nations question the benefits of globalization, China has become the world’s leading globalizer.
What I called “China’s plan to Sino-form the world” in a 2020 book has advanced so far that it is beyond the capacity of the United States and its allies to impede. Half a billion people in neighboring countries now depend on Chinese technology for communications, data processing and logistics, providing China with a nearly limitless source of young workers for its industries and an ever-expanding export market.
For China, economic outreach to the Global South is key to breaking through American efforts to contain China’s drive for economic predominance. China, wrote the influential “Observer” columnist Chen Feng on July 28, “has to solve the problem of generating its own independent growth momentum, after breaking through the critical point of the ‘Matthew Effect,’” the economic maxim that rich countries get richer and poor countries get poorer.
“America’s comprehensive and unlimited anti-China campaign can slow down China’s development, at the cost of a greater deceleration of the United States. But China is not only putting in place a dual cycle,” that is, promoting domestic consumption as well as exports,” Chen added. “China also divides the external [export] cycle into two sub-cycles: Europe and the United States on one hand, and the Belt and Road/Asia, Africa and Latin America on the other.”
China’s multi-trillion dollar Belt and Road Initiative (BRI) has gestated with limited apparent returns for nearly a decade. What we observe in the trade data suggests that China’s investments are paying off in most of the developing world.
Western policymakers have been looking in the wrong direction. China’s trade with the Global South plus South Korea and Taiwan is now as large as its combined exports to the United States and Europe.
This is by far the most important event in the world economy since the rise of China itself. The populations of the developing world are dwindling at a faster rate in high-income Asia than elsewhere. The scarcest resource in the world is young workers who have enough education to enter the world economy.
When Deng Xiaoping began his reforms in 1979, China’s per capita GDP was less than $200 and just 3% of adults had tertiary education. China’s message to the countries of the Global South is: You can grow like we did, if you let us build your infrastructure, install your digital economy, construct your factories, hire your workers and sell you our products.
In Vietnam, Indonesia, Mexico, Turkey, Brazil and a dozen other developing countries, political leaders have taken China’s offer.
The Carnegie Endowment wrote in a July 11 report on China’s success in Indonesia: “Many argue that China exports its developmental model and imposes it on other countries. But Chinese players also extend their influence by working through local actors and institutions while adapting and assimilating local and traditional forms, norms, and practices.”
In the case of Indonesia, the Carnegie report adds:
On average, Indonesians distrust China and many Chinese firms. Yet [top telecom infrastructure provider] Huawei and to a lesser extent [China’s second-largest telecom equipment maker] ZTE have successfully positioned themselves as trusted cybersecurity providers to the Indonesian government and the Indonesian nation. This has been no easy feat given long-held Indonesian animosity toward China. Many Chinese companies have faced protests over concerns they were taking local jobs. Huawei and ZTE have suffered no such fate. Nor has there been a broad coalition of Indonesian voices against using Chinese technology in critical telecommunications infrastructure. In short, Indonesians care a lot more about Chinese cement plants than they do about Huawei involvement in 5G networks.
Huawei, Carnegie reports, is training 10,000 Indonesian officials in cybersecurity. China in effect is delivering a turnkey digital economy to Indonesia with everything included from broadband base stations to training.
On July 25, Indonesian president Joko Widodo visited Beijing, the first head of state to visit the country since last February’s Winter Olympics. The Chinese website Observer commented, “On July 22, high-level officials from China and Indonesia held a video conference and agreed on advance plans for the joint construction of the Belt and Road Initiative and the Global Maritime Fulcrum, and make all-out efforts to ensure that the Jakarta-Bandung high-speed rail is completed and opened to traffic as scheduled and continuously deepen cooperation in the regional comprehensive economic corridor.”
The 145-kilometer rail link is a prestige project, but it symbolizes China’s rising profile in Southeast Asia’s largest country.
China’s burgeoning role in the Indonesian economy does not fit the profile of what American critics call “debt trap diplomacy.” On the contrary, higher raw materials prices allow Indonesia to pay cash for Chinese imports. The country has run a current account surplus for the past two years.
Chinese exports to Mexico now comprise 16% of the country’s total, and have grown as fast as China’s exports to Southeast Asia. Telecommunications is a big contributor. Mexico in 2020 had 77 broadband accounts per 100 people, versus just 23 in 2012, as I wrote in February 2021 (“Sino-Forming South of the Border”). In between Huawei built a mobile broadband network, and the cost of service dropped by about three-quarters.
As a banker for a Hong Kong boutique, I brought Huawei officials to Mexico and Mexico’s ambassador to Huawei headquarters in Shenzhen. Huawei explained to the Mexicans that they had a big economy but woefully inadequate broadband. Let us build you a broadband network and the eco-system of e-commerce, e-finance and digital technologies that go with it, and you can become rich like China, the Huawei officials said. In fact, Huawei had a published plan for the digital transformation of every country in the world. Many of them are in an advanced stage of implementation.
China’s investments in Mexico have risen rapidly in the past two years. $5.8 billion of China’s total $20 billion commitment to the country was disbursed in the past two years, in part because Chinese companies are moving facilities out of the United States to its southern neighbor.
China’s investments in Brazil – now the world’s largest producer of soybeans – are considerably larger. “As of 2020, Brazil has received more than half of all Chinese investment in Latin America—around USD 66 billion with three-fourths of that investment dedicated to the energy sector and the rest going to agriculture, infrastructure and other areas,” report Luiz Augusto de Castro Neves and Tulio Cariello in a 2022 book.
Turkey’s imports from China have tripled since 2018. China also is the country’s largest export market. The first train to Istanbul from the Chinese city of Xi’an arrived in 2019 on a line built under the BRI. China’s largest transport company, COSCO Shipping, bought a billion-dollar controlling stake in Turkey’s third-largest container port. China financed Istanbul’s new airport with a $6.2 billion loan.
Turkey’s swap line with China allows it to pay for imports in yuan rather than dollars. As the Turkish lira crashed last year and Turkey’s dollar reserves fell, the local-currency swap line became a critical source of trade financing.
China’s trade with the Global South could shift into national currency in short order. By 2019 China had established $500 billion in local currency swap lines with other countries. Swap lines among Asian central banks are estimated at $470 billion, according to the International Monetary fund.
Financial technology is now available to conduct retail transactions directly between Asian countries. In 2021, Singapore and Thailand linked their real-time payment systems, PayNow and Promptpay, enabling “customers of participating banks in Singapore and Thailand [to] transfer funds of up to S$1,000 or 25,000 baht daily across the two countries, using just a mobile number,” according to the Monetary Authority of Singapore and the Bank of Thailand.
The Sino-forming of the world has far-reaching strategic implications. China’s influence in Southeast Asia is growing almost as fast as its trade profile. Indonesia, a country with a long history of hostility toward China, has embraced China’s vision of economic development driven by digital infrastructure and managed by Chinese providers.
The Philippines elected Ferdinand “Bong Bong” Marcos by an unprecedented two-thirds majority, partly on a platform of greater economic cooperation with China. Turkey, the close ethnic relation of China’s Uighur minority, is now an economic dependency of China, which has sustained its imports despite the collapse of the Turkish lira and rampant inflation.
One can only speculate what the future might bring. Diplomatic relations between India and China remain hostile, and Chinese investment in India has ground to a halt, but India’s consumption of Chinese goods has doubled in two years. Trade with China’s longtime ally Pakistan, meanwhile, has stagnated.
Diplomatically, China remains at odds with Israel, maintaining its traditional sympathy toward the Palestinian Arabs and its close relationship with Iran, Israel’s most dangerous adversary. But China’s exports to Iran have collapsed during the past five years while exports to Israel have surged.
Diplomacy doesn’t necessarily follow trade, but the facts on the ground are changing. The world may look very different in a very few years.
Follow David P. Goldman on Twitter at @davidpgoldman