David Gray, Reuters

International Reports

China: A Developing Country as a Global Power?

by Veronika Ertl, David Merkle
China insists on its status as “the world’s largest developing country” and the special treatment in international regimes that this status entails. In the Chinese narrative, this position is justified by a relatively low per capita income and tremendous social and regional differences in the country. Occasionally, as a result of international pressure, China seems willing to renounce its privileges as a developing country. It is increasingly difficult for China to maintain the balance between its identity as a developing country and its role as an important donor in development cooperation. Against this backdrop, Germany and Europe should try to ensure that China’s growing global engagement leads to its closer integration into the structures of international cooperation.

On 1 October 2019, the 70th anniversary of the founding of the People’s Republic of China, the country has reached the top of the international stage. China has become the most important trading partner for many countries in the world and its national economy still continues to grow four decades after the start of Deng Xiaoping’s reform and opening up policies. This brings both opportunities as well as potential conflicts. Against this backdrop, mutual accusations and allegations of unfair trade practices between the US and China have become common since the outbreak of the trade conflict in 2018. Thus, it is hardly surprising when US President Trump tweets that China deliberately claims to be a developing country within the ­WTO in order to obtain trade benefits by unfair means.

Again and again, the question of whether China is a developing country or not has been the focus of international debates. This article will address the issue of what arguments form the basis of the Chinese self-identification as a developing country and what effects that narrative has for international economic structures and international politics – and finally, how this will influence future international cooperation.

China: A Developing Country? Between Growth and Social Inequality

China’s accession to the ­WTO in 2001 was the catalyst for the internationalisation and global integration of the Chinese economy, whose development has been steadily driven forward through its reform and opening policy since the 1980s. With a population of just under 1.4 billion people, the country is now the second-largest national economy in the world; in terms of purchasing power parity, it is the largest. Since the global financial crisis of 2008, China has made the biggest contribution to global economic growth and is on course to completely eliminate absolute poverty by 2020. Nevertheless, the country’s per capita income is relatively low, globally ranked 68th and at just one-seventh of the mean income in the US.

 

Fig. 1: Top Ten Countries with the Largest Gross Domestic Product (GDP) in 2018 (in Billion US Dollars) and the Top Ten Countries with the Largest Share of Purchase Power-Adjusted Global Gross Domestic Product (GDP) in 2018 (in Per Cent)

https://www.kas.de/documents/259121/4862628/aio_17_grafik_1_EN.svg/7f1ab305-aab1-ae09-e433-994ed54cfdf1?t=1574682094152

Source: Own illustration based on Statista 2019: Größte Volkswirtschaften: Länder mit dem größten BIP im Jahr 2018 (in Milliarden US-Dollar), 24 Apr 2019, in: https://bit.ly/32BKGhx [11 Nov 2019]; Statista 2019: Die 20 Länder mit dem größten Anteil am kaufkraftbereinigten globalen Bruttoinlandsprodukt (BIP) im Jahr 2018, 7 May 2019, in: https://bit.ly/2O5wrMq [11 Nov 2019].

 

The expansion of the health insurance and pension system along with various welfare programmes has improved many social development indicators in the People’s Republic of China in recent years. In the international comparison of the Human Development Index, which includes not only gross domestic product (­GDP) per capita, but also life expectancy and the level of education, the country has been steadily improving. At 0.752 points, China is now in the group of countries with “high human development”. However, China is still relatively distant from the industrialised or newly industrialised countries with “very high human development” scores.

Tremendous inequality and social division in the country remain problematic. Progress in combatting poverty has gone hand in hand with the rise of considerable inequalities elsewhere – between urban and rural areas in particular, but also between different provinces. Thus, in recent decades, many workers from the western provinces have been drawn to the dynamic eastern coast and the Pearl River Delta in the south of China. It is in this metropolitan region between Hong Kong and the cities of Guangzhou, Shenzhen, and Zhuhai, that the export engine of the Chinese economy (“the world’s workshop”) has been running at full speed for a long time. Meanwhile, the region has become China’s innovation hub, leading to a boom in the IT and ­technology-driven industries and to remarkable changes in job standards. A general rise in wage levels has driven up the cost of labour-intensive sectors to such an extent that attempts are being made to increase industrial output through the automation of production processes. Conversely, industries still relying on cheap labour have migrated to nearby countries in South East Asia. As a consequence, many factory workers have lost their jobs and have returned to their home provinces. In addition, with economic competition becoming fiercer, factors such as the structural make-up of the economy, the emergence of industrial clusters, or access to trade routes produce winners and losers in the competitive economy more starkly than before. For example, the contributions to the national ­GDP made by three north-eastern provinces, Liaoning, Jilin, and Heilongjiang, have decreased significantly. Liaoning province, which borders North Korea in the east, even registered negative economic growth in 2017.

 

Fig. 2: Share of the Export Economy in Value Creation in Chinese Provinces (in Per Cent)

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Source: Own illustration based on Moody’s Analytics 2019: China’s Provincial Economies: Growing Together or Pulling Apart?, Jan 2019, in: https://bit.ly/2rsHHec [11 Nov 2019]; Map: p Natural Earth Data.

 

In 2016, a reform of the hukou system (state household registration) was adopted. For decades the classification of the population as rural or urban had led to an imbalance in the quality and provision of services to residents between those registered as urban and those registered as rural. Furthermore, this dual structure, introduced in the 1950s for population planning purposes, restricted the ability of the rural population to move into the cities. Recent approaches to unify the system aim to ensure that further migration of the rural population into the cities is beneficial to economic development. So far, however, solutions have been limited to the less booming cities, and the issue of equal access to education and social services remains a difficult endeavour for the municipalities concerned.

 

Fig. 3: Goods Exports and Imports 2017 in Comparison (in Billion US Dollars) and GDP per Capita 2018 in Comparison (in Thousand US Dollars)

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Source: Own illustration based on Le Monde diplomatique 2019: Warenhandel weltweit, Atlas der Globalisierung, pp. 60 – 61; International Monetary Fund 2019: World Economic Outlook. GDP per capita, current prices, Oct 2019, in: https://bit.ly/2WXeG6k [8 Nov 2019].

 

Regarding the structure of the economy, it must be noted that the share of agriculture and forestry remains relatively high (about eight per cent, compared to one per cent in the US), which is uncharacteristic of developed economies. Thus, it has been repeated by the Chinese side that the share of so-called knowledge-intensive services (meaning research and development) remains comparatively low, despite massive investments, in absolute figures, by the Chinese government. Furthermore, to emphasise its status as a developing country, China has repeatedly made reference to the fact that its urbanisation (less than 60 per cent) remains low compared to ­OECD countries.

Hence, the situation remains complex, and it may not be helpful to classify China as either a developing or an industrialised country. The glittering metropolises of the eastern coast suggest high levels of development, yet other regions of China are still marked by absolute poverty, as is the case in rural regions in the western provinces of Yunnan, Qinghai, and Tibet.

Beyond domestic considerations, China’s global power and its growing political weight raise questions about the narrative of China as a developing country. A paper released by the European Commission ahead of the EU-China Summit last spring illustrates this clearly. It explicitly states that China can no longer be regarded as a developing country, since it has become “a key global actor and leading technological power” and with this also a “systemic rival” for Europe. Never before has there been a similar example of a country whose social and economic development still has to catch up with the world’s leading countries, while at the same time it commands such power in shaping regional and global orders. China’s Belt and Road Initiative (“New Silk Road”), with both commercial and geostrategic motivations, serves as a prominent example. It is against this backdrop that the EU stresses the importance of protecting European interests and values when dealing with China and aims at urging China to assume its share of responsibility for the rules-based international order.

The Significance for China’s Role in International Regimes

China and the ­WTO: A Case for “Special and Differential Treatment”?

 

There has been much discussion recently of China’s self-declaration as a developing country within the ­WTO in the context of the trade war between the US and China. Around two thirds of the WTO members declare themselves to be developing countries and thus receive “special and differential treatment”. This means that the developing countries are accorded longer implementation periods for agreements, the right to implement subsidies, and are granted technical assistance. This shall help developing countries to strengthen their economic development and competitiveness before having to open their markets.

This system of special and differential treatment for countries declaring themselves as development countries, was criticised by the US in June 2019 as a pretext for protectionist policies in developing nations and unfairly advantaging their economies. Accordingly, the US submitted a proposal to regulate the declaration of countries within the ­WTO. The reform proposal states that those countries which satisfy at least one of the following characteristics should no longer benefit from special and differential treatment:

  • Being classed as high-income countries by the World Bank;
  • Being members of the ­OECD;
  • Being members of the G20; and / or
  • Having a share in world trade of more than 0.5 per cent.

 

China and other countries currently declared as developing countries vigorously reject this reform proposal and insist that self-declaration is the best possible method in order to account for the considerable differences in economic development between ­WTO members. In this respect, Gao Feng, spokesman of the Chinese Ministry of Commerce, stressed that China continued to stand by its self-assessment as the world’s largest developing country and was prepared to honour its ­WTO commitments – to the extent that these were within its economic capacities as a developing country. China was going to join forces with other developing countries to defend their common interests in this regard.

At the same time, China is well aware of the changing expectations towards its role in the multilateral trade system. Against this backdrop, experts on China have noticed a shift in the country’s rhetoric. Made to choose between the imminent disintegration or blockade of the ­WTO and reforming the institution, China recognises the necessity of reform – particularly because China, thanks to its ­WTO membership, is a major beneficiary of the rules-based trade system. This realisation is reinforced by the current cooling of the Chinese economy. While there is insistence on the developing country status and the concomitant special treatment, the Chinese government, partly as a result of increasing pressure from industrialised countries, also shows some willingness to make concessions and to support reforms of the ­WTO. At the EU-China summit in April 2019, both sides agreed to cooperate on reforming the ­WTO. But unlike other countries, which aim at far-reaching reforms, China’s government insists that reforms should only be carried out “on the basis of necessity”. It further emphasises that any reforms must not target individual countries negatively or be dominated by the interests of individual members – a clear sideswipe at the US.

 

Table 1: Self-Declared Developing Countries within the Framework of the WTO that Would Be Affected by the Criteria of the US Reform Proposal

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Source: Author’s compilation. Current developments based on: Channel News Asia 2019: Singapore does not take advantage of WTO special provisions for developing nations in negotiating agreements: MTI, 27 Jul 2019, in: http://po.st/y8qlG1 [11 Nov 2019]; Teller Report 2019: The UAE is a pivotal trade center and does not need special measures for developing countries, 30 Jul 2019, in: http://bit.ly/2NF5Dnv [11 Nov 2019]; Ihara, Kansaku 2018: Taiwan quits ’developing economy‘ status in WTO with eye on China, Nikkei Asian Review, 17 Oct 2018, in: https://s.nikkei.com/32Eag5g [11 Nov 2019]; Kölling, Martin 2019: Südkorea gibt Status als Entwicklungsland auf – und beugt sich so Trumps Willen, Handelsblatt, 25 Oct 2019, in: http://bit.ly/2NTUL3K [11 Nov 2019].

 

From the discussions, it becomes increasingly apparent that China has turned from rule taker to rule negotiator. Along these lines – and with special and differential treatment of developing countries as one of China’s non-negotiable positions – the concessions to be expected from China are likely to depend greatly on the extent to which industrialised countries manage to build up the necessary pressure.

 

Climate Change: Turning Away from Old Allies?

 

In the area of international climate negotiations, developing and emerging countries generally refer to the principle of “Common But Differentiated Responsibilities” (­CBDR) formalised in the Rio declaration of 1992, under which countries’ responsibilities for global development depend on their different capabilities. The differentiation between developed and developing countries with regard to their contribution to reducing emissions was then explicitly enshrined in the Kyoto Protocol of 1997, a trailblazer for international climate change mitigation. Thus, developed countries were urged to reduce their CO2 emissions and to support developing countries in combatting and adapting to climate change, while developing and emerging countries were only required to report on their emissions.

This system of different rules for developed countries and developing or emerging countries, which had begun to seem obsolete in the face of changed economic realities, was overhauled by the 2015 Paris Agreement. The regulations for implementing the agreement now provide that, in general, all signatories are required to reduce emissions, but different levels of development and / or national circumstances will be taken into account in efforts for mitigating climate change, and less developed countries are to receive special support from industrialised countries because of their greater vulnerability to the consequences of climate change.

At the UN Climate Change Conference in Katowice in December 2018, the signatory countries agreed on a set of rules for implementing the Paris Agreement. The EU and other industrialised countries, in particular, were intent on implementing uniform rules for all states in the Paris Agreement to the disapproval of many developing countries. Surprisingly, it was also China, which in the past had vehemently insisted on the ­CBDR principle, that ultimately helped bring about an agreement on uniform rules. After the US announced its withdrawal from international efforts for mitigating climate change, China was increasingly able to assume a leading role in the climate change negotiations, not least because of its economic weight. In deciding to support the adoption of uniform rules, China broke ranks with traditional allies among developing and emerging countries such as Brazil, South Africa, and India. A prerequisite for China’s agreement was the concession of flexibility in implementation and support given to developing countries by developed countries in cases of insufficient capabilities. It is incumbent on each country to assess whether it requires such support. It remains to be seen to what extent China, which is responsible for more than a quarter of global greenhouse gas emissions, will itself be making use of that rule.

During the climate change negotiations in September 2019, the Chinese Foreign Minister, Wang Yi, once more emphasised the common responsibility of the international community to advance climate action. The fact that China has become a global provider of energy routes through its Belt and Road Initiative and, in that capacity, promotes projects using renewable energy sources but also constructs numerous coal-fired power stations, demonstrates the difficult balancing act Beijing must manage.

 

Development Cooperation: China as a Recipient

 

Despite China’s economic power and its increasing role as a global player, China remains on the ­OECD list of recipient countries of Official Development Assistance (­ODA). In 2017, for example, China received ­630.1 million euros in German ­ODA funds and thus ranks 3rd among the recipients of German ­ODA transfers – a fact to which many respond with bewilderment. How can this be explained?

For one thing, the quoted figure represents the gross ­ODA transfers received. If the loan repayments made by China are deducted from this figure, a net ­ODA figure of ­358.2 million euros remains. As for the net ­ODA transfers received from all donors, China’s balance has been negative for a number of years now as a result of high loan repayments. This means that the country’s repayments are higher than its receipts.

Furthermore, on closer inspection, it becomes apparent that the German ­ODA transfers to China are not classical bilateral development cooperation, since that form of development cooperation with China was discontinued as early as 2009. This means that no new commitments have been made and only existing projects continue to be financed until their completion. Meanwhile, the bulk of German ­ODA funds for China are given through financial cooperation, in particular in the form of loans by the Kredit­anstalt für Wiederaufbau (KfW), the German state development bank. Additionally, Germany provides funding for Chinese nationals studying in Germany and projects of the federal government such as consultancy and training in sustainability and financial reform.

However, subsidised development loans to China, for example by the World Bank, attract increasing criticism. Although China had exceeded the maximum income threshold of ­6,795 US dollars per capita for receiving loans with special conditions in 2016, it continued to receive an average of ­two billion US dollars per year from the World Bank Group’s International Bank for Reconstruction and Development (­IBRD). According to a 2018 agreement by the World Bank shareholders, loans are granted to countries above that threshold at higher interest rates and theoretically only for projects that will benefit global public goods or the long-term development of countries away from World Bank loans. However, only 43 per cent of the loans received by China from 2016 to 2018 fall into those two categories. Against the backdrop of China’s active lending to developing countries, criticised by some as a “debt trap”, and the overall economic power of the country, critics therefore demand that World Bank lending to China should be discontinued altogether.

That ­ODA funds and promotional loans continue to be granted to China, which has long since become a donor itself, raises questions on why Germany and other countries continue this form of development cooperation with China. As the German Ministry for Economic Cooperation and Development (­BMZ) points out: “Whatever challenges of global significance there may be […] today, none of them can be met without China’s involvement.” This includes reaching the goals of the 2030 Agenda for Sustainable Development. For this reason, Germany is building a deeper development partnership with China so as to involve the country more closely in meeting global challenges for sustainable development. In 2017, the strategic partnership for cooperation in development policy gave rise to the German-Chinese Centre for Sustainable Development, among others, as a platform for exchange in matters of development policy, which also implements trilateral development projects. As early as 2013, the EU also adopted an EU-China 2020 Strategic Agenda for Cooperation, which enables closer cooperation with China in general and more specifically in sustainable development. The relevance of this cooperation for the implementation of the global sustainability goals of the 2030 Agenda was stressed again at the latest EU-China summit in April 2019.

As in other areas, the way China is perceived in development cooperation has changed as a result of the country’s economic power and growing global role: increasing numbers of countries and international organisations are beginning to treat China less as a recipient, and more as a partner in meeting international challenges, hoping to involve China more closely by making use of Chinese capabilities.

 

South-South Cooperation: China as a Donor

 

These capabilities, as well as China’s will to act as a donor, are particularly apparent in the area of south-south cooperation, where China plays a leading role. As “the world’s largest developing country”, China emphasises how it voluntarily champions the interests of developing countries. In addition, China has long been associated with the Group of 77 (G77), the largest intergovernmental organisation of developing countries. The G77 represents these countries’ interests internationally and encourages global south-south cooperation.

Although China is often referred to as a “new” donor, its support for weaker countries can be traced back to the 1950s. Since then, the direction of Chinese development cooperation has undergone multiple reform processes but is still based on the “Eight Principles for Economic Aid and Technical Assistance to Other Countries” adopted in 1964. These postulate, above all, mutual respect of sovereignty, non-interference in domestic affairs, and equal cooperation for mutual gain.

The progress of Chinese development cooperation over the past decades clearly reflects China’s identity and its economic transformation as a donor country.

With the economic rise of China, the total development aid granted has grown accordingly; in 2016 China provided ­6.6 billion US dollars, making it the seventh-largest donor in the world. Although in the absence of official reporting these figures must be treated with caution, they nonetheless suggest that China’s activities as a donor have global implications.

The qualities of Chinese development aid differ greatly from the standards of “traditional” donor countries in the ­OECD’s Development Assistance Committee (­DAC). China’s development cooperation is more strongly characterised by economic interests, as evidenced by its focus on infrastructure projects. There is no strict separation between commercial financing and instruments of development aid, and often they complement each other. Accordingly, Chinese companies – most of them state-owned – play an important part in implementing these projects. Many western observers warn of “debt traps” and political dependency on China that developing countries exchange for this development aid “with Chinese characteristics”.

An important milestone for Chinese development aid was the creation of the China International Development Cooperation Agency (­CIDCA) in April 2018. The agency is meant to coordinate the hitherto fragmented structures of Chinese development cooperation and to increase its efficiency and effectiveness through centralised strategic planning and control. With ­CIDCA, there is also supposed to be stricter separation between development aid and commercial financing. It remains to be seen whether the agency will have the financial capacity required for its tasks and to what extent the ministries that currently perform these duties, most notably the Ministry of Commerce, are willing to transfer authority to ­CIDCA. According to one report, the development aid budget of the ­CIDCA for 2019 is no more than ­18 million US dollars, while the Ministry of Commerce still commands 2.63 billion US dollars. Thus, it is likely that the Ministry of Commerce, and with it also commercial interests, will continue to exercise a strong influence on Chinese development cooperation.

This assumption seems all the more reasonable considering the Chinese Belt and Road Initiative, through which China is making massive infrastructure investments in numerous developing countries. China’s emerging role as a major development donor is also evident by the establishment of the Asian Infrastructure Investment Bank (­AIIB) and the creation of well-endowed new funds such as the South-South Cooperation Assistance Fund. The high levels of investment announced are particularly noteworthy. The level of investment by the assistance fund for example is set to grow to twelve billion US dollars by 2030 to support developing countries in implementing the 2030 Agenda for Sustainable Development. Another fund, the China South-South Climate Cooperation Fund, is to spend ­3.1 billion US dollars on supporting developing countries in combatting climate change. Among other things, the fund supports the implementation of the Chinese lighthouse project that has become known as the “10-100-1000 Initiative”, in the context of which China wants to establish ten model areas for low-carbon growth, 100 climate mitigation and adaptation programmes, and climate training for 1,000 trainees from the global south. While, for China, industrial nations have a responsibility to support developing countries in combatting and adapting to climate change as a result of their past emissions, it regards its own aid in this area as voluntary and complementary to these efforts.

It is important to note that China’s activities as a donor attract criticism not only in the West. There is also growing domestic criticism of the large sums made available by China for development aid while some of its own citizens remain in poverty and the country is facing developmental deficits in many regions. This domestic criticism once again shows the dual nature of the Chinese narrative as a developing country and the country’s role as a global power and important donor in the area of development cooperation.

Conclusion: A Balancing Act between Aspiration and Reality

China’s rise to global economic power is celebrated by the government in Beijing with much pomp and symbolism in order to engender approval of the “Chinese Model of Development” both domestically and abroad. At the same time, the Chinese government is fairly blithe to the critical voices of the international community on the issue of its own development status. And yet, global cooperation with China has become inevitable in many areas. More and more conspicuously, China has been assuming key positions in international organisations, from which it actively seeks approval of its own stance – among developing as well as industrialised countries. Here, China has clearly embraced pragmatism by adopting methods standard to industrialised countries – methods that are based on the understanding that actively shaping the global rules of the game always requires having a majority on one’s side. In this context, the Chinese narrative of being a developing country (especially at a time where China’s geostrategic ambitions face widespread wariness among industrialised countries and some neighbouring countries as well) plays an important part in signalling to partner countries that China remains “on their side”.

At the same time, it is apparent from international organisations like the ­WTO, that China benefits from its status as a developing country, especially in trade policy. While China has become the most important market in many economic sectors – and thus an integral part of the global trade system –, access to the Chinese market and its framework conditions follow ­WTO rules only to a certain degree. Given the evident consequences of the current trade conflict and the imminent blockade of the ­WTO, China is under stronger pressure to take substantive reform steps.

China’s self-identification as “the world’s largest developing country” is therefore challenged by China’s growing economic power. In the area of development cooperation, China is already no longer seen as an ordinary recipient nation, but increasingly as a necessary partner for achieving sustainable development. But in view of China’s activities as a donor in much-publicised south-south cooperation, the Chinese narrative of being an equal partner to other developing countries, especially to least developed countries (­LDCs), looks less and less credible, since the Chinese economy has developed steadily over the past 40 years and has, by and large, left behind many of the structural problems characteristic of developing countries.

Nevertheless, it is to be expected that China will continue to play an important part as a donor in the context of south-south cooperation. While some steps have been taken towards professionalisation and increased transparency, an alignment with ­OECD standards cannot be expected.

As has become apparent in the past months and years, China is determined to defend its status as a developing country and to ensure it continues to receive the advantages that accompany this status, despite considerable international objections. At the same time, however, the Chinese government also acknowledges the advantages the country derives from its membership in multilateral agreements and has been showing a deliberate – though limited – willingness to reform in some areas most necessary to maintaining the aforementioned agreements. As a strong economic actor and prominent donor, China has become a global power and thereby not only participates, but also increasingly influences the rule-setting of multilateral forums and the accomplishment of agreements.

To make sure that German and European interests and values are adequately represented in this process, it remains essential to better understand the conflicting signals between Chinese aspirations to political and economic stability and China’s wariness towards the existing international order. With regard to cooperation in international organisations in particular, it is important for Europe to bear in mind the needs of countries in Asia, Latin America, and Africa, so as to create specific incentives for trust and cooperation. This will ultimately demonstrate to China ways that are not based on competing development models but are rather emphasising commonalities and common responsibilities in global challenges such as trade, climate change, and combating poverty.

– translated from German –

 


 

Veronika Ertl is Desk Officer for Development Policy at the Konrad-Adenauer-Stiftung.

 

 

David Merkle is Desk Officer for China at the Konrad-Adenauer-Stiftung’s Asia and Pacific Department.

 

 


 

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