RCEP to generate significant gains for new development pattern
RCEP Ministerial Meeting in August, 2020 Photo: NEWS.CN
China has enacted an epoch-making strategy for a new development pattern that smooths domestic circulation and lets domestic and international circulations reinforce each other. This measure responds to the profound changes unseen in a century in the world and the need for a shift in the national economic drive.
On Nov. 15, 2020, 15 countries, including China, Japan, South Korea, Australia, New Zealand, and ASEAN countries signed the Regional Comprehensive Economic Partnership (RCEP), the world's largest free trade agreement. This signing will provide major opportunities for building China's new development pattern.
Trade
RCEP will provide stimulus to reshape the industrial chain. By 2019, ASEAN countries rose to become the world's fifth-largest economy, following the United States, China, Japan, and Germany. By 2017, RCEP countries contributed 26.1% of the world's total exports of goods and services, 11.8 percentage points higher than the United States-Mexico-Canada (USMCA) region. Since 2000, the share of intra-regional trade in Asia has shown an upward spiral. The removal of tariff barriers and the growing trade dependence in the RCEP region have both served as fuel for the industrial chain reshaping in East Asia.
The Chinese government and enterprises should seize the opportunity, and take action when the global industrial chain may adjust after the pandemic. Based on the RCEP signing, China can strengthen ties with Japan, South Korea, and all the ten ASEAN countries, further increasing China's central role in the Asian industrial chain and securing its pivotal position in the global industrial chain.
In this process, two forms of flying geese development model can have clear advantages. One form targets domestic circumstances. The Beijing-Tianjin-Hebei region, the Guangdong-Hong Kong-Macao Greater Bay Area, and the Yangtze River Delta act as the head in a V-shaped formation. The western triangle economic zone composed of Chengdu, Chongqing and Xi’an, and the city cluster along middle reaches of the Yangtze River are the second geese, which are then followed by other regions. When applying the same model in East Asia and beyond, China, Japan, and South Korea are the first goose in a V-shaped formation, followed by the relatively developed countries in ASEAN or Belt and Road (B&R) initiative, which is then followed by underdeveloped B&R countries. The RCEP signing provides a good platform and opportunity for accomplishing the double flying geese model. The model will reinforce China's core position in the Asian industrial, supply, and value chains and improve the chains' completeness and autonomy.
Finance
RMB internationalization can progress within the scope of RCEP. RCEP helps consolidate trade and investment interdependence among East Asian partnerships. Coordinated development and increasingly close economic and trade relations in East Asia will reduce East Asian countries' reliance on the US and EU. Furthermore, this move will impact the status of the US dollar, the euro, and the pound sterling in Asia.
Regarding the evolution of RMB internationalization, between 2010 and 2015, China encouraged RMB settlement in cross-border trade and direct investment, and established offshore RMB financial centers represented by Hong Kong. The central bank signed bilateral currency swap agreements with its counterparts in other countries. Since 2018, China started to revise RMB internationalization strategies. It aimed to improve RMB's position as an invoicing currency in commodity trading, expedite the opening of the domestic financial market to foreign institutional investors, and cultivate real demand for RMB in neighboring and B&R countries. The new strategies will provide stability and sustainability for RMB internationalization.
The integration of RCEP with new strategies will accelerate the process of RMB internationalization. The manifestations are as follows: First, RCEP can help set up cross-border commodity exchanges which can enhance RMB’s function as an invoicing currency. Second, through RCEP, the reshaping of an East Asian industrial chain (that China actively participates in, and even leads) will help develop a real demand for RMB. Third, the opening of China's financial market will gather pace if keeping an eye on RCEP and the construction of free trade zones (FTZs) and free trade ports (FTPs). The new RMB internationalization strategies can also link with the above-mentioned double flying geese models, so that trading and financial development can interact and promote each other.
Opening up
The RCEP can connect to China's FTZs and FTPs. East Asia has labor and capital advantages, and the signing of RCEP is conducive to the free flow of production factors in several ways. First, RCEP countries have the advantages of population stock and demographic dividends. Regarding population scale, as of 2018, the RCEP region connected 29.7% of the global population, exceeding the EU (6.7%) and the USMCA (6.5%) by 23.0 and 23.2 percentage points respectively. As for the age structure, in 2018 the RCEP region had 31.6% of the world's population aged between 15 and 64, which is 24.9 and 18.4 percentage points higher than the EU (6.7%) and USMCA (13.2%) respectively. Second, the RCEP region has capital advantages. As of 2018, the net FDI inflows from the RCEP region accounted for 38.3% of the global net FDI inflows, which surpassed the USMCA by 10 percentage points. More than one-third of global investment flows within the RCEP.
More than half of China's provinces and municipalities have established FTZs or FTPs. In the next phase of constructing FTZs and FTPs, they should seek their respective development focus as soon as possible and align their resource endowments and comparative advantages with the neighboring RCEP countries' production factors. Also, China should make plans to build FTZs and FTPs with distinct characteristics, so that the regional economy can proceed to a higher level. For example, the FTZs and FTPs adjacent to Japan and South Korea can promote dual circulation through cooperation with the two countries’ governments and enterprises. Also, the approach can apply to the FTZs and FTPs near ASEAN countries.
Since 2018, the accelerated opening of the domestic financial market has attracted more high-quality participants. This strategy helps introduce optimized market competition mechanisms, expand the market's scope and depth, and bolster RMB internationalization. In addition, signing the RCEP will also lead to higher-level and newer forms of financial cooperation in East Asia.
However, in recent years, the Chinese market has deepened its awareness that large cross-border investment inflows and outflows may have negative clouts on domestic asset prices and financial stability. Therefore, we should monitor the flow and prevent potential risks while accelerating the two-way opening of our domestic financial market. In this context, it behooves China's central bank to retain control over short-term capital flows. In this way, it can prevent systemic risks in the domestic financial system caused by large cross-border capital inflows and outflows.
Mechanisms
Multilateral mechanisms led by emerging markets should be cemented. As one of the beneficiaries of globalization, China should unswervingly promote economic globalization. It should make full use of the existing international multilateral mechanisms, such as the United Nations, G20, WTO, UNCTAD, IMF, World Bank, World Health Organization, and the Paris Agreement.
Also, sustained efforts should be made to promote new multilateral mechanisms initiated by the Chinese government, such as RCEP, Belt and Road, Asian Infrastructure Investment Bank, BRICS New Development Bank, and the Silk Road Fund. In this process, the country should attract more non-governmental forces and bolster marketization.
Signing the RCEP has bestowed East Asian countries with greater discretion. In the future, economic and trade issues within the region can seek solutions through internal mechanisms rather than WTO arbitration. It has also testified that emerging markets have taken a major step towards constructing international order.
Zhang Ming is deputy director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences (CASS). Chen Yinmo is from the Institute of World Economics and Politics at CASS.
Edited by YANG LANLAN