The Central Committee of the Chinese Communist Party has established an epoch-making strategic goal: the building of a new model for domestic and international development based on mutual stimulation. It is not only a way of embodying "great changes unseen in a century" in the international environment, but also an essential requirement for transforming the driving force behind China's economic growth. On November 15, 2020, China, Japan, South Korea, Australia, New Zealand and other ASEAN countries (15 countries in total) officially signed the world's largest Regional Comprehensive Economic Partnership Agreement (RCEP). The signing of the RCEP opens up an excellent opportunity to create a new model for development. Here we will explore how, within the RCEP, the mutual stimulation of internal and external development will be implemented in four areas: trade, finance, openness and working mechanisms.
Trade: Transforming the Production Chain within RCEP
In 2019, the 10 member states of ASEAN became the fifth largest economy in the world, behind only the United States, China, Japan and Germany. As of 2017, exports of goods and services in the RCEP region accounted for 26.1% of the total global volume, or 11.8 percentage points higher than in the USA, Canada and Mexico. Since 2000, the share of intra-regional trade in Asia has shown a steady upward trend, while the European Union has demonstrated a downward trend. Removing tariff barriers and increasing trade interdependence in the RCEP region is transforming industrial chains in East Asia.
The Chinese government and Chinese businesses should seize the opportunity to adjust (downsize and regionalise) the global production chain after the coronavirus epidemic ends. The signing of the RCEP has made it necessary to strengthen ties between China, Japan, South Korea and the ASEAN countries, strengthen China's key positions in the Asian production chain, and maintain China's dominance in the global production chain.
As you strengthen key positions in the value chain, attention should be paid to the benefits of the flock of flying geese model. First, this is the implementation of the "flock of flying geese" paradigm within the framework of the internal development of China, where Beijing, Tianjin, Hebei Province, the "Big Bay" region and the Yangtze River Delta zone will serve as "leading geese", the central and western regions - as a "second echelon", and other zones of the country - as a "closing echelon". The implementation of this model within ASEAN will be carried out under the leadership of the "leading geese" - China, Japan and South Korea, the second echelon will be comprised of relatively developed countries participating in the Belt and Road Initiative, and the third echelon will include the less developed countries of the region ... The signing of the RCEP provides a platform and opportunity for a two-sided flock of flying geese model. The creation of this model will not only help strengthen China's key positions in the three chains (the production chain, supply chain and value chain) in Asia, but also contribute to the continuous improvement of the performance and vitality of the Asian production chain.
Finance: Promoting Renminbi Internationalisation under RCEP
RCEP makes it possible to strengthen the degree of trade and investment interdependence of partner countries in East Asia. Coordinated development and closer economic and trade relations in East Asia will reduce the dependence of East Asian countries on the United States and the European Union. In addition, it will have an impact on the currency status of the US dollar, euro and UK pound in Asia.
From the point of view of the process of internationalisation of the Chinese yuan, from 2010 to 2015, China's actions in this direction were carried out using the outdated strategy of promoting "Three in one" internationalisation, namely, encouraging settlement in yuan in the course of cross-border trade and direct investment transactions, the vigorous development of the offshore yuan in Hong Kong; and the signing by the Central Bank of China of currency swap agreements with other central banks. Since 2018, China has begun to change its strategy to promote the internationalisation of the yuan. The new strategy also includes three areas: vigorously developing the status of the yuan as a settlement currency in the wholesale trade of large wholesale goods, accelerating the opening of the domestic financial market to foreign institutional investors, and creating real demand for the Chinese yuan in neighbouring countries and states participating in the Belt and Road Initiative. The new "Three in One" strategy will make the internationalisation of the yuan more sustainable.
The combination of RCEP and this strategy will help accelerate the internationalisation of the yuan. First, stimulating the creation of cross-border exchanges for large wholesale goods within the framework of RCEP and the use of regional currencies, including the Chinese yuan, as the basic currency of account, will increase the status of the yuan as a settlement currency. Second, the active participation of China and even the leadership of the transformation of the production chain in East Asia within the framework of RCEP will create real demand for the Chinese yuan. Third, the opening of China's financial market and the construction of ports and free trade zones based on RCEP will accelerate the opening of the financial market. In addition, the combination of the new “Three-in-One” RMB internationalisation strategy along with the aforementioned “flock of wild geese” development model should help to promote and improve trade and financial performance.
Openness: merging RCEP and China's free trade zones
Labour and capital are important strengths in East Asia. The signing of the RCEP facilitates the free flow of production factors. First, the RCEP region is distinguished by a demographic reserve and a demographic dividend. In terms of population size, in 2018, the RCEP region's population was 29.7% of the global population, 23.0% more than the European Union (6.7%) and 23.2% more than the United States, Mexico and Canada (6.5%). In terms of age structure, in 2018, the share of the population aged 15-64 in the RCEP region was 31.6% of the global population, which is 24.9 and 18.4 percentage points higher than in the European Union (6.7%) and the USA, Mexico and Canada (13.2%), respectively. Second, the RCEP region has an advantage in terms of capital inflows. In 2018, net FDI inflows to the RCEP region accounted for 38.3% of global net inflows, which is 10 percentage points higher than in the United States, Mexico and Canada. More than a third of global investments are now in the RCEP region.
The next step may be the organic integration of RCEP with China's free trade zones. More than half of China's provinces and central cities serve as ports or free trade zones. In order to stimulate the development of the regional economy at a higher level, at the next stage of construction of free trade zones and ports, it is necessary to consolidate their status as soon as possible, to combine the resource endowments and the comparative advantages of various provinces and cities, to reveal the advantages of neighbouring countries in the RCEP region in terms of production and introduce a programme to create free trade zones with distinctive characteristics. For example, free trade zones and ports located near Japan and South Korea can contribute to domestic and international development through technical cooperation with the governments and enterprises of Japan and South Korea, and free trade zones and ports adjacent to ASEAN countries through industrial cooperation.
Since the beginning of 2018, the accelerated opening of China's domestic financial market has contributed to the introduction of a large number of high-level participants, the improvement of the market competition mechanism, the expansion of the Chinese financial market, and the internationalisation of the yuan. The RCEP’s signing will also create new forms of financial cooperation in East Asia.
However, in recent years, the Chinese market has become increasingly aware of the negative impact of cross-border investment on domestic asset values and financial stability. Therefore, in the process of accelerating the bilateral openness of the domestic financial market, one should also actively monitor and prevent potential risks. With the opening of the domestic financial market accelerating, the Central Bank of China still needs to maintain control over short-term capital flows to prevent the systematic risks of the domestic financial system from exacerbating the systematic risks of the domestic financial system caused by large inflows and outflows of cross-border capital.
Working Mechanisms: Further Building Multilateral Mechanisms Led by Emerging Market Countries
As one of the principal beneficiaries of globalisation, China must steadily promote economic globalisation. On the one hand, existing international multilateral mechanisms such as the UN, G20, WTO, UNCTAD, IMF, World Bank, World Health Organization, Paris Climate Agreement, etc. should be fully utilised. On the other hand, it is necessary to continue to promote the development of new multilateral mechanisms under the leadership of the Chinese government, such as RCEP, the Belt and Road, the Asian Infrastructure Investment Bank, BRICS New Development Bank, the Silk Road Fund and others. In the process of this development, it is important to attract the participation of non-government forces and increase the degree of commercialisation. Thus, the signing of the RCEP gives the countries of East Asia more freedom of action. In the future, regional internal trade and economic problems should not be referred to WTO arbitration, and can be resolved using internal mechanisms. It also shows that emerging market countries are taking an important step towards building international order.
