China’s high growth rates are not sustainable and the Chinese Government needs to be less obsessed with the declining growth rates and focus more on the social stability, especially tacking the problem of unemployment in the country
The Chinese Government has set “stability” as the major theme for economic planning this year. It is, in fact, a continuation of the last two years’ economic policy, when the growth slowed down below the 7 per cent annual target in the fourth quarter of 2016. Although this is considered the slowest GDP growth that Chinese economy has witnessed in 26 years, nevertheless it fell within the Government’s “new normal” range of 6.5 to 7 per cent. This indicates that the policy to resolve structural imbalance in Chinese economy has succeeded so far. But there remains considerable unease about the effective working of the policy and the extent to which it would ensure long-term stability of the Chinese economy.
Although China has escaped major financial crises for over two decades, the problem of overcapacity in major industrial and productive sectors has increased at a rapid rate in the post-crisis years, first as a result of slowing demand for exports from China; and second, due to the injection of stimulus investment package, further adding to overcapacity in many domestic and global industries. The primary origin of excess capacity can be attributed to China’s legacy of planned industrial policies designed to fulfil the targets of capital goods production regardless of the demand for goods. In the post-reform years, despite the transition to a market-oriented economy, the domination of the State- Owned Enterprises (SOEs) continues in strategic sectors, which mostly thrive on subsidies and other forms of state support. Also the policy to create national champions has contributed to over-production in certain Government-targeted industries.
Adding to the excess capacity problem in many of China’s manufacturing industries is the rapid urbanisation which includes massive demand for construction machinery and building materials. The impressive urbanisation process has been one of the main forces driving the construction sector boom. The single-source financing model that underpins Government-led infrastructure development is also not sustainable. This is primarily because China’s infrastructure financing mainly came from Government lending and land-transfer revenues. Therefore, initiatives to boost domestic demand, such as the “new urbanisation” effort by the Chinese Government, will have limited impact on domestic infrastructure-market expansion.
Another major hurdle, the Chinese economy is facing, is the problem of rising local Government and corporate debts. As part of the efforts to recover quickly from the crisis and maintain its high growth rates, the Chinese Government resorted to credit expansion and lowered interest rates to stimulate growth and employment in industries, particularly steel, shipbuilding, textiles, light manufacturing, nonferrous metals, equipment manufacturing, etc. But the rise in investment has not been commensurate with profits, further adding to the difficulties in servicing interest payments of the current flood of bank lending. Also, the lack of social security, the stringent capital controls, and the limited investment choices available to households have led to a high savings rate. As a result, capital is continually transferred from households to the production sector (through controlled investment programs), thus augmenting the gap between consumption and production.
There is little doubt about the importance President Xi Jinping attaches to the supply side structural reform, aimed at stabilising the economy. Some key aspects of the policy involves a shift from infrastructure-led growth to a service and consumer-driven model, reform of the Chinese SOEs, while phasing out the problems of overcapacity resulting from the previous stimulus. It is also expected to reduce reliance on credit and to clear away debts of state companies. The approach to these policies, however, suggests a traditional top-level drive to create a new enterprise management system, which often leads to tensions between the centre and local and also between the Government and the enterprises in its attempt to balance growth rates efficiency and stability. Also, the decision to use SOEs as an instrument of Government policy has undermined the very purpose of SOEs reform. The role of “growth stabilisers” entrusted on these enterprises, today, would, in fact, lead to a situation of higher Government debt in the longer run.
As the Chinese Government struggles to manage its domestic economic situation, cities like Foshan and Shenzhen have proved to be the role models in carrying out the supply side structural reform. The private sector in Foshan, along with the municipal Government, has adopted measures suitable to the local conditions, primarily aimed at improving the supply quality. Thus, the major lesson to be drawn from Foshan is that the success of structural reform requires a combination of market forces, as well as Government intervention in reducing the institutional costs.
The issue of SOEs reform in China is more than an economic problem. First, Chinese SOEs are aggressively diversified in their operations and differ in their degrees of market-orientation. Second, any major reform of the SOEs along the market lines might upset the social safety net, leading to a massive unrest and social upheaval on a national scale. Also, China’s size and diverse regions make any policy implementation difficult. Thus, in China’s situation, the policy makers need to display a greater willingness to interact with enterprises, local Governments and market agencies and take into account the regional specificities. The reality is that China’s high growth rates are not sustainable and the Chinese Government needs to be less obsessed with the declining growth rates and focus more on the social stability, especially tacking the problem of unemployment in the country.
(The writer is a Visting Fellow at the Chongyang Institute for Financial Studies, Renmin University, Beijing. She can be contacted at priyanka.pandit@yahoo.com)