Caixin Online — Once again, gloomy forecasts for the Chinese economy are making the rounds amid ongoing financial turbulence in much of the world.
Premier Wen Jiabao’s recent assessment at the “Summer Davos” forum of economic leaders in Dalian was timely indeed: He said the pace of China’s economic growth had slowed since the second quarter, as expected, largely as a result of government efforts to cool things down.
Recent economic data confirm that the pace of growth has slowed. And if China is making progress toward reducing what has been an over-reliance on policy stimulus for growth, then any less-than-spectacular gross domestic product figures should not unduly worry us.
Shaken by the earthquake in Japan and power shortages on the mainland, the Chinese economy experienced some unexpected fluctuations in recent months. Nevertheless, GDP growth for the full year is still expected to top 9%. That’s nothing to fret about.
Yet there is real concern about economic restructuring, long-term risks, and whether the nation’s economy is going to adjust according to plan.
In the 33 years since national market reforms began, the Chinese economy has capitalized on its three key advantages: low capital costs, low energy prices and cheap labor. It’s thus grown via exports and investments to become the world’s second-largest economy.
But this development model is now out of step with the current global economic environment, and its growth levels cannot be sustained. To ensure a steady future for growth, China must lift its economy to a higher level. It must revamp its economic structure.
That’s easier said than done. The central government has promoted economic restructuring since 1996, the first year of the Ninth Five-Year Plan. Yet there is little to show for these efforts.
In the 12th Five-Year Plan, unveiled this year, the government again stressed the need to transform the nation’s economic development model. But not all analysts are optimistic about implementing this transformation.
China’s current development model is the main reason why restructuring progress has been so slow. The government, by controlling substantial amounts of resources, has the power to react quickly to a crisis — much more quickly than other countries with major economies. Yet this resource-control model impedes efforts to restructure.
In the wake of the 2008 global financial crisis, local governments made use of Beijing’s 4 trillion yuan ($625 billion) stimulus package by extending loans and providing land in ways that helped state-owned enterprises and expanded infrastructure.
Private-sector industries found they could not compete in the face of this financial resources-distorted atmosphere, which included monopolistic practices. Now, three years since the crisis began, the “de-industrialization” of capital in China is posing serious risks.
The government-led allocation of resources has had additional, though unintended, negative consequences. By following a central government directive to develop the economy in prescribed ways, local governments have in fact started homogenizing their economies.
Not only are they losing their own comparative advantages, but they’ve also found themselves fighting one another over shrinking market share. And while China’s real economy is in decline, the country’s demographic dividend is also coming to an end.
So a major test for China’s restructuring effort will be whether it can improve productivity and build upon comparative advantages.
This can be accomplished if the government is clear about its function and eases out of its resource-allocation role, focusing instead on creating a fair environment for business. It should provide equal opportunities for education, employment, entrepreneurship and innovation, and build a social safety net commensurate with the country’s development.
Speaking in Dalian, the premier referred to the need to “uphold and improve the basic economic system; speed up fiscal, tax and financial reform; reform prices for the factors of production; and reform monopoly sectors and other important fields.”
These are precisely the areas where reform efforts have stalled. Consider, as a typical example, the need to rationalize resource prices. China’s export-oriented model means that substantial amounts of the government’s price subsidies in fact flow out of the country. Not only is this a net loss for the nation, but it puts a heavy burden on our natural resources and environment.
Factor price reform and environment-related charges have been high on China’s to-do list for a long time. But these initiatives have been pushed onto the back burner repeatedly due to worries about inflation and the moribund global economy.
The State Council’s guidelines on private-sector investments — released last year as a follow-up to its policy set in 2005 — made clear the principles of equal access and fair treatment. But, in practice, such guidelines are easily “neutralized” by department documents, and state-owned enterprises continue to monopolize their sectors and influence decision-making. Private enterprises are effectively shut out.
For economic restructuring to succeed, China must understand its own strengths and weaknesses. All the talk about the “Chinese model” should not go to our head.
The nation’s current structural problems are nothing new, and there is even general agreement about solutions. What’s worrying, though, is that an overemphasis on “maintaining stability” is putting a veneer on the status quo.
We need the political will to change what sometimes appears to be an untouchable status quo. The reforms that the premier has pledged are needed now to resolve China’s development problems.
2 comments:
Time for China to reform economy
‘China model’ is due for sustainable replacement
By Century Weekly
26 September 2011
Caixin Online — Once again, gloomy forecasts for the Chinese economy are making the rounds amid ongoing financial turbulence in much of the world.
Premier Wen Jiabao’s recent assessment at the “Summer Davos” forum of economic leaders in Dalian was timely indeed: He said the pace of China’s economic growth had slowed since the second quarter, as expected, largely as a result of government efforts to cool things down.
Recent economic data confirm that the pace of growth has slowed. And if China is making progress toward reducing what has been an over-reliance on policy stimulus for growth, then any less-than-spectacular gross domestic product figures should not unduly worry us.
Shaken by the earthquake in Japan and power shortages on the mainland, the Chinese economy experienced some unexpected fluctuations in recent months. Nevertheless, GDP growth for the full year is still expected to top 9%. That’s nothing to fret about.
Yet there is real concern about economic restructuring, long-term risks, and whether the nation’s economy is going to adjust according to plan.
In the 33 years since national market reforms began, the Chinese economy has capitalized on its three key advantages: low capital costs, low energy prices and cheap labor. It’s thus grown via exports and investments to become the world’s second-largest economy.
But this development model is now out of step with the current global economic environment, and its growth levels cannot be sustained. To ensure a steady future for growth, China must lift its economy to a higher level. It must revamp its economic structure.
That’s easier said than done. The central government has promoted economic restructuring since 1996, the first year of the Ninth Five-Year Plan. Yet there is little to show for these efforts.
In the 12th Five-Year Plan, unveiled this year, the government again stressed the need to transform the nation’s economic development model. But not all analysts are optimistic about implementing this transformation.
China’s current development model is the main reason why restructuring progress has been so slow. The government, by controlling substantial amounts of resources, has the power to react quickly to a crisis — much more quickly than other countries with major economies. Yet this resource-control model impedes efforts to restructure.
In the wake of the 2008 global financial crisis, local governments made use of Beijing’s 4 trillion yuan ($625 billion) stimulus package by extending loans and providing land in ways that helped state-owned enterprises and expanded infrastructure.
Private-sector industries found they could not compete in the face of this financial resources-distorted atmosphere, which included monopolistic practices. Now, three years since the crisis began, the “de-industrialization” of capital in China is posing serious risks.
The government-led allocation of resources has had additional, though unintended, negative consequences. By following a central government directive to develop the economy in prescribed ways, local governments have in fact started homogenizing their economies.
Not only are they losing their own comparative advantages, but they’ve also found themselves fighting one another over shrinking market share. And while China’s real economy is in decline, the country’s demographic dividend is also coming to an end.
So a major test for China’s restructuring effort will be whether it can improve productivity and build upon comparative advantages.
This can be accomplished if the government is clear about its function and eases out of its resource-allocation role, focusing instead on creating a fair environment for business. It should provide equal opportunities for education, employment, entrepreneurship and innovation, and build a social safety net commensurate with the country’s development.
Speaking in Dalian, the premier referred to the need to “uphold and improve the basic economic system; speed up fiscal, tax and financial reform; reform prices for the factors of production; and reform monopoly sectors and other important fields.”
These are precisely the areas where reform efforts have stalled. Consider, as a typical example, the need to rationalize resource prices. China’s export-oriented model means that substantial amounts of the government’s price subsidies in fact flow out of the country. Not only is this a net loss for the nation, but it puts a heavy burden on our natural resources and environment.
Factor price reform and environment-related charges have been high on China’s to-do list for a long time. But these initiatives have been pushed onto the back burner repeatedly due to worries about inflation and the moribund global economy.
The State Council’s guidelines on private-sector investments — released last year as a follow-up to its policy set in 2005 — made clear the principles of equal access and fair treatment. But, in practice, such guidelines are easily “neutralized” by department documents, and state-owned enterprises continue to monopolize their sectors and influence decision-making. Private enterprises are effectively shut out.
For economic restructuring to succeed, China must understand its own strengths and weaknesses. All the talk about the “Chinese model” should not go to our head.
The nation’s current structural problems are nothing new, and there is even general agreement about solutions. What’s worrying, though, is that an overemphasis on “maintaining stability” is putting a veneer on the status quo.
We need the political will to change what sometimes appears to be an untouchable status quo. The reforms that the premier has pledged are needed now to resolve China’s development problems.
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