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Monday, 27 June 2011
Reforms can’t wait as an inevitable slowdown of the Chinese economy looms
The prospect of leaner times means the government must act now to ease social pressures and protect people’s access to education, jobs and opportunities
Reforms can’t wait as an inevitable slowdown of the Chinese economy looms
The prospect of leaner times means the government must act now to ease social pressures and protect people’s access to education, jobs and opportunities
Hu Shuli 23 June 2011
Will China’s economy face a hard landing, or will a slowdown be within its control? Whatever the answer to this debate, analysts would agree that its economic growth is bound to slow down. Yet the central government has made no sound plans to prepare for it.
Thirty years of growth at breakneck speed has made China the world’s second-largest economy. Fortunately - or unfortunately - it has not yet faced a real economic crisis. But, already, the economy is showing signs of fatigue after years of growth driven by big government and high investments. If the global financial crisis could be said to have brought the curtains down on an economic fairytale, China, too, will soon face a similar inevitability - in this case, the “Lewis turning point”, when manufacturing competitiveness heads south as labour costs rise.
To be sure, China’s prospects should not invite undue pessimism; the growth potential of its 1.3 billion people is far from being exhausted. But it should carry out reforms in politics, society and the economy as soon as possible to build a “breakwater” that can protect it from a downturn. To do so, China must open up further to the world.
In recent years, scholars and analysts at home and abroad have forecast a slowdown in the Chinese economy. The World Bank expects growth in China’s gross domestic product to drop from 9.5 per cent in 2010 to 7.9 per cent in 2015, as the pace of growth in its labour force and productivity eases. Similarly, research by the State Council’s Development Research Centre shows that growth is likely to slow from today’s 10 per cent to 7 per cent in 2015. These forecasts reflect concerns about China’s development.
There’s no doubt China is well able to cope with a short-term downturn or fluctuations: with its considerable control of resources, the Chinese government can respond more quickly and more effectively than governments in other large economies. But if a slowdown is sustained, China will find itself in serious trouble without a proper plan, at risk of a financial crisis and social conflict, and unable to pull itself back onto a path of steady growth. Hence, the government cannot afford to ignore these “prophets of doom”; it has a responsibility to safeguard the economy.
There are reasons for worry. Despite China’s outstanding economic performance and its leaders’ greater attention now on ways to ease social tensions, disorderly protests and riots continue to erupt from time to time. This pressure on our social fabric will only increase in economic bad times.
The conflicts are often linked to the long-standing problems of income disparity, an inadequate social safety net and official corruption and abuse of power. These problems are different in nature to the challenge of inflation and unreasonably high property prices. Rising prices can be tackled through a mix of policies including imposing restrictions; if the policies are well chosen and implemented decisively, prices will come down. Social problems, however, concern the people’s access to development and right to enjoy the fruits of rapid economic growth. In a downturn, companies will stop expanding and investments will shrink, which will put many people’s livelihood at risk. This should not be dismissed as the necessary price of growth.
Clearly, we urgently need to narrow the income gap, improve governance and expand the social safety net. Efforts to transform our development model and overhaul the industrial structure must go beyond mere talk and paperwork.
Current efforts to amend the personal income tax law are an attempt to redistribute income. But the key to solving many of China’s social problems lies in making income distribution fair in the first place, correcting distortions in resource allocation, and ensuring a truly competitive environment in which more people have access to education, jobs and opportunities for enterprise and innovation.
Reform is even more critical in a slowing economy. We should step up our efforts, especially in these areas that have already been earmarked for reform: the development of institutions for private enterprise; the pricing of resources; fees for environmental protection; social security for rural and urban residents; social welfare and public services; rural management and land reform. The reform drive has stagnated of late. One way to reinvigorate it is to further open up China to create more opportunities.
Mature market economies are generally open to foreign investors; though protectionist sentiments become more prominent in bad times, attitudes are not prone to volatile changes. By contrast, the attitude among some segments of Chinese society is strictly utilitarian and therefore prone to wild swings: at the first signs of a slowdown, it becomes xenophobic but, in good times, it becomes complacent. Foreign investors who were welcomed at the beginning of reforms are now to some extent discriminated against.
During the Asian financial crisis, China decisively implemented structural reforms - it cut the size of its state sector, carried out housing reform and joined the World Trade Organisation, laying a solid foundation for its subsequent growth. Now, in the aftermath of the global financial crisis, China must muster the courage for another round of reforms to pave the way for the next decade of stable growth.
This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine.
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Reforms can’t wait as an inevitable slowdown of the Chinese economy looms
The prospect of leaner times means the government must act now to ease social pressures and protect people’s access to education, jobs and opportunities
Hu Shuli
23 June 2011
Will China’s economy face a hard landing, or will a slowdown be within its control? Whatever the answer to this debate, analysts would agree that its economic growth is bound to slow down. Yet the central government has made no sound plans to prepare for it.
Thirty years of growth at breakneck speed has made China the world’s second-largest economy. Fortunately - or unfortunately - it has not yet faced a real economic crisis. But, already, the economy is showing signs of fatigue after years of growth driven by big government and high investments. If the global financial crisis could be said to have brought the curtains down on an economic fairytale, China, too, will soon face a similar inevitability - in this case, the “Lewis turning point”, when manufacturing competitiveness heads south as labour costs rise.
To be sure, China’s prospects should not invite undue pessimism; the growth potential of its 1.3 billion people is far from being exhausted. But it should carry out reforms in politics, society and the economy as soon as possible to build a “breakwater” that can protect it from a downturn. To do so, China must open up further to the world.
In recent years, scholars and analysts at home and abroad have forecast a slowdown in the Chinese economy. The World Bank expects growth in China’s gross domestic product to drop from 9.5 per cent in 2010 to 7.9 per cent in 2015, as the pace of growth in its labour force and productivity eases. Similarly, research by the State Council’s Development Research Centre shows that growth is likely to slow from today’s 10 per cent to 7 per cent in 2015. These forecasts reflect concerns about China’s development.
There’s no doubt China is well able to cope with a short-term downturn or fluctuations: with its considerable control of resources, the Chinese government can respond more quickly and more effectively than governments in other large economies. But if a slowdown is sustained, China will find itself in serious trouble without a proper plan, at risk of a financial crisis and social conflict, and unable to pull itself back onto a path of steady growth. Hence, the government cannot afford to ignore these “prophets of doom”; it has a responsibility to safeguard the economy.
There are reasons for worry. Despite China’s outstanding economic performance and its leaders’ greater attention now on ways to ease social tensions, disorderly protests and riots continue to erupt from time to time. This pressure on our social fabric will only increase in economic bad times.
The conflicts are often linked to the long-standing problems of income disparity, an inadequate social safety net and official corruption and abuse of power. These problems are different in nature to the challenge of inflation and unreasonably high property prices. Rising prices can be tackled through a mix of policies including imposing restrictions; if the policies are well chosen and implemented decisively, prices will come down. Social problems, however, concern the people’s access to development and right to enjoy the fruits of rapid economic growth. In a downturn, companies will stop expanding and investments will shrink, which will put many people’s livelihood at risk. This should not be dismissed as the necessary price of growth.
Clearly, we urgently need to narrow the income gap, improve governance and expand the social safety net. Efforts to transform our development model and overhaul the industrial structure must go beyond mere talk and paperwork.
Current efforts to amend the personal income tax law are an attempt to redistribute income. But the key to solving many of China’s social problems lies in making income distribution fair in the first place, correcting distortions in resource allocation, and ensuring a truly competitive environment in which more people have access to education, jobs and opportunities for enterprise and innovation.
Reform is even more critical in a slowing economy. We should step up our efforts, especially in these areas that have already been earmarked for reform: the development of institutions for private enterprise; the pricing of resources; fees for environmental protection; social security for rural and urban residents; social welfare and public services; rural management and land reform. The reform drive has stagnated of late. One way to reinvigorate it is to further open up China to create more opportunities.
Mature market economies are generally open to foreign investors; though protectionist sentiments become more prominent in bad times, attitudes are not prone to volatile changes. By contrast, the attitude among some segments of Chinese society is strictly utilitarian and therefore prone to wild swings: at the first signs of a slowdown, it becomes xenophobic but, in good times, it becomes complacent. Foreign investors who were welcomed at the beginning of reforms are now to some extent discriminated against.
During the Asian financial crisis, China decisively implemented structural reforms - it cut the size of its state sector, carried out housing reform and joined the World Trade Organisation, laying a solid foundation for its subsequent growth. Now, in the aftermath of the global financial crisis, China must muster the courage for another round of reforms to pave the way for the next decade of stable growth.
This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine.
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