Time to be re­al­is­tic on China’s econ­omy

China Daily European Weekly - - Comment - Fan Gang Fan Gang is the di­rec­tor of China’s Na­tional Eco­nomic Re­search In­sti­tute and a mem­ber of the Mon­e­tary Pol­icy Com­mit­tee of the Peo­ple’s Bank of China. The ar­ti­cle is an edited ex­cerpt from a speech given by him at the 2018 Busi­ness Lead­ers An­nual

The pre­dicted ‘ hard land­ing’ never hap­pened — but the na­tion still has a long way to go on the route to pros­per­ity

There has recently been a great change in the tone in pub­lic opin­ion about China’s econ­omy. In the pre­vi­ous six or seven years, some do­mes­tic and for­eign econ­o­mists have been pes­simistic about China but, since the first half of last year, a new term — re­silient — has been used to de­scribe the Chi­nese econ­omy, and peo­ple now be­lieve it will not suf­fer a “hard land­ing”.

Time mag­a­zine pub­lished an edi­tion with the head­line “China won” on its cover. Some opin­ion lead­ers at home have also hailed the rise of China, with­out sta­tis­ti­cal back­ing, say­ing that China has over­taken the United States — and such claims have been grow­ing.

How­ever, it is im­por­tant to re­main sober and take a sen­si­ble and re­al­is­tic look at China’s de­vel­op­ment. There is some truth in say­ing China is strong now, es­pe­cially in the man­u­fac­tur­ing in­dus­tries that have been bad­mouthed for many years. Now peo­ple think the coun­try is a man­u­fac­tur­ing power backed by creation and innovation.

But we need to see that China has prob­lems, too.

Thanks to the ex­change rate, China’s GDP leaped in 2017 — the coun­try’s GDP per capita was around $8,000 (6768 eu­ros; £5911) in 2016, and jumped to $9,600 last year, us­ing the ex­change rate at the end of year — com­ing close to the bench­mark of $10,000 that would al­low it to be des­ig­nated a mid­dle-in­come coun­try.

How­ever, com­pared with the GDP per capita of de­vel­oped coun­tries, we are less than 20 per­cent of the US, while South Korea is 70 per­cent of the US. We say China is the world’s sec­ond­largest econ­omy, but that’s be­cause of our large pop­u­la­tion; the US pop­u­la­tion is only one-fifth of ours.

A slew of fac­tors greatly de­ter­mine our eco­nomic growth: ed­u­ca­tion, sci­ence and tech­nol­ogy, innovation, the environment, sys­tems and mech­a­nisms. They all mat­ter when it comes to sus­tain­able growth.

As a de­vel­op­ing coun­try, we must be fully aware that the gap with de­vel­oped na­tions is huge and that we can­not af­ford to be com­pla­cent.

We can learn a les­son from Japan. In the 1980s, Japan’s per capita GDP al­most caught up with the US and peo­ple were con­vinced that it would be­come the world’s No 1. The Ja­panese were so over­whelmed by their suc­cess that they felt the eco­nomic bub­ble would not burst and did not take any ef­fec­tive mea­sures.

Af­ter the bub­ble did burst, Japan suf­fered slug­gish eco­nomic growth for 20 years. Although its GDP per capita is now 70 per­cent that of the US, it is noth­ing com­pared with its golden age.

There­fore, while we ap­plaud the Chi­nese ac­com­plish­ments, I am con­cerned that if we ig­nore the weak­nesses and prob­lems and don’t take ac­tion, they will even­tu­ally be­come a big prob­lem.

One of China’s ma­jor achieve­ments, of­ten over­looked, is that there hasn’t been an eco­nomic cri­sis in the 40 years of high growth, which is un­prece­dented glob­ally.

When de­vel­oped coun­tries grew rapidly in the early years, they ex­pe­ri­enced an eco­nomic cri­sis about ev­ery 10 years, which was fol­lowed by a pe­riod of re­ces­sion. Although the Chi­nese econ­omy has had cy­cles, with growth as high as 14 per­cent and as low as 6 per­cent, we haven’t ex­pe­ri­enced a big cri­sis, nor did we see a big re­ces­sion.

Our cen­tral govern­ment is also look­ing at po­ten­tial risks. One of the main top­ics this year is to guard against fi­nan­cial risks. Fi­nan­cial risks ex­ist in ev­ery cor­ner of busi­ness and may af­fect some of the cur­rent op­er­a­tions of our busi­ness, in­clud­ing fi­nan­cial op­er­a­tions.

China’s econ­omy has not main­tained over 10 per­cent con­sis­tent growth for the past 30 years. We ex­pe­ri­enced a cycle in the 1990s be­cause of an over­heated econ­omy dur­ing 1992-94, and the growth rate de­clined for five con­sec­u­tive years un­til 1999. Then the econ­omy bot­tomed out from 2000 to 2002, and en­tered a new pe­riod of growth in 2003.

China’s econ­omy over­heated twice in the past four decades, the first time dur­ing 199294, the other dur­ing 2005-07, with 14.2 per­cent growth in 1992 and 14.1 per­cent in 2007. We ad­justed our­selves for a year in 2008 and then the global fi­nan­cial cri­sis struck. As a re­sult of the govern­ment’s stim­u­lus pack­age, China had an­other round of growth above 10 per­cent in 2009 and 2010.

Growth be­gan to slow in 2011 and con­tin­ued to do so till 2016. Growth in 2017 was slightly higher than in 2016, but that doesn’t mean a re­bound will hap­pen soon.

The ’90s wit­nessed an L-shaped eco­nomic de­vel­op­ment path. This time is the same, and China’s econ­omy will linger around the bot­tom range for some time be­cause many prob­lems have not been re­solved. I dis­agree with some claims say­ing that China has en­tered a new cycle, a V-shaped re­bound.

In the short term, we will main­tain growth of 6.5 to 7 per­cent. Our macroe­co­nomic poli­cies are neu­tral — no more stim­u­lus or con­trac­tion. Main­tain­ing neu­tral­ity helps us to make ad­just­ments and re­forms that need to be done be­fore mov­ing on to the next round of nor­mal growth.

In the long run, we need to fully rec­og­nize the many chal­lenges that China’s econ­omy faces, in­clud­ing ris­ing wages and en­vi­ron­men­tal costs, and the widen­ing of the in­come gap.

In ad­di­tion, we’ve got great po­ten­tial that waits to be tapped.

Our cur­rent GDP per capita of more than $9,000 is far be­hind the $40,000 to $50,000 of de­vel­oped coun­tries. Af­ter the many years of in­dus­tri­al­iza­tion, China’s ac­tual in­dus­trial level is less than 70 per­cent. About 30 per­cent of our work­ers rely on agri­cul­ture as their main source of in­come. Our ur­ban­iza­tion level is just 55 per­cent. About 70 per­cent of the pop­u­la­tion is in low-in­come groups, half be­ing farm­ers, the other half be­ing mi­grant work­ers. This sit­u­a­tion pre­sents enor­mous room for growth and con­sump­tion. What are un­cer­tain now are ex­ter­nal fac­tors. On the pos­i­tive side, the re­cent eco­nomic re­cov­ery in de­vel­oped coun­tries is in­deed strong. The United States is at a his­tor­i­cal high of 3 per­cent growth, and Europe has had rel­a­tively high growth of 2.6 per­cent. This is ben­e­fi­cial in boost­ing our ex­port growth, as it did last year.

Then there is the Trump effect. Do we wit­ness the rise of pro­tec­tion­ism and does this mean that glob­al­iza­tion will stall and go back­ward? We need to see the big­ger pic­ture.

Glob­al­iza­tion was first pro­moted by de­vel­oped coun­tries, driven by the in­ter­ests of their cap­i­tal, en­ter­prises and multi­na­tional cor­po­ra­tions. And this driv­ing force of glob­al­iza­tion is still there. Multi­na­tional cor­po­ra­tions still al­lo­cate re­sources glob­ally, de­spite some of their work­ers op­pos­ing glob­al­iza­tion since they find it un­fa­vor­able to them­selves.

The new driv­ing force for glob­al­iza­tion is from de­vel­op­ing coun­tries, in­clud­ing China. Ten years ago, de­vel­op­ing coun­tries were con­ser­va­tive about glob­al­iza­tion and were afraid of their economies be­ing ruled by multi­na­tional cor­po­ra­tions. They later found that glob­al­iza­tion can ac­tu­ally ben­e­fit them by fa­cil­i­tat­ing de­vel­op­ment.

China is in a spe­cial sit­u­a­tion now. We want to con­tinue to at­tract for­eign in­vest­ment to de­velop the coun­try, as many places still lag be­hind, while, at the same time, the large amount of cap­i­tal ac­cu­mu­lated in the past 20 years beck­ons us to go global, look­ing for new growth points.

So in the short term, trade pro­tec­tion­ism may lead to glob­al­iza­tion tak­ing a step back or a de­tour, but it will def­i­nitely march for­ward in the long run.

Given this ex­ter­nal environment, China should pay more at­ten­tion to its do­mes­tic mar­ket, where new forces are fuel­ing growth.

The first is the change in the busi­ness environment. China has been en­cour­ag­ing en­trepreneur­ship and innovation and be­come more tol­er­ant of the prob­lems it cre­ated along the way. For ex­am­ple, bike-shar­ing and car-shar­ing busi­nesses are not al­lowed in many coun­tries, but China de­cided to let them take the step first and fix the prob­lem later. The innovation and en­trepreneur­ship China is en­cour­ag­ing to­day will be­come the coun­try’s new eco­nomic driver and con­trib­ute to a large part of growth in the years to come.

The sec­ond is the de­vel­op­ment of our fi­nan­cial sys­tem, es­pe­cially in the di­rect fi­nanc­ing area, such as ven­ture cap­i­tal, pri­vate eq­uity and eq­uity in­vest­ment.

Five or 10 years ago, we did not have such mech­a­nisms, and en­trepreneurs had to ap­ply for loans from banks when they wanted to start a busi­ness, which was very dif­fi­cult. Now peo­ple have a new mind­set and pro­vide money for ven­ture cap­i­tal. The in­creas­ing fi­nanc­ing op­tions will boost innovation and en­trepreneur­ship and will ben­e­fit our fu­ture de­vel­op­ment.

An­other phe­nom­e­non in re­cent years is the ex­pan­sion of con­sump­tion in China.

In de­vel­oped coun­tries, the whole pop­u­la­tion is a con­sump­tion force. But in China, the main con­sumers were only young peo­ple, be­cause the el­derly didn’t have much sav­ings, since they didn’t earn much in the past.

Now a wealth­ier gen­er­a­tion has reached re­tire­ment age, and these peo­ple are still en­er­getic when they re­tire at 60. With plenty of time and money, these peo­ple have started to join the main con­sumer group. From this point of view, China’s con­sump­tion is ex­pand­ing.

An­other point is that China’s man­u­fac­tur­ing sec­tor has in­jected a new force into the coun­try’s growth. As a num­ber of Chi­nese man­u­fac­tur­ers have im­proved prod­uct qual­ity, the im­age of Chi­nese man­u­fac­tur­ing in the world has changed. “Made in China” is no longer as­so­ci­ated with low qual­ity, and peo­ple have started to trust our prod­uct qual­ity; so in the fu­ture, the man­u­fac­tur­ing sec­tor will em­brace a new pe­riod of growth.

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