Going global induces economic efficiency
Amid an atmosphere of general global uncertainty, the delegates and decision- makers at the two sessions currently taking place in Beijing have a historic opportunity to establish a firm foundation for China’s economic reform process.
The two sessions consist of the National People’s Congress and the Chinese People’s Political Consultative Conference. High on the agenda of both meetings this year are questions on how to continue essential reforms to the structure of China’s economy.
The 2016 election of Donald Trump as US president has cast a pall of anxiety over international affairs. In Europe, a constitutional crisis triggered by the UK’s decision to leave the EU has distracted Europeans from paying attention to encouraging economic growth, trade and investment.
In other words, the West is currently floundering in a sea of bewilderment, hesitating about which direction to take next as it attempts to navigate the fast- moving currents of globalization.
These developments leave Beijing in the position of an influential decision- maker at a key moment in globalization. However, there are several challenges for China to overcome before it can establish itself on the world stage.
Foremost among these is how to restructure the domestic economy. Work on what Beijing calls “supply- side” reforms has been in progress since 2015, but critics claim that progress is too slow.
Nevertheless, some gains have already been made in cutting industrial overcapacity. The effects of this can be seen in the economic slowdown in the northeast, where Liaoning has become the first Chinese province to slide into recession.
The northeast “rustbelt” was the region which felt the deepest impact of a targeted reduction in coal output in 2016.
Last year, China succeeded in cutting coal production by more than 250 million tons which had been set as a target. This was done for two reasons: to reduce excessive production of fuel and to clean up China’s polluted air.
However, it is not easy to replace coal as a source of energy over the short- and mediumterm, and inevitably there were problems in 2016. Chief among these were a spike in the global price of coal and a temporary shortfall in stockpiles of coal at power plants toward the end of the year.
These developments indicate just how difficult it is to carry out reforms in an economy the size of China’s, and how urgent it is for delegates at the two sessions to find solutions which do not destabilize or derail China’s economic growth.
The target for GDP growth in 2017 has already been set at around 6.5 percent. However, it will be tricky to maintain a level of growth in the ballpark of this figure while continuing with industrial restructuring.
Apart from the need to make coal use more efficient and less polluting, there is also the problem of what to do about so- called zombie companies.
These are State- owned enterprises ( SOEs) which are not only generating inefficiencies such as industrial over- capacity but also creating high levels of debt in the economy.
Restructuring has already been taking place. The question is how to continue the work at a sufficiently fast pace without creating ripples on the surface of the economy. One possible solution to the over- capacity and debt problems which are creating a drag effect on the Chinese economy is to continue the drive to “go global.” Both President Xi Jinping and Premier Li Keqiang have stressed the need for China to be a leader in promoting globalization, and there is no doubt that this policy is intended to enable the continued growth of the domestic economy.
If Beijing can set Chinese companies to work on projects within the Belt and Road initiative, such as building high- speed railways, roads, power stations and etc., then this should not only provide a safety valve for domestic over- capacity, but also actively encourage firms to develop new and more profitable business models.
Domestically building infrastructure allows some of the overcapacity to be utilized in the short term. But once China has enough of it, then the only way to go is outward across Asia toward Europe, the Middle East and Africa.
The overall plan is to reduce domestic over- capacity by 2020, by which time much of the vital infrastructure such as high- speed railways will have been completed. At that point, it will be necessary to have a sufficiently restructured economy to make Chinese SOEs into lean, profit- making machines, rather than lumbering, debt- laden zombies.
The focus of the Chinese industry will thus have to turn within three years from the domestic to the international sphere, looking to build winwin interconnectivities with other emerging economies. It is to the details of how to make this important transition happen that the delegates at the two sessions must now devote their valuable time.