China's re­bal­anc­ing act

The Pak Banker - - OPINION - Ajit Ranade

015 was a wa­ter­shed year for China. For the first time in more than two decades its growth rate dipped be­low the psy­cho­log­i­cal mark of 7%. This was no mere tem­po­rary blip. It was a har­bin­ger of an era of lower growth. Top Chi­nese of­fi­cials made this a talk­ing point much be­fore the data be­came of­fi­cial. "It was an­tic­i­pated," they said. It was an inevitable con­se­quence of a large base. China is now a 10 tril­lion dol­lar plus econ­omy, so dou­ble-digit growth is surely a thing of the past. Added to this are tepid global prospects, which is bad news for an ex­port-de­pen­dent econ­omy.

The lower growth sce­nario got a stamp of ap­proval this month as the Na­tional Peo­ples' Congress passed the 13th Five-Year Plan. The plan aims for 6.5% growth for the next five years. China has moved to a per­ma­nently lower or­bit. Does this mean that the China scep­tics are be­ing vin­di­cated? Is the jug­ger­naut stalling? Is a hard land­ing round the cor­ner? No, such a prog­no­sis is not sup­ported by cur­rent data. If China grows at 6.5%, it will reach $15 tril­lion in 2020. That is spec­tac­u­lar com­pared to near-zero growth in the euro zone or stag­na­tion in Ja­pan. Even fel­low BRIC mem­bers Brazil and Rus­sia are strug­gling with re­ces­sion and neg­a­tive num­bers. Note that China is still adding jobs in big num­bers. It added 64 mil­lion jobs dur­ing the 12th Plan, at a time when its own labour force is plateau­ing. The hous­ing mar­ket is still healthy, even if some­what frothy. Hous­ing prices are a re­li­able gauge of house­hold sen­ti­ment and the pace of ur­ban­iza­tion.

All this is not to deny that China's econ­omy is un­der­go­ing a fun­da­men­tal change. The 13th Plan is thus a turn­ing point. The devel­op­ment strat­egy will shift away from the course of ex­port-led growth of the past three decades. Even be­fore Pres­i­dent Xi Jin­ping's regime, there was talk of "Har­mo­nious So­ci­ety" and more in­clu­sive growth. There was talk of cor­rect­ing the var­i­ous im­bal­ances in the econ­omy and re­duc­ing in­equal­ity.

There are ba­si­cally five di­men­sions along which the re­bal­anc­ing and growth will oc­cur. The first is a shift of em­pha­sis from for­eign to do­mes­tic. The slow­ing world econ­omy has caused global trade to fall sharply. So China's early and ex­tra­or­di­nary de­pen­dence on ex­ports will have to di­min­ish. The de­pen­dence on do­mes­tic driv­ers will in­crease and in­clude both con­sump­tion and in­vest­ment. The sec­ond re­bal­anc­ing is from in­vest­ment to con­sump­tion. China's in­vest­ment to gross do­mes­tic prod­uct ra­tio at 45% is still too high. No other large econ­omy has had such a big share of in­vest­ment for such a long time. As a re­sult, the share of con­sump­tion spend­ing has fallen from around 55% to less than 40% in the past two decades. The re­turn on cap­i­tal in­vested has fallen from around 16% to less than 3% now. Ex­ces­sive in­vest­ment means waste of cap­i­tal, and hence needs to fall. In­creas­ing con­sump­tion will need tax re­form and a less co­er­cive regime for sav­ings.

The third re­bal­anc­ing is from ur­ban to ru­ral. The lat­ter in­cludes devel­op­ment of tier 2, 3 and 4 cities and towns as well. This re­bal­anc­ing also means mov­ing devel­op­ment to more back­ward re­gions like the prov­inces of the north­west. It calls for re­duc­ing re­gional in­equal­ity. China's ur­ban­iza­tion is around 54%, and the 13th Plan aims to reach 60%. This is still be­low de­vel­oped econ­omy stan- dards. But the pace of ur­ban­iza­tion needs to slow down. The fourth re­bal­anc­ing is be­tween the old and new econ­omy. China has an over­hang of ex­cess ca­pac­ity in a va­ri­ety of sec­tors. Dur­ing the 13th Plan, coal pro­duc­tion ca­pac­ity will be cut by 500 mil­lion tonnes and steel ca­pac­ity by 150 mil­lion tonnes. More than 1.8 mil­lion work­ers are ex­pected to lose their jobs in these two sec­tors alone.

Dur­ing 2015, China wit­nessed 2,700 strikes and protests, dou­ble that of the pre­vi­ous year, as per China Labour Bulletin. This is a symp­tom of dis­rup­tion and dis­lo­ca­tion that will come out of the re­bal­anc­ing away from old-econ­omy in­dus­trial sec­tors to new-econ­omy con­sump­tion-ori­ented sec­tors. This is al­ready man­i­fest­ing in a se­vere slow­down and ris­ing un­em­ploy­ment in the rust- belt prov­inces of the north­east, Jilin, Liaon­ing and Hei­longjiang. This re­ori­en­ta­tion calls for worker re­train­ing and reskilling. Thus the job cre­ation dur­ing 13th Plan will re­quire ca­ter­ing both to new work­ers as well as those dis­placed by the re­bal­anc­ing be­tween old and new sec­tors. The last re­bal­anc­ing is be­tween cur­rent and fu­ture gen­er­a­tions. This ba­si­cally calls for greener and more sus­tain­able growth, thereby leav­ing a bet­ter world for to­mor­row. China's en­ergy in­ten­sity, i.e., en­ergy use per unit of GDP fell by 18% dur­ing the 12th plan. The 13th Plan aims to re­duce this fur­ther by 15%. China's en­ergy in­ten­sity is how­ever still far more than de­vel­oped economies'-5.4 times that of Ja­pan, for in­stance.

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