Only real economy can ensure sustainable progress
During the economic development of the past 40 years, China has seen the emergence of a number of famous brands such as the tech giants known as BAT (Baidu, Alibaba and Tencent). But behind the shining record, there are weaknesses and risks. There has been a lot of zeal for speculation, especially in the real estate market, and the real economy has been somewhat neglected due to its perceived low returns.
The real estate policies in the past decade have distorted the market, turning homes into investment tools. Young people in major cities such as Beijing, Shanghai and Shenzhen can barely afford an apartment without financial help from parents on both sides. With such pressure, it is not surprising that young people become more profitdriven and also engage in short-term speculation.
With such high living costs, young people don’t feel attracted to the real economy, in which businesses often require more than a decade to succeed. China’s structural transformation and innovation-powered economy will only be slogans if the real economy is left behind.
But China’s real economy is beset by various problems.
One drawback is that China lacks core technology. China is strong in terms of software, but it still needs to change the rules of game if there is to be any chance of coming closer to the technological level of most developed countries.
The second shortcoming lies in advanced manufacturing. China is still not able to produce some key parts and equipment, such as aviation engines and chips. The materials, craftsmanship and equipment are still lagging behind in these areas.
Third, China does not have brands that can compete with the biggest global names. China is proud of its thousands of years of history, but sectors such as luxury goods are dominated by European brands. Chinese brands are less likely to be household names and are often seen as affordable rather than offering high quality. It will take time and effort for Chinese brands to challenge their Western rivals.
There are four aspects China has to work on to secure a successful economic transformation.
First and foremost, the market has to play a decisive role in the allocation of resources. Entrepreneurs rather than bureaucrats must be given more voice and respect. This will require a more developed and independent legal system to protect the property rights of entrepreneurs and corporations.
Second, the education and research system must truly encourage independent thinking and innovative research as well.
Third, the real economy must become more prominent. In 2017, banking and real estate companies accounted for majority of the total net profit of more than 3,000 listed companies in the A-share market. Companies as well as individual investors poured money into real estate speculation. Government policy is needed to adjust this situation.
Last but not least, entrepreneurs need to be more patient. Most of China’s entrepreneurs are obsessed with creating new business models and becoming players in the virtual economy. This is like putting the cart before the horse. Some of them have fallen into a loop of putting together so-called innovative projects, pumping up their company valuations and eventually cashing out. Not enough of them have focused on laying foundations for core technologies, advanced manufacturing and powerful brands.
Economic reform and transformation is an arduous task. The China-US trade friction this year has shown the advantages and underlying strength of the Chinese economy. But it has also exposed some shortcomings. Chinese people must wake up to the dangers of overheated short-term speculation. The real estate industry has generated exorbitant profits, but it is time to end this distortion and give more weight to the real economy. Improving people’s livelihoods so that they can devote their energies to the real economy is what will matter most in the long run.
The author is deputy director with the International Monetary Institute at Renmin University of China. bizopinion@globaltimes.com.cn