What is damaging the Chinese economy?
To keep going, the country needs to limit the role of government-owned enterprises
After a decades-long “growth miracle,” China’s economy has lately become a source of mounting concern. Some factors – from high corporate debt to overcapacity in the state sector – have received a lot of attention. But three less-discussed trends point to still other threats to the country’s economic development. First, despite the decline in GDP growth, social financing – and especially credit – has increased.
This relates directly to China’s debt problem: the continual rolling over of large liabilities creates a constant demand for liquidity, even if actual investment does not increase. Such “credit expansion” – which is really just rolled-over debt – is not sustainable. Clearly, the debt issue must be addressed. And the Chinese government has been working to do so, implementing policies aimed at supporting debt restructuring. But these strategies cannot fully address China’s debt problem, not least because the largest share of debt in China is held by state-owned enterprises.
The second risky trend is the rapid decline in fixed-asset investment, from 20 per cent to around 8 per cent today. The decline has been particularly marked in the private sector. Given that private investment accounts for at least 60 per cent of total investment in manufacturing, this will undoubtedly have macroeconomic consequences. And, though double-digit growth in state-sector investment will temper the overall effect, this trend also reflects problems with state-sector dominance.
The third trend that should be worrying China is that unemployment remains relatively steady. Because the unemployment rate is not excessively high, this might seem like a good thing. But it reflects some negative trends – starting with long-term weakness in productivity growth.China’s productivity growth rate, which averaged 8 per cent over the last 20 years, may have dropped now to less than 6 per cent. And the country is not exactly positioned for a surge in productivity. According to the National Bureau of Statistics, the services sector has far outpaced manufacturing in employment growth since 2010, a reversal of the earlier trend.
Given the need for China to move away from manufacturing, this is not altogether bad news. But most of the service-sector jobs being created are in low-end, low-productivity activities. Worse, these are often informal jobs characterized by high turnover, which impedes human-capital accumulation. China has no easy option for addressing this problem. If the government continues to prop up State Owned Enterprises (SOEs), especially “zombie” firms, the concentration of a large number of workers in lowproductivity, stagnant SOEs will continue to undermine productivity growth. But if China pursues state-sector restructuring, unemployment will rise. And, once unemployed, state-sector workers tend take much longer to find a new job than their private-sector counterparts do.
Yet state-sector restructuring seems unavoidable. Indeed, it would help to address a number of the most fundamental challenges facing China, from debt and overcapacity to lack of competitiveness. To be sure, some claim that SOEs should be allowed to continue their operations, citing their huge profits. But those profits are the result of their monopoly status and massive state investment, which brings lower returns than private-sector investment. That is why progress on SOE reform is so urgent, regardless of the short- and even medium-term challenges that it might create.
Most of the service-sector jobs being created are in low-end, low-productivity activities. These are often informal jobs that impede human-capital accumulation
Two decades ago, then-Premier Zhu Rongji began to pursue such reform, with the goal of bolstering the efficiency of SOEs and creating space for private-sector investment. But the reforms were incomplete, and some have even been rolled back, with SOEs regaining market share in some cases. In 2013, the Third Plenum of the 18th Central Committee of the Communist Party of China took up the mantle, with a plan to reform SOEs through mixed ownership. But here, too, progress has been inadequate. And, in fact, without a strategic reorganization of SOEs, mixed ownership will become a feature of only non-essential sectors. If China is to succeed in its economic restructuring, industrial upgrading, and expansion of high-productivity services, the role of SOEs needs to be limited to a few relevant sectors. Only then can China recapture its dynamism and keep its economic development on track. The writer is Professor of Economics and Director of the China Centre for Economic Studies at Fudan University, Shanghai.
Project Syndicate