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Evaluating China's Economy
China’s largest and most prominent success thus far has been in the economic sphere.
Thanks to Deng Xiaoping’s policies, China, by opening itself up to the world, has
allowed its economy to flourish and grow, becoming the second largest economy in the
world in less than four decades. The Middle Kingdom has come to embody the notion of
an Asian economic miracle, but can the miracle last?
Following Deng Xiaoping’s moves to decrease the cult of Mao Zedong and open up to
the world, China moved first from a closed communist system to a planned economy,
then to a “partial” market-oriented economy (where the Chinese Communist Party,
CCP, is pulling the strings). China’s reforms were made gradually. The state began first
by phasing out collective farming, introducing a gradual liberalization of prices and fiscal
decentralization, creating a diversified banking system, and developing stock
markets. Increasing autonomy was granted to state-owned enterprises (SOE), while
private sector growth and foreign investments were allowed but controlled. International
trade was now becoming the basis of China’s growth. These changes resulted in
improved living and working conditions, far removed from China’s dire days under Mao.
However, given the unsettled nature of today’s worldwide economy, the current Chinese
economic situation is under scrutiny by many foreign observers. With growth slowing,
observers around the world are wondering: What is the real pulse of the Chinese
economy?
Following Deng Xiaoping’s moves to decrease the cult of Mao Zedong and open up to
the world, China moved first from a closed communist system to a planned economy,
then to a “partial” market-oriented economy (where the Chinese Communist Party,
CCP, is pulling the strings). China’s reforms were made gradually. The state began first
by phasing out collective farming, introducing a gradual liberalization of prices and fiscal
decentralization, creating a diversified banking system, and developing stock
markets. Increasing autonomy was granted to state-owned enterprises (SOE), while
private sector growth and foreign investments were allowed but controlled. International
trade was now becoming the basis of China’s growth. These changes resulted in
improved living and working conditions, far removed from China’s dire days under Mao.
However, given the unsettled nature of today’s worldwide economy, the current Chinese
economic situation is under scrutiny by many foreign observers. With growth slowing,
observers around the world are wondering: What is the real pulse of the Chinese
economy?
This said, China’s economic slowdown is due to both external factors such as the
worldwide economic slowdown (leaving China’s trading partners in bad shape) and to
internal factors such as the inefficient allocation of capital by state-owned Banks,
industrial overcapacity and well-known ticking debt-bomb that nobody can evaluate
accurately. This year, the Institute of International Finance estimated that the total
payload debt-to-GDP ratio is 295 percent. With the gloomy global economic climate,
China’s debt problem is not reassuring — mostly because nobody knows the real extent
of it. The uncertainty leads to speculations of all sorts, ranging from descriptions of
China’s debt as “wet powder” (i.e., a situation that will be defused by the government as
usual) by some optimistic investors to predictions of an unprecedented “global financial
cataclysm” by other, more pessimistic hedge fund managers.
The economic slowdown has brought back talks about a potential recession, but that’s
without counting on state intervention to contain it. In fact that state intervention is
happening — and a closer look reveals some interesting side effects on the private vs.
public sector in China. It is clear that the investments in the public sector vs. the private
are unbalanced. The government invests massively in different infrastructure projects
through its SOEs to keep the economy afloat and under control, creating in turn
unintended consequences such as the real-estate bubble and ghost malls, buildings,
and towns. Meanwhile, investments in the already-too-small private sector are
shrinking.
At the same time, the state continues to adopt sector-specific regulation through a
decision-making process that weighs the strength of domestic industries vis-a-vis
foreign competitors, along with the perceived strategic value of the sector (for more on
this, see Roselyn Hsueh’s China’s Regulatory State). On one hand, when the domestic
sector is more competitive and its strategic value is high (e.g. textiles), the state applies
a mixed orientation. If the strategic value is low (e.g. paper), the state applies incidental
controls. On the other hand, when the foreign sector is more competitive and
the strategic value is high (e.g. telecommunications), the state applies deliberate
control; if the strategic value is low (e.g. automobiles), the state applies a mixed
orientation.
Thus, the private sector is bound hand and foot in the face of governmental intervention.
The consequences for the economy are that some industries are thriving while others
are withering. Various sectors rise and fall depending on the state strategy outlined in
the current Five-Year Plan (FYP). In the latest FYP, economic reforms were high on the
government’s agenda. This was done in order to avoid over-dependency on heavy
industries, and on exports that create an unwanted yo-yo effect in the Chinese
economic landscape. But despite the talk of economic restructuring, China has yet to
find a clear path to sustainable and healthier growth.
China’s Economic Future
Beijing’s aim is reaching the perfect balance to keep its side of the “harmony” pact. In
order to do so, the CCP, with Xi Jinping at the helm, must pull different strings like a
master puppeteer. First, the government should have a clear and well-thought-out vision
about China’s economic future. They can do this by focusing on future-oriented
industries — for example, investing in renewable and green energy to avoid an
environmental and social catastrophe whose consequences may be devastating on a
very large scale. China must avoid short-term strategies and work on long-term ones
that will strengthen China’s economy over time, instead of patching it up whenever a
crisis arises.
Second, China must take steps abroad as well. This would include exporting its labor
force overcapacity to work on the many infrastructure projects under the umbrella of the
new “One Belt, One Road” initiative sweeping through Central Asia, as well as projects
won through international bidding, mainly in Africa. This would increase opportunities in
the Chinese employment market. Meanwhile, attracting Foreign Direct Investment (FDI)
must stay a priority, not only for coastal China, but more importantly for mainland
China’s poorer western provinces. Typically, FDI come from businesses. As a bonus,
this time, new groups (such as cooperatives or fair trade organizations) may enter the
FDI picture to make investment sustainable and keep it in line with communism’s
fundamental principle of economic equality. This will work to China’s benefit in both
the economic and social spheres and will lift the economy of the poor provinces out of
their current downturn.
To attract FDI, a strong currency policy must enter into force, in order to counterattack
the consequences of Brexit and to counterweight the dollar, which is still playing an
important role in financial markets. In addition, since the Chinese economy is strongly
linked to the Western economy, decreasing its dependency on exports is certainly a
must.
Third, China can keep up the “harmony” pact by satisfying needs of ordinary Chinese.
These needs include improving working and living conditions in order to boost income
over time. Hiring millions of young Chinese yearly in SOEs will continue to be inefficient
and non-productive, according to capitalist standards, but for China this will become
non-negotiable in the coming years. Stimulating the private sector to help absorb some
of the labor overcapacity is another possibility, but remains a limited avenue because of
state control.
One of the most important actions that could lead to a promising future for China is
domestic market stimulation. With a population of over 1.3 billion people, the
possibilities are endless for businesses, either Chinese or foreign. For China,
capitalizing on its domestic market would require Chinese businesses to improve both
their know-how and the quality of their products, as well as working on their branding
through innovative strategies and education. Working with universities and professional
centers to close the gap with regards to the skills shortage that companies are facing is
another must. In addition to this, containing inflation will help to stimulate household
consumption. Finally, continuing to fight the corruption that is undermining the Chinese
society, starting with Party members as Xi has already done, and restricting the
privileges of the “red” aristocracy, who are becoming insanely rich year after year, are
other venues to explore.
Furthermore, the steps taken in China will also have a positive impact abroad for
Chinese companies, and by extension for the Chinese economy in general. The
examples of Huawei and Haier speak volumes and give early signs of what may come
in the future when the Chinese wave will sweep the world.
In the meantime, China will continue to move forward, slowly aiming at harmony, the
goal of all China’s rulers since the creation of the Middle Kingdom. Harmony can’t be
reached directly in one go; it is reached through small alterations, Confucian-style. For
foreign observers, this gives the impression that the Chinese are moving back and forth
constantly, or even standing still, while actually they are gradually correcting partial
imbalances in both the economic and social spheres.
All these actions aim to reach the elusive harmony that the CCP believes will secure its
reputation and guarantee the stability of the country. However, the gradual pace of
these various systemic corrections (economic and social) must not handicap
China’s momentum, especially in the face of competition from more market-driver Asian
neighbors.