(AFP)
Beijing is dealing with the challenges of growing debt and falling growth rates
One of the popular sayings in China has been “once the ride on a tiger has begun it is difficult to get off” (qihu nanxia).
One of the popular sayings in China has been “once the ride on a tiger has begun it is difficult to get off” (qihu nanxia). Thus after three decades of reform and opening-up policies, which catapulted China into the second largest, over $11 trillion, economy of the world, the successful model of reform is now being seen to be having many pitfalls. There is however no way of discarding the model.
Indeed, the 2013 third plenum of the 18th communist party congress, that brought the new leadership under Xi Jinping and Li Keqiang into power, suggested a further “comprehensive deepening” of the reform process by breaking state-owned monopolies. The subsequent fourth plenum in 2014 ordered implementation of rule of law across the country.
The recent reforms are comprehensive in nature and if implemented could transform China’s economy further. However, many of the statistics and economic indicators in China are suspect. For instance, while China’s Premier Li Keqiang stated that the 2015 economic growth rate reached 6.9 per cent — a “new normal” decline from above 10 percent in 2010 — Fathom Consulting’s China Macro Indicator suggests the growth rate could be as low as 2.4 per cent. Premier Li himself doubted official statistics, suggesting that the emphasis should be on freight volume, electricity consumption and bank loans instead.
Nevertheless, China’s recent efforts are comprehensive in nature. Firstly, one of the major components of China’s economy is that of the state-owned enterprises (SOEs) numbering in thousands but a hundred of them became huge conglomerates in fields ranging from iron and steel, cement, energy, automobiles to banking and finance and others. To enhance competitiveness and efficiency, China issued guidelines in September, 2015, for the reform of the SOEs, specifically on modernising them, enhancing state asset management, promoting public-private/collective ownership and preventing erosion of state assets. China has also recently announced plans to reduce overcapacity in sectors such as coal, steel and cement through the Silk Road projects in Asia, Europe and Africa.
Secondly, to overcome the problem of shrinking exports, China began shifting from exports to domestic consumption — the “third engine” of growth — and from overdependence on the manufacturing sector to that of the services. Official statistics claim that the service sector contributed nearly 40 per cent of the GDP in 2015 and the manufacturing sector declined to 40.5 per cent. If these statistics are correct then China is making major inroads in restructuring its economy towards sustainable development.
Thirdly, the 12th Five Year plan identified urbanisation as the goal to provide people with better livelihood. In 1980, 19.6 per cent of China was urbanised, and now it is about 50 per cent of the population. Today China is emphasising on small and medium-sized cities.
Fourthly, China began reforming its currency valuation. The renminbi (RMB) had appreciated substantially over a period of time as the reform and opening-up policies succeeded in enhancing the economic output value. The currency factor was a major contentious issue between China and its largest trading partners — the United States, the European Union, Japan, South Korea and Southeast Asian grouping with whom China has nearly $2 trillion in exports and imports. While the August 2015 adjustment by the People’s Bank of China is to the tune of about 4 per cent correction, it is estimated that the RMB is undervalued between 20-40 per cent. Devaluation also became necessary as debt mounted by leaps and bounds from 121 per cent debt to GDP ratio in 2010 to 282 per cent in 2014, and an estimated 346 per cent in 2015.
Fifthly, linked to the above is the reform of the stock exchange mechanism. China’s stock markets have a total capitalisation of over $10 trillion. However, stocks fell sharply by over 30 per cent in mid-2015 — that is worth about $3 trillion. China spent an estimated $1 trillion in efforts to keep afloat the stocks. On July 28, 2015, the Shanghai stocks further plunged by more than 8 per cent, indicating the ineffectiveness of the measures by the government to boost confidence. More measures were unveiled after a 7 per cent fall in stocks in January 2016.
Sixthly, since 2013, China had been making preparations for the continental and maritime Silk Roads, in addition to huge capital commitments to the newly-floated New Development Bank of the BRICS and Asian Infrastructure Investment Bank. It is estimated that Beijing would allocate a cumulative outlay of nearly $600-800 billion for these connectivity projects in the medium term. This is expected to increase export of capital, equipment and excess capacities to these areas. However, China realises that the responses of the United States, Japan, clashing sovereignty issues, spread of terrorism and others could be crucial variables in the success of the Silk Road projects.
Seventhly, as the society began ageing, China recently initiated reform of the family structure by encouraging couples to have a second child, thus expecting to add two million children every year. Although, the impact of this policy is going to be slow in changing the demographics with a reasonable time span of achieving results in two decades. The relaxation of birth-control policies are aimed at rectifying the gender balance in the population mix as well. The overall policy is also intended to enhance domestic demand by about $10 billion every year.
Eighthly, as the country is seized with the looming environmental crisis, reform measures are undertaken to address this issue. The July 2015 meeting of the Central Leading Group for Deepening Overall Reform suggested several measures to address the environmental degradation issues. At the 2015 Paris climate change summit meeting, China suggested that it is committed to build a low-carbon industrial system, with green budgets and low-carbon transportation system, in addition to ushering in norms for the polluting industries.
Thus the above Chinese measures are comprehensive in nature in transforming the economy. However, their success depends on various factors in a country where local officials hardly follow the Centre’s instructions.
Shrinking global exports have hit Chinese-manufactured goods and the restructuring towards domestic consumption is a slow process. Rising “mass incidents” across the country against privatisation is creating ripples on social and political stability. The recent Panama Papers also leave a dent on the leadership’s anti-corruption drive.
The author is Professor in Chinese Studies at Jawaharlal Nehru University, New Delhi