China’s Transition To The “New Normal”: Challenges And Opportunities
By Alvin Cheng-Hin Lim

China’s Transition To The “New Normal”: Challenges And Opportunities

Mar. 01, 2016  |     |  1 comments


In May 2014, during an inspection tour of Henan province, Chinese President Xi Jinping raised the issue of China’s transition to a “new normal.” Buffeted by problems with the real estate market, domestic demand, and exports, China’s economic growth has been decelerating, reaching 7.4% in 2014, leading the Chinese government to set a soft growth target of 7% for 2015 (Tiezzi, 2015; “China likely,” 2015). In Henan, President Xi called on the Chinese people to remain calm in the face of the economic slowdown, while, more recently at the 2015 session of the National People’s Congress, Chinese Premier Li Keqiang explained that this slower pace of growth is in fact healthy for the economy, as it will lead to sustainable and high quality growth for the coming decades (“China’s lower growth,” 2015; “Xi's ‘new normal,’” 2014). While cynics may doubt if such sustainable and high quality growth can be achieved, developments on the ground, as we shall see in this paper, suggest that there are indeed grounds for optimism.


The coming period of slower growth will be one of structural change. The double-digit growth under the “old normal” between 1978 and 2013 was driven by exports and investments in fixed assets. These three and a half decades saw China growing at a rate of approximately 10 percent per annum, with a peak of over 11.5 percent annual growth between 2003 and 2007. However, the “old normal” ended in the early 2010s, which saw growth decelerating to 7.7% in 2012 and 2013 (“China lowers growth,” 2015). Experts see this slowdown as a symptom of China’s dual transition to a consumer-based economy as well as the upgrading of Chinese industries from the production of lower to higher value goods (“China’s lower growth,” 2015). The Chinese government believes this movement up the global value chain will generate growth at a medium-to-high level which can then be sustained for the next two decades (“China likely,” 2015).

The achievement of this sustainable medium-to-high growth will be essential for the Chinese people to achieve what President Xi has described as China’s dream of national rejuvenation (“Profile: Xi Jinping,” 2013). A key aspect of this “Chinese Dream” is economic. As stated in President Xi’s theory of the “Four Comprehensives,” the promised rejuvenation of China includes the achievement of a moderately prosperous society (“Xi’s ‘Four Comprehensives,’” 2015). As Premier Li observed at a news conference following the closing of the 2015 session of the National People’s Congress, while China has become the world’s largest economy, its huge population means it is only 80th in the world in terms of per capita GDP, with almost 200 million citizens still living in poverty. By this standard, China is still a developing country, and the promise of living in a moderately prosperous society remains a powerful dream for millions of Chinese citizens (Arends, 2014; Li, 2015). While this is a difficult challenge, it is not impossible to achieve. Chinese economist Justin Yifu Lin calculates that for China to double the GDP it achieved in 2010 by 2020, it will need to grow by at least 6.8% annually between 2014 and 2020 (“China likely,” 2015).

Challenges and Opportunities

Why did China’s economic growth begin to decelerate in the 2010s? The long-term cause is the maturing of the key factors in the productivity of the Chinese economy. After their astonishing growth during the decades of the “old normal,” China’s labor supply, capital investment, and technological growth have all finally peaked and are on the decline, leading to slower growth in the years ahead. The short-term cause was the increase in government, household, and corporate debt. While this functioned as a stimulus that helped China bounce back after the global economic crisis of 2008-09, the burden of repayment lowered subsequent spending, and this contributed to the recent downturn in China’s real estate sector (“Why China’s economy,” 2015). The glut of unsold housing units has led to the appearance of so-called “ghost cities.” While the international press has run sensationalistic articles on these “ghost cities,” more sober observers have pointed out that previous “ghost cities” in China have eventually filled up with inhabitants, but this transition from “ghost” to living cities does not attract the same international press attention (Chan, 2009; “The ghost towns,” 2010; Shepard, 2014a; Shepard, 2014b). One hypothesis for the inventory of unsold housing units is that these units have been wrongly priced, and that they would receive offers of purchase if priced correctly. This was the experience of the Chinese-built Kilamba Kiaxi housing development in Angola, which remained a notorious “ghost city” until the developers lowered the prices of the housing units (Benazeraf & Alves, 2014).



China’s labor supply, capital investment, and technological growth have all finally peaked and are on the decline, leading to slower growth in the years ahead.

Nonetheless, the recent slowdown in real estate development has led to a slump in related industries, including steel, glass and cement production, and this has led to a proliferation of so-called “zombie factories.” These are the thousands of inefficient state-owned enterprises which are fiscally insolvent, but are being given financial and political support by local government officials to avoid bankruptcy, thereby maintaining a false image of local economic well-being. While this not only wastes precious public funds, it also exacerbates corrupt dealings between these officials and the executives from these failing enterprises (Anderlini & Gu, 2014). As we shall see later, the Chinese government has identified such dealings as a key target of their anticorruption campaign. The slowdown in real estate development has also led to a downturn in land auctions. This is having a negative impact on China’s economic growth, as the proceeds from land auctions constitute a significant part of local government revenue. Recent statistics from the Chinese Ministry of Finance indicate that a 36.2% decrease in proceeds from land auctions has contributed to a 6.3% decrease in total government income in the first two months of 2015 (Timmons, 2015).

With the slowing economy, job creation has become a key challenge for China to achieve its goal of a moderately prosperous society. The government has projected that 15 million students from universities, technical, and middle schools will enter the job market in 2015, and that these students will be joined by 3 million surplus farm laborers who will also be looking for work (“China faces,” 2015). While China’s human resources ministry has set a target of over 10 million new urban jobs for 2015, it faces challenges from the slowing economy, which has slowed the creation of new jobs. Human resources experts note that the hiring sentiment of Chinese employers has dropped to its lowest level since the global economic crisis of 2008-09 (Magnier, 2015). The government remains optimistic that the challenge can be won, however. Premier Li pointed out that 1% of GDP growth translates into the creation of almost 2 million new jobs (“China lowers growth,” 2015).

Economic trends overseas can help China to ameliorate the downward pressures from its slowing economy. In particular, China is taking advantage of opportunities arising from the global collapse in commodities prices, in particular, crude oil, copper and iron ore. Economists estimate China is enjoying savings of up to 250 billion USD from its stockpiling of these discounted commodities, and the cheaper crude oil in particular is allowing China to rapidly achieve its objective of building a 90-day strategic petroleum reserve by 2020 (Magnier & Yap, 2015). To put the windfall savings of 250 billion USD into context, this is more than the total funds invested by the Chinese government into the Asian Infrastructure Investment Bank, Silk Road Fund, and New Development Bank, the primary financing vehicles for China’s overseas infrastructure projects, including those which will come under the “Belt and Road” framework (Magnier & Yap, 2015; Lim, 2015a).

The Anticorruption Campaign

As mentioned earlier, the Chinese government’s anticorruption campaign has become a key instrument in transitioning China to the “new normal,” especially since it eliminates the irrational diversion of precious government funds for economically wasteful purposes. Under President Xi’s leadership, the government has investigated not just low-level “flies” but also high ranking “tigers,” including Bo Xilai, Zhou Yongkang, and the late Xu Caihou. The government has also launched operations to capture corrupt officials who have fled overseas, as well as a “mass line” campaign to reform undesirable attitudes and behaviors such as hedonism and extravagance (Ting, 2015; “Xi leads China,” 2014). As mentioned earlier, cronyism between government officials and executives at state-owned enterprises has also been targeted by the anticorruption campaign, thereby removing these obstacles to the reform of these inefficient enterprises (“China in 2015,” 2015; “China gets tougher,” 2015; “China said to plan,” 2015; “‘Tigers’ caught,” 2015). More generally, the anticorruption campaign represents a significant opportunity for the Chinese government to clear the “dead wood” and achieve the goals listed under President Xi’s “Four Comprehensives.” In particular, the goal of achieving the rule of law will allow China to achieve social justice. The removal of corruption is a key step towards achieving a society governed by the rule of law as well as social justice. Politically, the reform or removal of corrupt party cadres at all levels is essential for the long-term survival of the Communist Party of China (“Xi’s ‘Four Comprehensives,’” 2015).

Economically, the anticorruption campaign appears to have a negative multiplier effect, with reduced spending by corrupt government officials and corporate executives reducing the revenue of a range of enterprises including luxury retailers, restaurants, as well as casinos in Macau and even Singapore (Ranasinghe, 2014; Armstrong & Daga, 2014; “Macau Crackdown,” 2015). A report from Bank of America Merrill Lynch estimates that the anticorruption campaign could have cost the Chinese economy over 100 billion USD in 2014 (Sudworth, 2014). In the case of Macau’s casino-based economy, the anticorruption campaign has been a key factor in its 17.2 percent contraction in the fourth quarter of 2014 (Riley, 2015). However, these negative economic impacts should be seen in the perspective of short-term losses vs. long-term gains, especially given the damage corruption inflicts on social cohesion, not to mention the distortions it inflicts on the proper functioning of the economy. The long-term gains of the anticorruption campaign hence include social justice as well as greater efficiencies in the economy (“Anti-corruption,” 2015).

Engines of Growth

Given the slowdown in the economic sectors that powered China’s growth during the “old normal,” the country needs new engines of growth to power its economy in the “new normal.” These are emerging from the ongoing structural transformation of the Chinese economy. In early 2014, the services sector grew faster than manufacturing (“Xi leads China,” 2014). Indeed, Premier Li emphasized entrepreneurship and innovation as new engines of growth for the Chinese economy, and that these will be supported with increases in domestic consumption as well as accelerations in administrative reforms (“Chinese premier,” 2015). Of course, the older engines of growth are not to be neglected, and the government will increase its expenditure on public goods and services, further stimulating the economy (“China likely,” 2015). China’s National Development and Reform Commission has planned investments in infrastructure worth almost 7 trillion RMB (“China in 2015,” 2015). These include investments of over 800 billion RMB in railway construction, with a further 800 billion RMB in water conservation in 2015. To further stimulate the economy at the local level, the Chinese government will increase the local government deficit to 500 billion RMB in 2015, a 100 billion RMB increase from the previous year (“China lowers growth,” 2015). Premier Li notes that over 70% of local government debt has been used to finance sound investments which stand to yield returns (“70 pct,” 2015).

Innovation can be seen in a number of China’s up and coming infrastructure projects. The Zhengzhou Airport Economic Zone, for example, is a new development based on the novel concept of the “aerotropolis.” Zhengzhou’s new airport will be the hub of a city that is planned to house 2.6 million people by 2025, with districts for industry, logistics and R&D. Zhengzhou is not alone. Over 100 airports are currently being constructed across China, and like the Zhengzhou Airport Economic Zone, these are designed as economic stimuli for their local economies (“Aerotropolitan ambitions,” 2015).

As mentioned earlier, the Chinese government is also planning to reform the country’s state-owned enterprises, which currently number over 100,000, transforming them into efficient engines of growth. While these enterprises contributed 48 trillion RMB to the Chinese economy in 2014, their return on assets was 6% less than those of China’s private enterprises (Zhang, 2015). The restructuring plan, which follows the model of Singapore’s Temasek Holdings, includes the consolidation of these enterprises by industry, followed by reorganization of the newly-merged companies as asset-management firms. The restructured enterprises are expected to go public by 2025 (Wei, 2015; “China Said,” 2015). The success of such major restructuring depends on the cooperation of the corporate executives, which explains the intensity of the government’s anticorruption drive’s recent probes into these enterprises.

Apart from revitalizing the older engines of growth by restructuring its state-owned enterprises, the Chinese government has also sought to increase the business of its industrial sector by encouraging the companies concerned to go global (“China Said,” 2015). While many, including Chinese multinational corporations like Huawei and Haier have achieved this, other companies need further encouragement from the government. The “Belt and Road” initiatives which were announced by President Xi in 2013 can be seen as the Chinese government’s attempt to arrange multiple business opportunities for Chinese industrial enterprises in these massive overseas infrastructural projects (Lim, 2015a).

Not all of China’s new industrial business is located overseas. In 2014, China managed to win significant industrial investments, notably in the automobile manufacturing sector. These include Dongfeng Peugeot Citroen Automobile’s 2 billion USD investment in a fourth plant in Chengdu; FAW-Volkswagen’s 1.9 billion USD investment in a plant in Qingdao; and Shanghai General Motors’ 1.2 billion USD expansion of its Wuhan plant. Outside of the automobile industry, Voestalpine AG invested 180 million USD with China’s Kocel Machinery in a steel plant in Yinchuan; Coca-Cola invested 100 million USD in a green plant in South Harbin Industrial City, part of its larger 4 billion USD investment in China; Kemira invested 100 million USD in a paper chemical plant in the Nanjing Chemical Park; and Honeywell Turbo Technologies invested 10 million USD in a turbocharger plant in Wuhan (“Top 10,” 2015).


The Chinese government is also planning to reform the country’s state-owned enterprises, transforming them into efficient engines of growth.


To attract more such investments, China is accelerating its free trade zone (FTZ) strategy, with new FTZs being approved for establishment in Tianjin, Fujian, and Guangdong (“China to speed,” 2015; “Chinese government,” 2015). Like the “Belt and Road” projects, the FTZs are intended to serve as the new engines of growth for China’s “new normal.” While their launch dates have not yet been announced, it is known that these new FTZs will be based on the original Shanghai FTZ, which was launched in 2013 (Lau, 2015). China’s earlier Special Economic Zones (SEZs) were focused on allowing the government to experiment with the liberalization of rules to best attract foreign investment in the manufacturing industries, and they soon became the engines of China’s “old normal” double-digit growth. The younger Shanghai FTZ, in contrast, was established to allow the government to experiment with the liberalization of rules to attract investment not in the manufacturing industries but in the financial industry (Cox, 2013; Schuman, 2013). The new FTZs in Tianjin, Fujian, and Guangdong will have different emphases. Guangdong FTZ will focus on increasing its economic linkages with Hong Kong and Macau. Fujian FTZ will focus on cross-straits economic cooperation with Taiwan, while Tianjin FTZ will focus on Jing-Jin-Ji (Beijing-Tianjin-Hebei) integration, as well as cooperation with Shanghai to increase the global reach of China’s maritime industry. The original Shanghai FTZ will be expanded, and more industries will be added to the reform program (Huang, 2014; “Free trade zones,” 2015). Apart from Tianjin, Fujian, and Guangdong, other provinces and cities have applied to establish FTZs, including Guangxi, Hefei, Henan, Liaoning, Shandong, Sichuan, Suzhou, Wuxi, Yunnan, and Zhejiang (“China approves,” 2014).


Among the investments the Chinese government hopes to attract in particular are those which will strengthen the country’s innovation in science and technology (“China to speed,” 2015). Technological innovation can already be seen in China’s arms industry, where it has recently overtaken Germany to become the world’s third-largest arms exporter. This has been achieved through investments in military R&D, allowing China’s arms manufacturers to produce technologically sophisticated weapons like unmanned combat aerial vehicles. With this movement up the technological ladder, China has gained new markets for its arms exports, including Bangladesh, Myanmar, and Pakistan. African militaries are also becoming a growing market for Chinese arms exports (Wall & Cameron, 2015; Lin & Singer, 2015). Technological innovation can also be seen in China’s energy sector, where investments in green energy (wind, solar, and hydropower) have taken root across the country’s vast energy grid, such that in 2014 China generated less power from fossil fuel sources than in 2013, while its power generation from green sources increased by 20% (Mathews & Tan, 2015). Indeed, China’s construction of wind and solar power farms, as well as its manufacturing of the plant and equipment for renewable energy production is greater than that of other countries (Mathews & Tan, 2014). While at present this isn’t sufficient yet to curtail the country’s pollution crisis, the trend towards green energy points towards a cleaner future for China.

Robotics is another area where technological innovation can be seen. The demographic decline in China’s working-age population, coupled with changing attitudes among China’s young adults toward manufacturing jobs, has led to shortages in labour for China’s factories. China’s existing population of industrial workers also increasingly expects higher wages. These labor issues have led Chinese factories to attempt supplementing their human labor with robots. Indeed, some companies like the appliance manufacturer Midea have implemented factory automation. This has created a new market for robot manufacturers. In 2014 China became the world’s largest market for industrial robots. While foreign robot manufacturers are currently dominant in China, Chinese robot manufacturers are catching up, especially since they offer cheaper systems (Li, Wang, & Zhang, 2015). In line with industrial robotics, another promising source of technological innovation for China’s “new normal” is the development of artificial intelligence (AI). Robin Li Yanhong, the founder of Baidu, recently sought the partnership of the Chinese military to establish the “China Brain” project. If fulfilled, the “China Brain” project promises advances in key technological fields like robotics and human-machine interaction. In 2014 Baidu recruited Andrew Ng, the founder of Google’s “Google Brain” AI project, to be its chief scientist. Baidu’s planned partnership with the Chinese military is important given the military’s rich resources and demand for advanced technological solutions (Perez, 2015).

These promising new engines of growth, combined with the revitalization of China’s older engines of growth, suggest that China will be able to meet the challenges of its “new normal.” Recent economic forecasts using innovative Big Data methodologies suggest that China, despite its slowdown, is still on track for growth, and that the Chinese economy, along with that of neighboring India’s, will triple over the next 7 years, generating a regional economy worth 26 trillion USD (Buchanan, 2015). If this prediction is true, the 21st century will indeed be the long-promised Asian Century, with China playing a leading role in global development.

Afterword

This paper was originally published in Eurasia Review (Lim, 2015b). Since that time of writing, the International Monetary Fund has estimated China’s growth to slow to 6.8% in 2015 and 6.3% in 2016. This slowdown has reduced China’s demand for commodities, and the subsequent collapse of global commodity prices has slowed the growth of the world’s emerging economies to just 4% in 2015. This has also impacted global growth, which slowed to 3.1% in 2015 and is estimated to reach 3.6% in 2016 (Chance, 2015). This highlights the importance of China’s new engines of growth like the “Belt and Road,” which has recently expanded into new sectors including nuclear energy cooperation with Saudi Arabia and Iran (Lim, 2016). The Chinese government is also considering the adoption of supply side reforms to resolve domestic structural problems like industrial overcapacity (“The Great China,” 2015; “Supply-side reform,” 2016). In addition, the Chinese government has sought to reduce domestic industrial overcapacity by encouraging the transfer overseas of production supply chains. Such production capacity cooperation has the potential to become win-win cooperation, as it offers a significant opportunity for the cooperating partner economies to accelerate their industrial development (Lelyveld, 2015; “Production capacity cooperation,” 2015).

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1 Comments To This Article

  • marks
    marks

    on Mar 01, 2016 at 12:09 AM - Reply

    1

    The main question is whether the world can adapt to China’s new normal, especially for countries increasingly dependent on Chinese growth model. Also, can Beijing continue to compensate for the slowdown to protect its “bottom line” for social stability?

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