Ever since China’s economy entered a “new normal,” the country’s economic policy had been flip-flopping between steady growth and structural adjustment. If steady growth is the priority, then we should first secure growth and then adjust the structure. But if structural adjustment is more important, then we should allow for fluctuating or slower growth while working on structural adjustment. However, it seems that decision makers feel that both are equally vital and both need to be achieved. In theory, both goals are not mutually exclusive, although problems may surface when they are executed at the same time. Therefore, the result has been that during some periods, or in some sectors, steady growth was all-important and the government would implement various policies to stimulate growth; while at other times, the government would emphasize the significance of structural adjustment and lean towards formulating policies to adjust the economic structure. It was inevitable that these two different sets of policies would clash.
After a period of uncertainty, we finally reached a consensus, which was to achieve structural adjustment under the premise of stable economic growth, i.e., supply-side reform. However, this did not seem to have solved China’s economic woes. Recently, an anonymous “person with authority” said that China’s economic trajectory was experiencing an L-shaped path, involving a sharp decline followed by a long period of flat or stagnant growth. The questions are: when will the decline bottom out, and is it sustainable? If the drop is unrelenting, then China’s economic future will be highly unstable. At the same time, observers are starting to re-discuss whether China will fall into the middle-income trap. This is a reaction to the uncertain economic fate.
How did this happen? The Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC) is the top level designer for the next step in China’s economic reform and development. Its objective is to let the market take a decisive role while the government takes the lead. So, has it succeeded in terms of policy formulation and implementation?
China’s supply-side reform has five major components, namely: to cut excessive industrial capacity; to destock; to de-leverage; to lower administrative costs; and to improve weak links. The five tasks can be divided into two groups. Cutting excessive industrial capacity and destocking are basically the same activity, while de-leveraging, lowering administrative costs, and improving weak links are about structural reform.
For the first group, there are two ways to tackle the problem: first, shut down industries with excess capacity by administrative means; second, find an outlet for excess capacity, as showcased by the “One Belt, One Road” (OBOR) initiative. These two policies, one for reducing supply and the other for finding new demand, are correct. However, the most effective method of reducing excess capacity —urbanization — has been overlooked. The current overcapacity of some industries has been caused by previous major urbanization projects. After the18th CPC National Congress, urbanization was held up as one of the pillars for economic growth. So why is urbanization no longer emphasized?
The issue here is that urbanization did not change with the times. What does urbanization mean to the government and businesses? It is about erecting tall buildings and setting up ghost towns, yet neglecting or even being ignorant about other aspects of urbanization. Although China has been talking about a new type of urbanization, it does not know what is “new.” Actually, from the experience of countries which have gone through successful urbanization, it is not a difficult undertaking. What is needed is a transition from quantitative economics to qualitative economics.
Whether it is qualitative economics or urbanization, there is always a need for new infrastructure. The condition of the infrastructure in most Chinese cities is not up to scratch. Just look at the city sewers. Many cities will start to flood after heavy rainfall, hence there is an urgent need to improve the sewerage system. Also, most cities do not have adequate parking facilities, turning the whole city into a huge parking lot. So, every community needs to have its own carpark. China also needs to develop its senior citizen healthcare industry. As the Chinese society starts to age, the country needs to build more nursing homes. We also need more sports and pre-school facilities. All these infrastructure building will utilize a huge amount of reinforced concrete. The upgrading of cities is not only necessary — it is also a way of reducing excess capacity. So why are we not doing these? OBOR is an important avenue to trim overcapacity, but it is not the only way. Internal consumption is actually easier and safer than external consumption, including OBOR. Externally, there are many factors that are not under the control of the Chinese government; hence it may be easier to manage internal consumption. China has still much more space for consumption, but nobody is pushing for it. If we start to build the aforementioned facilities, it may spur a new wave of internal investment, thereby leading to economic growth and the upgrading of urban areas.
The rural areas also have much room for development and investment. The era of the first-generation migrant workers (people who moved from the rural areas to the cities for work) is almost over, and now we are faced with the second and third generations. If the land property rights system remains unchanged, it will be difficult for China to absorb all the migrant workers. It is partly because the second and third generations are unwilling to give up their migrant worker status. Most of them are born and bred in the cities, and it will be near impossible for them to adapt to the rural living conditions that their parents had put up with. At the same time, the infrastructure in the rural areas is also in dire straits, with no public amenities for hygiene, heating, water supply, garbage collection, etc. This has prompted farmers to go the DIY route and build their own facilities. However, this has resulted in serious pollution of the environment and ecosystem. It is impossible to ask the farmers to coordinate their efforts, so the government should take over the job of infrastructure building in the rural areas. This is another way of trimming overcapacity, yet the government has done very little about it.
If we start to build the facilities, it may spur a new wave of internal investment, thereby leading to economic growth and the upgrading of urban areas.
Things that should be done, like urbanization, have stopped; yet things that should not happen, like the property bubble, are cropping up. Recently, land prices have broken records at auctions. This is similar to what happened after the 2008 financial crisis — the government is depositing a large amount of money in state-owned enterprises (SOEs) via banks. What can the SOEs do with this money? Speculate in land. With an oversupply in the property market, this speculation not only increases the risk of the bubble bursting, it also greatly increases the operating cost of businesses. Many companies, especially private enterprises, have been forced to move out of the major cities as a result of sky-high property prices.
This issue is related to the relationship between monetary and fiscal policy. Rationally, these two policies should be used complementarily, without one being more effective than the other. If there is a problem in forking out a huge amount of money for urbanization, why not channel the money for SOEs into infrastructure building? If the money that is being used by SOEs to speculate in land is diverted to the building of facilities in the cities or rural areas, then we will see some positive changes.
The second group of tasks in China’s supply-side reform is mainly about structural reform: de-leveraging, lowering administrative costs, and improving weak links. The implementation has not been satisfactory though. To lower costs, it is necessary to reform the administrative permission system. However, the reform has resulted in confusion, as bureaucrats at all levels of government have covertly increased administrative costs instead of lowering them. Most entrepreneurs genuinely feel that it is increasingly hard to do business nowadays, as government officials are deliberately ignoring the piles of permission papers submitted by businesses.
A bigger problem is institutional oversupply, especially in the financial sector. China’s financial sector has been taken over by speculative acts, perpetuated by international and domestic players. In many sectors, the leading Chinese companies have been silently bought over by foreign capital. These purchases are like buyouts, meaning that the businesses will be “killed” rather than developed. In contrast, Chinese companies face so much more difficulty in buying Western businesses, as they are blocked politically. There is a lack of effective institutional supply policy by the Chinese government to govern the purchase of local companies by foreign businesses, such that issues of economic benefit and state security have been overlooked.
Domestically, there are many state-owned financial companies that are gobbling up healthy private enterprises. The finance sector has a part to play, including supplying funds to help enterprises to grow. However, the opposite is happening: money is flowing from enterprises into the finance sector, hindering the growth of enterprises. SOEs should be helping private enterprises develop, not destroy them.
Internet financing is another pretty thing lurking with hidden dangers. In the past, we had the Wenzhou way of financing, which was an informal loan club within a group of friends. This type of financing is safer than online P2P lending, as the club only admits close friends and there is an element of trust. As for P2P lending, cheating is rampant; it is also beyond the reach of the law. There has been unprecedented growth in the finance and internet industries, yet these two sectors are marred by speculation and cheating scandals. It is no wonder people are calling the economy a “speculative economy.”
It is not wrong to make SOEs bigger and better, but we should be practical and not overdo it. For example, in Northeast China, there are too many SOEs and not many private enterprises can survive. There is an imbalance of SOEs and private enterprises, contributing to the decline of that region. Today, there are many local SOEs that are unprofitable, compelling the government to prop them up with financial or other means. The local governments are following instructions to support the SOEs, only because it is beneficial to themselves and their families, not to society as a whole. Many of the local SOEs can actually be privatized. As private enterprises constitute a tax base, the government can actually manage these businesses using the tax system. Now, the local governments are simply moving the eggs from one basket to another, and not caring if the eggs would hatch into healthy chicks.
SOEs are now invading the private enterprise sector under the guise of public-private partnerships (PPPs). However, besides speculating in property, land, and finance, what good can SOEs do? Instead of expanding, private businesses are finding that there is now less room for them to grow. This is also the reason why they are leaving the country. If this situation continues, we may go back to the 1950s’ Communist-style PPPs. China may have a market economy, but all the money is concentrated in the state-owned financial sector, and no private enterprise can put up a good fight.
The same problem is happening in academia, notably in the discussion of the economy and economics. Of all the social sciences, economics is the least abstract, as it concerns things that are closely related to people’s lives. However, the study of economics in China has become mere copying of concepts and theories, and policies that are thus formulated are naturally difficult to implement. Local governments and enterprises are often clueless as to how to adhere to these policies. If all of these continue unabated, how can China escape the middle-income trap?
(Translated by Chean Chian Cheong)