China’s economy faces big challenges

Tags: Op-ed
China’s economy faces big challenges
Bloomberg
NUMBER GAME: In this 2013 file pgoto, a pedestrian walks past the Hang Seng Index figure displayed on an electronic board at a Dah Sing Bank branch in Hong Kong, China
Without a do­ubt, the rapid socio-economic modernisation of China has been the most important development in the world economy during the past three decades. During the difficult years of the global financial crisis in 2008, the People’s Republic almost singlehandedly saved the world from a more severe downturn. Recently economic news coming out of China, however, has been less impressive. Around the globe, economic experts are concerned that a serious downturn in the Chinese economy could damage the fragile recovery of the world economy.

While economic growth of around seven per cent is respectable by any measure, it is not enough in the special conditions which China finds itself in. It was always to be expected that double-digit growth would not be sustainable for all years to come. There were repeated calls by a number of Chinese leaders for a moderation of growth, as they obviously feared an overheating of the economy and the emergence of dangerous speculative bubbles, notably in the real estate and financial sectors. However, in view of the serious backlog of economic development that is still plaguing huge numbers of Chinese, the economy has to grow very strongly. This is not only an economic but even more so a political necessity. The “mandate of heaven” of the present Chinese government solely rests on the competent management of the Chinese economy, which means high growth and low inflation.

By comparing China with India, it is easy to discern the giant leaps in socioeconomic development that the Middle Kingdom has achieved within much less than a generation. Within this short span of time, China became the factory of the world. Today it is, after Germany, the second biggest exporter of the world. When Deng Xiaoping started his profound economic reforms in the late 1970s, he had the foresight to establish special economic zones, where with foreign capital and foreign technology factories built goods solely for overseas market. In any case after the devastation that Mao Zedong had wreaked on the country, there was no domestic purchasing power available to absorb even simpler consumer goods.

While the enthusiasm of global investors for the Brics countries has considerably cooled down and while it looks increasingly so that most emerging economies will not manage to avoid the poverty trap, in China’s case, the opportunity to escape this fate is real. Of course, the Middle Kingdom, like any economy in the world is subject to the vagaries and trends in the world’s capital flows. However, particularly when one compares China’s current position with that of India, there can be no doubt that Beijing today plays in a totally different league from New Delhi. It is, in fact, frustrating to witness that many of the deficiencies that plague the Indian economy are homemade and self-inflicted. Those who have not given up hope on India are eagerly awaiting the forthcoming general election which hopefully might result in an economic rebirth of this great country.

It is in the nature of economic development and progress that a country can never afford to stand still. This holds particularly true of structural reforms. Deng Xiaoping himself had realised this, most notably when a short time before his death he made the historic and deeply symbolic “trip to the South”, instilling bitterly needed new impetus into the economic reforms. It is no secret that the administration that led the country from 2002 to 2012 did not show much courage or imagination in steering a new course in socioeconomic development. There is great expectation that the new leaders who took power in 2012-13 will embark on a bold new course.

Of course, the reform process does not get easier over time. This is evident in China’s case. To liberate the farmers and to give ample space to the enterprising spirit of the Chinese were the easier parts of the socioeconomic renewal. Following that the choice of a mercantilist approach to the national macro-economy was also relatively straight forward. China built up muscle power through a rapid and massive expansion of infrastructure and through the accumulation of ever bigger foreign exchange reserves. This muscle power is certainly most useful to absorb or mitigate external shocks on the national economy. The way China dealt successfully with the global financial crisis of 2008-10 is a case in point.

However, the new challenges that the country faces today are much more demanding and much more complex. On its way to a global economic super power, China is now entering a new ball game. The qualitative innovations that are required are similar to those undertaken by Japan and South Korea on their path to mature economies. Of course in China’s case, the dimensions are much larger. Three structural reforms are urgently required: the modernisation and transparency of the finance sector, the fight against corruption, and the strengthening of the private sector versus the still far too influential state owned enterprises. Many vested interests will have to be harmed and above all, the social challenge of a growing wealth gap amongst the population and between the different regions of the vast county will have to be dealt with.

(The writer is the Far East correspondent of Swiss daily Neue Zurcher Zeitung)

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