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China faces up to task of sustaining red-hot growth

BEIJING: Beyond the present preoccupation with whether China can gently deflate an investment bubble lies an even more urgent question: can the world’s seventh-largest economy shift the emphasis on growth from quantity to quality?

With savings and investment rates of over 40 percent and an exodus of tens of millions of peasants to more productive urban jobs, China would be hard-pressed in the short term not to keep up its record over the past 20 years of expanding gross domestic product by an average 9.7 percent a year.

But look out a bit further. China is ill-prepared financially for the ageing of its workforce, which the Centre for Strategic and International Studies says will shrink by as much as 35 percent between 2015 and 2050. With the state health care system crumbling, Chinese worry about medical bills as much as their old age. So they save rather than spend. Yet the allocation of those savings is poor. Capital markets are underdeveloped and banks still obey the state, not shareholders. So will today’s breakneck investment, 47 percent of 2003 GDP, produce a new crop of bad loans tomorrow?

“No country in history can compare with China’s investment ratio, and that’s a potential risk: high investment, high input, low efficiency,” said Xu Hongyuan, a senior economist at the State Information Centre, a government think-tank. “At worst we will experience a financial crisis, sooner or later.”

Above all, can China’s Communist Party rulers complete the transition from Marx to market?

The required reforms are known, unviable state firms need to be shut down or restructured, banks must lend for profit not for patronage, interest and exchange rates must eventually be allowed to respond to market signals not to official orders.

All Change: What links these changes is that they would entail a thorough reordering of the ruling party’s priorities. Out would go the imperative to deliver growth with scant thought to returns on investment or environmental damage.

In would come what president Hu Jintao and premier Wen Jiabao call a more balanced, human-based growth strategy to tackle one of the party’s main worries, yawning income gaps between town and country, between rich coastal regions and the poor interior.

Min Tang, the Asian Development Bank’s chief economist in Beijing, is impressed by what he calls a fundamental change in China’s thinking about development over the past two years.

“How much change there has actually been is hard to say. But nationwide there is a consensus that GDP growth-only development is not the long-term target. It’s really about quality,” he said.

Tang said it was the outbreak of the deadly SARS respiratory disease last year that rammed home how vulnerable Chinese society had become. The government is responding by spending more on health, increasing farm subsidies and promising to scrap rural taxes within five years.

It’s hard to be against sustainable development in a country of 1.3 billion people with acute water shortages and, on the World Bank’s count, 16 of the world’s 20 most polluted cities.

“Before last year I didn’t hear anybody talk about this when I spoke to local officials,” said Yao Li of the International Finance Corp, an arm of the World Bank. “Now they do, even if not everybody understands it clearly. It’s a good trend.”

Yet the drive to cool investment in industries like steel and property is triggering a backlash from powerful local politicians who have built their careers by delivering fast growth.

Shanghai party boss Chen Liangyu openly confronted Wen at a recent politburo meeting, telling him the curbs needed to be relaxed, according to diplomats and media reports.

Conspiracy theorists see the row as a bid by former president and party chief Jiang Zemin to reassert authority. Diplomats say such rivalries are the common currency of politics everywhere.

Whatever the truth, the episode has reminded companies of the political risk of doing business in China.

Joerg Wuttke, chairman of the German Chamber of Commerce in Beijing, said it was hard to imagine Chinese growth falling below 7 percent a year given the stimulus of urbanisation and the relocation of manufacturing from Europe and the United States.

“If there’s an uncertain factor, it’s politics. Will there be one centre of decision-making or will there be two or three?” Wuttke said. “There is a fierce fight in the government and the prime minister is under a lot of flak from a lot of people.”

In support of Wen’s reform agenda, the cabinet circulated new guidelines in July that would hand firms more responsibility for making investment decisions according to market forces.

Economists welcomed the move for its potential to increase accountability. Yet no one believes Wen and Hu, for all their desire to promote job-generating private firms, are about to cut loose the huge state-owned enterprises and banks that give the communist party the commanding heights over the economy.

“I don’t think they will work,” the State Information Centre’s Xu said of the investment rules. “They won’t give up their power.”

Put another way, capitalism red in tooth and claw will co-exist with blunt central-planning controls for some time yet. “There’s a long way to go for China to construct a totally market economy,” said Li Yushi, an economist with a ministry of commerce think tank. reuters

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