4
focus: balance
facebook.com/insightedinburgh
Time for Change: Redirecting the Chinese Dragon
issue 7 Zhou Ding
Kenzo Muller analyses the necessary re-balancing in the Middle Kingdom IN THE WINTER of 1978, China’s top decision-making figures convened to discuss possible reform after emerging from a decade of social unrest and political restructuring. The Third Plenum of the 11th CPC Central Committee emphasised economic policy over ideological adherence, which was taken to the extremes during the Cultural Revolution, and confirmed Deng Xiaoping as de facto leader of the Communist Party. Known for his pragmatic approach, Deng Xiaoping enacted a series of controversial reforms based on capitalist principles such as private ownership, investment and trade.
Waking the sleeping giant The opening up of China to the world economy set the country’s new development path on foreign investment. Over the next three decades, the country underwent economic and social metamorphosis from a relatively isolated command economy to the world’s largest manufacturer and exporter, raising millions out of poverty in the process. In November of 2013, the Party is scheduled to hold another third plenum, this time of the 18th Communist Party of China (CPC) Central Committee, under the leadership of the General Secretary incumbent Xi Jinping. Topics of discussion range from land reform to the role of state-owned enterprises to environmental issues. The plenum suggests China is reaching another crossroads in its road of economic growth. While Xi Jinping is unlikely to be as radical a game changer as Deng Xiaoping, his outlook is still reformist within the limits of the
current economic system. The 18th Central Committee recognises that many of the reforms instituted in the Deng era are unsustainable and perpetuating imbalances in the Chinese socioeconomic structure. Widening gaps between consumption and investment, exports and imports, as well as geographic and demographic factors, top the agenda of the plenum.
Old habits die hard In 2013, investment continues to play an integral part in the Chinese economy, accounting for over half of GDP growth. Yet recent economic data show a marked slowdown in growth. Quarterly growth ‘rebounded’ to 7.8% in the 3rd quarter, the highest it has been for 10 consecutive quarters, but still comparatively low to the ‘double-digit rates’ enjoyed during the 1990s. This can be understood intuitively; an economy cannot spend indefinitely on investment projects such as highways, airports and factories, as its returns will diminish over time and cease to remain profitable. Yu Yongding, director at the Chinese Academy of Social Sciences provides a telling example of overcapacity in the steelmaking industry, of which only 70% of its capital was utilized in 2012, generated a profit rate of 0.04% that same year. The profit reaped from two tons of steel would not be enough to buy a Cadbury’s Wispa. Underutilization of capital and general inefficiency is a recurring theme of government designated ‘strategic industries’ such as the steelmaking industry or telecommunications industry. While the role of state-owned enterprises was heavily reduced by privatization reforms
enacted by Deng Xiaoping, SOEs have seen a recent resurgence since the government provided a stimulus package to safeguard these industries from the effects of the financial crisis.
Global expertise Exports are also a shaky foundation to base the world’s second largest economy on, as it is dependent on global demand and an undervalued currency. In fact, recent exports have been fluctuating precisely because of these two factors. The Chinese renminbi has appreciated over 30% in value against the dollar since 2005, affecting the competitiveness of Chinese exports as they become relatively expensive to global importers. With the Eurozone still stuck in its debt crisis and the U.S. only beginning to recover from recession, global demand for imported goods remains unstable at a lower base level, fluctuating according to how these major trading partners assess their economic outlooks. China’s dependence on foreign demand is exemplified by the solar panel industry, where 88% of all solar panels produced in 2011 were shipped overseas. This summer, Chinese authorities were accused by the E.U. of predatory pricing of solar panels and encouraging dumping practices in the European market. The dispute remains unresolved with both parties threatening to raise tariffs on their respective imports of solar panels and wine. While the strict definition of dumping is selling below cost and thus making a loss on each unit