Editorial: Restructuring China’s Economy Requires Tackling Painful Challenges
China is trying to shift gears from traditional manufacturing and heavy industries to the technology-driven “new economy,” but there are tough challenges ahead. In January, the MasterCard Caixin BBD China New Economy Index (NEI), which gauges the pulse of China’s emerging industries, slid to 28.7, a record 3.8 percentage-point decline from the previous month. The index — which measures labor, capital and technology inputs that go into nine sectors, including biotech, renewables, internet companies and high-end manufacturing — dropped despite repeated government pledges to support these new growth areas. The weaker reading shows it’s not easy to restructure China’s economy, which relies on state-run behemoths.
China needs to fire up these new engines for long-term sustainable growth and push up its sagging productivity. It will also allow the “world’s factory” to move up the value chain to become a high-end producer. This requires persistent efforts to push forward supply-side reforms and reduce the bureaucracy’s obsession with short-term gross domestic product (GDP) targets.
Compared to traditional industries, emerging sectors such as green tech or finance require more investments in talent and technology than they do in fixed assets. Since the NEI was launched in March 2016, its monthly reading has hovered around the 30-point mark, indicating that less than one-third of the overall economic inputs went into these areas. This shows that China’s transition toward the new economy has been slow, as inputs into emerging sectors remain low.
It is a delicate act to balance between “the old,” which still plays a crucial role in stabilizing growth, and “the new,” which holds hope for future growth. During the transition, growth in fledgling sectors isn’t enough to offset the decline from traditional businesses such as manufacturing, infrastructure development and real estate, which contribute the lion’s share of the GDP. Fears of a “hard landing” may prompt policymakers to continue to focus on short-term growth targets, making it harder to wean the economy off traditional sectors, while squeezing resources of new industries.
Fostering innovation by encouraging startups, boosting research and retooling manufacturers with the latest technologies takes time. But it is the right choice for China to make it more resilient to global shocks.
It is reasonable for the world’s second-largest economy to lower its growth targets while giving priority to fostering emerging sectors. As many developed countries have experienced, a slowdown in growth is inevitable when an economy is in transition. Following a rapid ascent for over three decades, China’s traditional growth engine is losing steam. It can regain its momentum in the long run only if the country patiently pushes ahead with changes that are painful at times.
And for this, economic policy should focus on three areas.
First, speed up the reform process. Many sectors that have long been controlled by state-owned enterprises (SOEs) should be opened up further to private investors, and new business models should be given the green light, especially in services such as health care, the internet, telecommunications and finance. Meanwhile, regulatory systems should be improved to keep pace with quick changes in emerging industries while leaving the decisive role of resource allocation to the market.
Next, promote institutional innovation to support the new economy. It includes deeper financial-sector reforms to ensure more money flows into nascent sectors, especially asset-light businesses, while preventing asset bubbles and an exodus of capital from the real economy. The education system should also be revamped to cultivate talent with increased spending on R&D, and better protections for intellectual property rights must be put in place.
Finally, upgrade traditional industries that continue to stabilize the economy. But it is important to stop adding leverage and pouring valuable resources into areas riddled with overcapacity or struggling with low efficiency. More importantly, SOEs should gradually withdraw from competitive sectors, paving the way for private companies to play a greater role.
Some experts have suggested that China should allow its budget deficit to double over the next five years from the current 3% of GDP. They also recommend setting aside 10 trillion yuan ($1.45 trillion) over the next five years to invest in affordable housing, urban infrastructure and the social welfare system; support industrial upgrading; and minimize the fallout from overcapacity cuts and deleveraging efforts. Such suggestions are worthy of policymakers’ attention.
The Chinese economy should not be viewed through rose-colored glasses or the overcautious, dark tints of pessimism. Indeed, the economy is facing mounting pressure as it slows down during the transition, but it is still possible to avoid a hard landing. Focusing on long-term gains and pushing forward reforms will be key to fueling growth while insulating China from volatilities in the global economy.
Hu Shuli is the chief editor of Caixin Media.
Founder & Publisher, Caixin Media
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