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| Chinese President Hu Jintao (r) looking relaxed at a meeting with Japanese Foreign Minister Masahiko Komura in Beijing, Dec. )3, 2007. Hu pledged to step up the sound and stable development of Sino-Japanese relations. Peace between China and Japan leads to mutual benefits, and rivalry is damaging to both, Hu said. Photo: Xinhua |
Facing the world's largest trade surplus, China's exceptionally high growth is creating serious national and international economic imbalances and is unlikely to be sustained, concludes a report* by the US Conference Board, released on Monday.
The Conference Board is a private US economic research organisation.
The Conference Board issued the report through its China Center for Business and Economics, based in Beijing. While China's government clearly recognizes the risks associated with the country's current growth trajectory and is undertaking measures to reduce the trade surplus and to spur consumption growth at home, it faces serious difficulties in reversing the trend of recent years.
China's rapidly expanding trade surplus with the US has "very little to do" with an undervalued renminbi/yuan (In Mandarin, "renminbi" means the people's currency; "yuan" means unit), and faster appreciation of the currency, though welcome, would be "no panacea", according to the report.
"Faster currency appreciation, especially when combined with greater flexibility, would make it easier for the government to redress internal and external economic imbalances, but it is not a panacea and appropriate calibration is difficult," the Conference Board report said.
"Although an undervalued currency contributes to China's trade surplus, it is not a primary cause of it and has very little to do with the bilateral United States-China trade deficit," it added.
A second report from the Conference Board says that while Chinese firms still operate at productivity levels well below their foreign counterparts, they made startling progress in the early years of this decade. The report says that extraordinary growth in productivity had been the main driver of Chinese competitiveness, creating profits that companies pour back into investment that in turn leads to greater profits.
"Although the current situation is not sustainable, it is likely to continue for the foreseeable future in the absence of much more aggressive efforts to force change," says Pieter Bottelier, Professor of China Studies at Johns Hopkins School of Advanced International Studies, and Senior Advisor to The Conference Board. He is co-author of the report on the Chinese macroeconomy, with Gail Fosler, President and Chief Economist of the Conference Board.
The sectors mainly responsible for China's rapidly widening trade surplus include steel and steel products, heavy machinery, textiles, garments and electronics.
Says Fosler: "China's fast growth and rapidly expanding trade surplus are driven by a number of factors that together have created a momentum that is hard to slow and may intensify internal and external economic imbalances for some years."
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The Gathering Storm: Addressing China's Internal Imbalances
China's over-reliance on capital formation and net-exports to maintain strong growth is its most serious macro-economic problem. To make the country's economic growth model more sustainable, the government has been trying for some years to increase consumer spending. But the share of wages and household disposable income in China continues to lag GDP and investment growth, while the share of profits in GDP has increased.
The current economic imbalances actually foster other important policy problems in China. For example, while the government has attempted to boost energy efficiency, progress since 2002 has been slow because of the shift in manufacturing toward heavy industry and energy-intensive processing of ores and minerals, sometimes for foreign customers. A second serious problem is social inequality — underscored by a vast urban/rural income gap. Inequality would probably be even greater without the government's aggressive efforts to promote investment in the nation's interior provinces and autonomous regions, its extensive anti-poverty projects and its more recent efforts to channel additional subsidies to basic rural education and healthcare.
Third is environmental pollution that is made worse by the industrial imbalance in favour of heavy industry. Many of the problems are related to the insufficient enforcement of official laws and regulations, especially at local levels — but the push toward higher rates of industrial production do not help.
Why China's Economic Growth Model is Not Sustainable
The Conference Board study concludes that China's model for investment, output and net-export growth is not sustainable. Correcting forces in the form of a decline in corporate profits due to rising labor costs, an appreciating exchange rate, and rising land and utility costs will undoubtedly kick in at some point, but the cycle of high profits and high investment is still intensifying. China will probably continue to enjoy global cost advantages in many industries for years to come. Internal and external imbalances are likely to grow significantly before the current cycle ends.
The worsening of China's external and internal economic imbalances suggests that there's too much investment in manufacturing and too little in social infrastructure (health, education, social security, low-cost housing, environmental clean-up). Additional measures aimed at slowing investment growth in manufacturing are needed, the report emphasizes, along with renewed efforts to reduce the need for precautionary household savings and promote consumption. Faster exchange rate appreciation, especially if combined with greater flexibility, could support such measures by reducing net exports and by shifting the domestic incentive framework in favour of services, which remain relatively under-developed in China, but offer enormous potential for future employment growth.
Notes the Conference Board report: "If current dynamics are allowed to continue, the trade surplus, which may exceed 9 percent of GDP this year, is likely to balloon, which will intensify international trade frictions with unpredictable consequences."
China's Productivity Boom is Enabling it to Compete Effectively With World's Most Advanced Economies
While Chinese firms still operate at productivity levels well below their foreign counterparts, they made startling progress in the early years of this decade, according to the second report published on Monday by the Conference Board.
"These gains were not just a by-product of fast economic growth," says Gail D. Fosler, President and Chief Economist of the Conference Board. "More significantly, they came about because of the adoption of advanced technologies, the recruiting of a higher quality workforce, and most importantly, the rapid restructuring of firms into modern, competitive businesses."
The research contained in this report covers 1995-2003-preliminary analysis of firm-level data through 2005 suggests that the competitive restructuring of Chinese firms is continuing at a rapid pace.
The report finds that the pace of restructuring and the resulting rise in the productivity of Chinese firms should be a caution to multinational businesses that regard China solely as an untapped market opportunity. Chinese firms, including many of the lumbering and seemingly hopelessly out-dated and inefficient State Owned Enterprises (SOEs) are beginning to compete effectively with even the most advanced global companies. U.S. International Trade Commission analysis from 2007 shows that private Chinese domestic firms have taken the lead from foreign firms as exporters to the rest of the world of "made in China" products.
The report says that it is clear that the productivity gains from restructuring and reallocation in China reflect a shift towards joint venture, private- and foreign-owned firms, but also downsizing and productivity growth among surviving State-Owned Enterprises. Interestingly, while foreign firms have high average productivity, domestic private Chinese firms and joint ventures exhibit productivity growth that outpaces foreign firms. This is consistent with foreign firms creating operations with state of the art technology that makes it difficult to push the productivity frontier rapidly while Chinese firms enjoy substantial restructuring benefits as they adopt new technology and processes.
China has Other Competitive Advantages
While China's competitive landscape clearly does not yet mimic that of the U.S., the changing structure of its markets is permitting its vast resources to be used more productively and efficiently while providing entrepreneurs with incentives to seek out market opportunities both within China and in the global marketplace.
In advanced economies, as well as emerging and transition economies, competitiveness and flexibility are critical for improving productivity levels and growth rates. Flexibility at the firm level permits more productive firms to increase their market shares and to be more likely to survive and expand than less productive firms.
While much is often made about manufacturing jobs being off-shored from the U.S. to lower-wage countries such as China, in reality, the loss of manufacturing jobs was taking place in both countries simultaneously. On average during each year of the study, China lost 1.3 million jobs out of 30.8 million workers in large and medium production firms while the U.S. lost 263,000 jobs out of 18 million. Cumulatively, China lost 10 million workers in those firms over 9 years-which means a loss of more than five times the size of the total manufacturing job loss in the United States over that period.
More than one in four industrial jobs were either destroyed or created over an average one-year interval for China, while roughly one-in-five manufacturing jobs was reallocated in the U.S. This indicates enormous job shuffling and resource shifts associated with China's reform process.
"The high pace of restructuring is not surprising in a country undergoing such rapid reforms to its market structure," says John Haltiwanger, Professor of Economics and one of the authors of the report. "But China is so large that such massive restructuring has huge implications for China and the rest of the world, especially since the restructuring has been so productivity enhancing."
In the early years of the study period, large-and medium-sized domestic private firms were virtually non-existent. Even as late as 1999, employment in these enterprises was still less than one percent of the total. By 2003, they accounted for 4.9 percent. The rapid growth of private firms reflects the prosperous development of private enterprises induced by a more market-driven economy.
In 1995, SOEs and collectives contributed 75.7 percent of China's total industrial output. While their employment share was dropping, so was their contribution to the national accounts. As SOEs and collective firms were losing some 20.2 million workers, their output contribution to the industrial sector dropped 48 percentage points to 28.2 percent in 2003.
