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Overspeeding China Must Slow Down

UTRECHT, The Netherlands, Nov 19 2010 (IPS) - Rosy figures tempt China to postpone much-needed reform, says a renowned Chinese economist. “Much growth is non-productive, with enormous speculation widening the gap between rich and poor.”

The Chinese government is “too much focused on speed”, says Prof. Wang Jianmao, a liberal economist at the China European International Business School in Shanghai. “But just as a ship needs to slow down in order to repair its engines, our economy needs to slow down if it wants to tackle structural problems which endanger future growth.”

There are different economic engines, like exports, investments and consumption. “The vital engine of consumption, however, is not working in China. If we delay repair the other two will stop at the same time. Not a single country can sustain growth when its economy keeps growing with double- digits.”

From 2004 to 2007 the Chinese gross domestic product increased by more than ten percent each year, peaking in 2007 at 14.2 percent. That slowed down to 9.6 and 9.1 percent in 2008 and 2009, but Beijing hopes to return to rates above ten as soon as possible. “That would be very dangerous”, says Wang. “That kind of growth is a growth borrowed from the future. To unleash our potential, we need institutional reforms which are long overdue.”

In the midst of success, it’s easy to postpone painful measures. This year, as many as 54 Chinese companies made it into the Fortune 500 list of biggest companies. Three Chinese companies, a refiner and two electric conglomerates, rank among the top ten.

“That doesn’t mean they are productive”, says Wang. “They have had access to unlimited amounts of cheap money. The interest rate for them has been lower than inflation. They keep on investing up to the point of serious overcapacity, which has a negative effect on both the returns and the prices. In other words, they waste people’s money.”

Big profits without adding value and creating jobs is a bad strategy for a country that urgently needs more consumer spending, says Wang. “Labour income as a share of gross domestic product has been declining for years. Instead of supporting capital-intensive industries, we need small and medium enterprises, in order to create labour-intensive jobs, up the value chain. We have the world’s largest market for luxury cars, but at the same time too many people earn just the minimum wage.”

According to official statistics, unemployment is low, just four percent. “Don’t believe them. They just count formal, registered unemployment in the cities. Short-term contracts on the countryside are counted as full employment. Unemployment is high, but companies can’t find enough people because there is a big mismatch between demand and supply.”

Jan van der Putten, a Dutch advisor to companies that want to invest in China, recognises the problems, but thinks it’s to easy to blame the goverment. “They know just as well that consumption has to grow. But it’s very hard to implement. The average Chinese spends 30 percent of his income on food. That’s just too much. It’s the result of the development model that has been chosen, focused outwards instead of inwards.”

Fortunately, the preparations for the new five-year plan (2011-2015) call for focus on structural reforms, writes the World Bank in its Quarterly Update on the Chinese economy, published two weeks ago. “Changing the growth pattern is rightly a key target. Rebalancing will not happen by itself – it will require significant policy adjustment.”

But it’s very hard to change patterns in China, Van der Putten says. “As the proverb goes: ‘The mountains are high and the emperor is far away.’ There are so many laws and regulations that local leaders feel free to choose which ones they want to implement.”

The biggest obstacle to the much-needed transition is the enormous speculation, says Wang, who once served at the World Economic Forum as a China expert. “Living in the city has become unaffordable for many people. Prices will continue to rise, leading to an ever growing gap between rich and poor. Moreover, it slows down urbanisation, which is absolutely necessary for rising consumption. Capital gains aren’t even taxed. And we call ourselves a socialist country!”

Wang says he sometimes feels a bit lonely in his pleas for a capital gain tax to combat speculation. And he has more reforms on his wish list. One of the most important is getting rid of the “ridiculous” one-child policy. “People will never spend more and save less when they can’t have more children in order to care for them when they’re old. The government could allow every couple to have two children, or even three if both the husband and the wife are single children themselves. It’s necessary, moreover, if we want to be ready for the time the Chinese workforce dwindles.”

According to Van der Putten, this is something the government is well aware of. “They already allowed a second child if both parents are single children themselves. There is an open debate about the policy. In one region they have now started an experiment, by which people are allowed to get a second child if just one of them is a single child himself.”

Since 2009 China is the world leader in clean energy investments. With 52.5 GW of renewable energy, China is second in the world for installed capacity, the Pew Environment Group reported earlier this year. Its targets are among the world’s most ambitious.

“The bottleneck for sustainability, however, is innovation,” says Wang. “We spend less on innovation than other countries and we do it ineffectively, through state companies.”

Wang thinks the Chinese are well aware of the importance not to copy the U.S. example. “Japan is our benchmark. Japan succeeded in becoming very energy-efficient. Our habits are different from the Americans, too. We will never eat as much meat as they do, to mention an example.”

Wang fears the scramble for resources that Beijing is pursuing in developing countries. “China needs to realise that cheap extraction of resources is not the smartest thing to do. We must understand that if we help countries develop, they will be able to buy our products.”

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