China's New Normal: The worst of times, the best of times
- By Robert A. Rogowsky
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E-mail China.org.cn, July 10, 2015
The issue of how to handle the roughly 155,000 state-owned enterprises (SOEs) is challenging too. China has begun to transition them through a program of mixed-ownership reforms announced in November 2013. Sinopec is one recent example. But reforms allow private investors to buy minority equity shares rather than buy into the businesses themselves. Sinopec, one prominent example, is keeping 70 percent of the company in the state's hands. This model basically provides a larger private funding source for SOEs and no real reforms. Easy access to funds usually proves problematic.
SOEs stand in the way of shifting from China's current investment-based economy to a consumption-based economy. Consumption only accounts for 35 percent of GDP in China. SOEs are problematic because their profits go to the government rather than to investors, employees, or households, all of whom are much more likely to use it for consumption.
It cannot be denied that China has been a remarkable economic success story. But its export markets are growing slowly. Global annual GDP growth is sliding toward the 3 percent range more common among developed nations. Important markets -- namely the United States and Europe -- are even lower. China is finding its export model fading at an earlier stage of its development than either Japan or Korea.
There are distinct signs of unsustainability. Heavy reliance on an investment model leads to overcapacity. Goldman Sachs estimates a 20 percent vacancy rate in modern ("commodity") urban housing. The debt-GDP ratio is rising faster than other emerging markets; the fastest absolute build up ever. The World Bank estimates that environmental and natural resource degradation and depletion cost China 9 percent of annual national income.
In addition, shifting from export led growth to a focus on domestic markets reduces the competitive pressures of the global marketplace. Domestic-oriented manufacturing and services tend to develop more slowly without intense competitive pressure. Recent complaints by foreign firms about biased enforcement of the new Anti-Monopoly Law suggests a new potential avenue to reduce competitive pressure on "national champions" and domestic firms in strategic industries. In addition, many service sectors in particular require different and more proactive regulatory approaches to limit rent-seeking, ensure competition, and foster continued productivity gains.
China's new normal is a clever way to make the forces coming down on the Chinese economy seem well, normal, and desirable; even strategically controlled. But they are not. These are complex, and potentially dangerous economic conditions in part being thrust on China and in part being manufactured by China. They must be faced. Failure will have dark implications for the whole world.
Robert A. Rogowsky is a professor at Middlebury Institute of International Studies.
Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.
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