Opinion     

Private sector deserves a bigger role

Shanghai Daily, November 4, 2013

• Q:

  Do you think China will achieve its goal of 7.5 percent growth this year?

  A: We do not do specific estimates on economic growth. The Chinese economy in past years has slowed a little bit but is stabilizing, which means natural adjustment. It is rebalancing from an export-oriented to a consumer-oriented economy, from manufacturing to services sectors. The world economy is improving, and China’s biggest export market Europe is out of recession, which will also help China.

  Q: So-called "Likonomics," named after Premier Li Keqiang, has been getting a lot of attention amid expectations of further Chinese economic reforms. How do you view the changes?

  A: “Likonomics” is different from "Abenomics" in Japan. It has two components. The first is deleveraging, or reducing the role of more stimulus in the economy. That is different from Japan, which has structural deflation while China doesn’t. The second component is structural reform and more opening-up.

  The government has to rein in credit growth, which is moving far ahead of gross domestic product. The government wants more financial discipline in the markets, especially in bank borrowing. There has been a lot of easy access to credit up to now.

  Reform is also about opening up more sectors of the economy to competition, especially in the services sectors. In developed economies like the US, the majority of GDP comes from that sector.

  “Likonomics” is helping China progress in a sustainable way.

  Q: Your report mentions reforms in the state-owned enterprise sector aimed at increasing productivity. Will that come at the expense of smaller, private companies?

  A: It’s important to get a balance between private enterprises and SOEs. Generally, private enterprises have higher productivity and a higher return on assets than state-owned enterprises. It’s not surprising that SOEs have low productivity because they sometimes have social roles to fulfill. The balance isn’t right. We need to create more of the role of private enterprises. Some sectors in China are heavily protected, if not monopolized. A lot of those sectors are in services. Creating competition will help to push up average productivity levels by making it easier for private enterprises to enter the market.

  The other angle is that small- and medium-size enterprises are struggling at the moment.

  They have to borrow at high rates or go overseas for capital. What China needs to do is open up more banking to SMEs to improve the flow of capital while introducing more competition.

  Q: Then how to balance long-term development and current growing pains?

  A: There’s evidence to support the idea that China is over-invested and over-capitalized. Fixed investment at about 45 percent of GDP is very high compared with developed countries. And look at the share of consumption. It’s around 30 percent, lower than others.

  The real issue is where the capital is going. The problem at the moment is that a lot of capital is bound for the wrong places. It goes to the SOEs rather than to the more productive sectors.

  Q: The new free trade zone in Shanghai has been a hot topic. Do you see it as a new force to spur the Chinese economy? What are the challenges?

  A: It’s sort of evidence of deregulation and more liberalization in the market. It’s a testing ground to see liberalization develop in a safe way and to assess the effects of things like easing capital controls. If it does work, the government will try to replicate the concept in other parts of China. It’s a stepping-stone rather than a game changer because the scale of the Shanghai experiment is relatively small.

  The challenges are whether the government can replicate in other places in China and what is the pace of opening up. The “negative list” released for the new zone needs to be shortened a little bit. Like former Chinese leader Deng Xiaoping once said — finding the stones, step by step, in the water. It can be controversial. But if you can demonstrate success, then you can win arguments.

  Q: What’s your view on the global economy?

  A: If we say that back in the 2008 financial crisis, the economy was in intensive care, I'd say the world economy is healing now. But there are still some concerns, some structural problems. In the EU, economies like Germany are still overly dependant on exports and have not seen a rebound in consumption.

  Interestingly enough, the recovery in the UK is very much based on consumers rather than on investment and exports.

  In the US, there are expectations for a tapering in bond-buying. The danger is that if US tapers too quickly, bond yields rise and money begins to flow out. Emerging markets become less sensitive to hot money flows if they are reforming their own economies and creating incentives for foreign direct investment.

  Since the global recession, governments have focused more on the demand side. What’s happening now is that demand inflation is coming to an end in term of stimulus. The next focus should be on the supply side in many economies. Governments should put emphasis on major infrastructure, skills and innovation.

  How to identify economic fault lines and address structural problems is what we learn from financial crises. More international cooperation is needed to understand and tackle problems.

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