China's business environment: 2017

2018-01-06 22:01:33
分类:政经评论

China's business environment: 2017

2018-01-06 Luke Zhang 大可 大可时评

 

China's business environment: 

 

FUDAN UNIVERSITY

 

A summary of Macro-analysis of the Chinese Economy in 2017

QiZhang

ChinaCenter for Economic Studies, Schoolof Economics, Fudan University

China's importance to the world economy has never been greater, nor its financial clout more obvious. Meanwhile, understanding China's economic trajectory and its nuances has never been more complex. In newspaper headlines, the continued growth in the country's gross domestic product (GDP) is sometimes overshadowed by the slowdown relative to a decade ago. However, the decisive and far more interesting story is structural changes in the Chinese economy, and how various transformations underlying these are taking place.

     As China moves from exports and domestic infrastructure investments as economic drivers to consumption and innovation as the engines of the future, what are the key developments to keep an eye on?

 

In2010, China’s nominal GDP rose to $5.879 trillion, thereby overtaking Japan tobecome the world's next-biggest economy, second only to the U.S. Since then, China’s nominal GDP has risen from 48 trillion RMB in 2011 to 74 trillion RMB in 2016, growing at an annualized rate of 7.3 percent in real terms. As aresult, China’s per capita gross national income (GNI) increased from $1,760 in2005 to $8,100 in 2016. China has already easily crossed the upper-middle-incomethreshold set by the World Bank at $4,036 per capita and is knocking at thedoor of high-income countries (defined as $12,476).

 China’seconomic achievements, however, are not confined to these GDP figures.They arecomprehensive and embodied by changes in industrial structure, private economy, openness, innovation, poverty reduction, and other social and economictransformations. For one thing, China is no longer a less-developed country featuring an agriculture-dominant economy. The industry and service sectorshave accounted for more than 80 percent of total output (Figure 1). And for thefirst time, as of 2016, the contribution to GDP from services, such as shops,restaurants, finance, and similar, pull ahead of industry, including manufacturing, mining, and construction.

Alongwith such a structural transformation, a massive labor migration has flowed outof the countryside and into cities, resulting in breakneck urban growth. As of2015, migration from the countryside had helped expand the urban population by500 million people. Over half the population is now urban, giving birth to greater numbers of large and super-large cities. By the end of 2015,more than 100 cities had more than a million people, and megacities have emerged, whose population, including that of their satellite towns, exceed 10million. Among the 30 cities worldwide that match this criterion, six are inChina, even by somewhat conservative population estimates: Shanghai (23 million), Beijing (19.5 million), Chongqing (13 million), Guangzhou (12 million),Shenzhen (11 million) and Tianjin (11 million). This urbanization trend looksto continue into 2018 and onwards for the foreseeable future.

 

Figure 1 The share ofGDP

 

Rise of the urban middle-class

 

Withongoing urbanization and a rising middle class, it is services and consumptionthat are coming to dominate economic growth. Although at present, private consumptiononly accounts for 39% of GDP with a size of $4.4 trillion (2016 figure), by2030 the figure will increase to 43% and $9.6 trillion, respectively, accordingto an estimate in a report by the investment bank Morgan Stanley. The samereport projects that by 2030, household disposable income will reach $8,700; the median age will rise to 43, and internet penetration will increase to 75%.The 2016 figures, by comparison, are "just" $5,000, 37 years old, and 52%, respectively. Moreover, Chinese consumers have not only grown richer andricher, but also become a driving force of high-tech innovations in a wide range of intertwined areas, such as fintech, e-commerce, auto, healthcare,insurance, traveling, and household electronics, reflecting the growing tech-savvyof the population. This may further create a new configuration of Chineseeconomy. For example, the massive increase in ownership of smartphones and the population's resulting tech-literacy to benefit from the sprawling e-commerce infrastructure, is likely to make e-commerce a key driver of China’s consumption and hence future growth.

In the ambitious blueprint known as “Thirteenth Five-year Plan” made in 2015-2016,China made up its mind to double GDP as well and per capita GDP by 2020 from 2010 levels. If this comes to fruition, China will spring up from the middle-incometrap to attain the high-income status it has long dreamed for. Indeed, China has made tremendous efforts to make sure this goal happens as scheduled. Forexample, at the end of the Third Plenum of the 18th Congress of thecentral committee of the Chinese Communist Party ("the Party") in November 2013 (the Third Plenum being a crucial policy meeting held regularly, in recent decades every five years, —ed.), the Party promised to "give themarket a decisive role in resource allocation and give better play tothe role of government." Echoing the statement, since then, the party has declared to push forward comprehensive reform on state-owned enterprises(SOEs), upgrade its manufacturing industries across the board to move up thevalue chain (source: Made in China 2025), and promote sustainable and inclusive economic growth, among other key policy objectives.

 Hurdles ahead

 

Apartfrom these strategic deployments, from 2015 onwards, China has also stepped upefforts to deal with the mounting debts that are believed to be at the “root ofweakness in China’s macro financial system,” quoting from Zhou Xiaochuan,China’s Central Bank chief. This includes reducing excess production capacityin the coal and steel sectors (by 10-15 percent of existing capacity over thenext three-to-five years), closing down "zombie factories" identifiedby the central government and local governments, and restricting the role ofthe local government financing vehicles (LGFVs, which fund among other thingslocal infrastructure investments through deficit spending) so as to put hugedebts under control.

Despite China’s ambitious plan to achieve high-income status in the next five years, aswell as the across-the-board approach to materialize this goal, getting therewon’t be easy. Skepticism and pessimism still exist, as reflected in the accelerating capital flight out of China after 2015.[1] For onething, such a significant change in economic structure toward a consumption-and-services-dominant economy could take longer than expected,especially since the realities underlying economic statistics are multi-causal. Despite the considerable rise in China’s services-to-GDP ratio in a row ofyears, it is still lower than the world average level (Figure 2). And although theservices sector overtook the industrial sector by 2016, it is still too earlyto say whether this will be the new normal, since industrial goods prices sawdramatic fluctuations in the past two years, and the increase inservices-to-GDP ratio reflected more the price-slapping of industrial goodsthan a real growth of services.

 

Figure2: Services-to-GDP ratio, %

 

Inthe meantime, investmentsstill contribute too much to GDP growth. So far, investment accounts for 50 %of economic output, well beyond what even Japan and South Korea registered intheir most intensive growth phases. Without rebalancing, and along with hugedebts, this can hamper the government’s efforts to reduce the industrial overcapacity problem, and hold off China’s transition from an investment-driven economy to one that relies more on domestic consumption.

 

Partial equlibria

 

The biggest challenges may come from the government itself. China’s economic miracle in the past four decades is based primarily on two pillars: opening up to the foreign world, among others Western countries like the US, EU members,and Norway, and market liberalization, as embodied by the retrenchment of the state sector and a rising private sector. The opening up to Western countries has broughtabout investments, technology, and management know-how, while marketliberalization has freed up space for genuine entrepreneurship and innovation.

Today,however, on both fronts, China is trapped in a partial reform equilibrium inwhich further necessary changes have stalled regardless of the success ofreform in the past. Although Chinese leaders have promised to treat Chinese andforeign companies as equals, U.S. and European companies have complained aboutred tape and limited market access, the latter referring to the official approvals foreign firms must win to enter China’s domestic market, besides along list of strategic industries in which foreign investment is eitherrestricted or off-limits, in addition to the somewhat ad-hoc nature of law- and tax enforcement. As a result, multinationals are no longer as interested inpouring money into China (Figure 3). FDI flowing into China reached a peak ofnearly $300 billion in 2013 but has since dropped, whereas Chinese outwardinvestments are skyrocketing.

Figure3

China’sprivate sector is today the most vibrant part of its economy, but fears arerising that national policy-making is turning the screws on it. In the pastfive years, Beijing has already reasserted control over state-owned enterprisesand claimed to take measures to make SOEs, including those titans owned by thecentral government known as "national champions," larger andstronger. What this means in practical terms is consolidating the superiorityof SOEs over private counterparts with, inter alia, greater access to capital, running counter to the government's eclared objectives of letting the marketplay a decisive role in resource allocation. This risks cementing skepticism aboutthe central government's commitment to solving the debt problem, as most debts have been generated by and accumulated in the state sector rather than privately. 

The Party also has called on private entrepreneurs to be patriotic, for example bycooperating with the government by turning in data on social media to regulatory agencies and allowing authorities to take at least 1 % stakes in ITgiants such as Tencent and Alibaba. Perhaps the most worrisome development isthe deteriorating private-property security that has long been a focus offoreign China-watchers. This includes not only scenarios in which peasants’ lands were appropriated with surprisingly low compensation and urban residents’houses demolished to clear the way for local governments’ infrastructure projects. But also, it gets those rich people involved, e.g., those who wereput in to jail in Chongqing’s Smash Black and Sing Red Songs campaign launchedduring 2007~2010, those business and financial barons who disappeared suddenlyand went nowhere, from Xiao Jianguo, a financial mogul, to Wu Xiaohui, aninsurance magnate. No wonder in last a few years there was a sharp slowdown inprivate investment in China.

 

Bullishness and ambiguity

 

Itis perhaps no surprise, then, that in the last few years there was a sharpslowdown in private investment in China. Over the first eight months of 2016,for example, private investment rose by merely 2.1 % from the same period ayear earlier, the lowest rise since records began in 2005. Again, this mirrorsthe stagnant progress of SOE reform and entrenched policies not favoring theprivate sector. On the other hand, there is no doubt the central government hasrealized the danger of slipping this burgeoning private economy. In the end of2015 and in September 2017, the State Council and the Central Committee of the Party jointly issued two documents that urged to protect private property rights andto foster entrepreneurship. Their real effect, however, has yet to be seen.

Allin all, it makes sense to be bullish on Chinese economy, given the current leadership’s resolve to push forward necessary reforms and the overall healthy macroeconomic indicators, such as a fast GDP growth rate, a high saving rate,strong foreign reserves, a low inflation rate, and so forth. Although problemsare apparent, among them a high debt-to-GDP ratio, a large but inefficient statesector, excessive investment and production capacity, they are neither immediate nor fatal threats.

Aslong as the Chinese government has steady control over its massive resources,the system can still move ahead while avoiding major pitfalls in theforeseeable future.

 

 

 

 



[1]In the last six months in 2015 alone,capital left China at an annualized rate of about $1 trillion.

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章奇简介:
北京大学经济学博士,中国科学院农业政策研究中心博士后,美国西北大学政治学系博士。现为复旦大学经济学院中国市场经济研究中心副教授。 从事有关中国政治经济学、经济政策、民营企业商业环境,以及地方治理和村民自治方面的研究。
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