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China goes local in search of growth

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29 May 2013

The new Chinese premier has been wrestling with China’s economic future since the global financial crisis took its toll, writes Kerry Brown

Right:

On the move: Li Keqiang at a conference to discuss the EU-China Partnership on Urbanisation last year.
Photo: Friends of Europe

On the move: Li Keqiang at a conference to discuss the EU-China Partnership on Urbanisation last year.
Photo: Friends of Europe



WHEN Chinese premier Li Keqiang told a group of party cadres this month that Beijing would reduce the role of the central government in economic matters to encourage “fast, sustainable growth” he was elaborating a theme he has pursued since 2009. That was the year the global financial crisis began having a heavy impact on China’s all-important export industries. China may well have become the world’s largest exporter of goods, but the crisis made it clear that a huge proportion was sold into developed markets, where demand had started to contract the previous year. The crisis showed vulnerabilities both in the Western financial system and in China’s model for growth.

Exports have been such a major engine of growth in the Chinese economy since the 1980s. It has been on the backs of the vast manufacturing and processing plants that cover the Pearl River Delta area and now reach deep into China that the economic boom of the last three decades has been built. Seeing this growth threatened made policy-makers in Beijing start to think hard about the direction in which they needed to steer the economy. In speeches he made as vice-premier in 2009 and 2010, Li began to refer to the need to find new spaces for growth.

The main issue, as he outlined it then, is that the Chinese economy is a very particular one. Almost 50 per cent of GDP is in fixed capital investment and only 40 per cent in consumption. In a developed economy, this would be a wholly different figure – 60 to 70 per cent in consumption and only 10 to 20 per cent in capital investment. China’s level of capital investment shows that the role of government is still vast. Central planning might be gone, but the state, nationally and provincially, is still the largest economic actor. The problem now is that this pattern of economic activity cannot create the kind of fast, sustainable growth – to use Li’s phrase – that China needs, especially as there is a widespread appreciation that export demand from the West is unlikely to return to the levels of a few years ago.

The most important of Li’s new spaces for growth are not the great markets that used to exist outside China, but its own internal market. Somehow, the battle to create a generation of consumers in China has got to be fought, and won. This means creating a finance system that people can trust, a housing system that performs the same vital economic role as in Europe, North America or Australia, and a welfare system that provides predictability and reassurance and fulfils its own economic role as a creator of dynamism and growth. Urbanisation must also accelerate – as Li noted in 2010, one of China’s other unique features is that urbanisation is still at around 50 per cent, compared to rates in other emerging economies of 60 per cent or more.

What is clear in the statements Li Keqiang has made since he became premier and took charge of macroeconomic planning is that he doesn’t believe applying a common template across China will work. In China’s continent-sized economy, the difference in per-capita income levels between Shanghai and Gansu province, for instance, are as great as those between a developed country in Europe and an emerging economy in Africa. With per capita GDP of over A$12,000, Shanghai needs no stimulation. Retailers thrive, and the city has a strategy to create a mixed economy and support the growth of the service sector. More than 450 international financial entities are registered n the Pudong financial district, where over a quarter of a million people work; the city aims to dramatically increase this in the decade to come. In Ganus, per capita levels are less than A$5000, the state-owned sector dominates, and service sectors are tiny.

Shanghai might be heading for a more dominant service sector, but as statistics Li Keqiang used in 2010 made clear, this will be a tough battle for most of the rest of the country. In the United States or Germany, services account for 70 to 80 per cent of economic activity. In a typical emerging economy, they rank at about 56 per cent. In China, the figure is just under 50 per cent.

Shifting to an economy in which services and consumption are stronger is going to be a huge challenge, and across the terrain of China’s provinces and autonomous regions it has to be fought differently. In a book on reform written in 2009, two theorists at the Central Party School in Beijing, Wang Changjiang and Zhou Tianyong, write of how the history of China was often characterised by power flowing towards the centre, and then outwards again, in decades-long waves. We have seen this process over the years, with the Maoist period being one of deep centralisation and the early Deng period one of decentralisation, followed by a process of give and take, with the centre still very much in charge of fiscal and macroeconomic policy throughout the last two decades.

Local government and enterprises are likely to be given more leeway, as long as they find space for fast, sustainable growth. The word “sustainable” here is important. Pumping out GDP that ends up wrecking the local environment can’t be the name of the game anymore. The performance of local government will be judged according to more sophisticated measures. The trick will be to deliver growth that satisfies the aspirations of the people and brings down the level of protest, but doesn’t end up clogging people’s lungs with pollution.

What we can expect is a period in which politics in China becomes more local – with different experiments in different provinces to try to crack the conundrum of fast but sustainable growth. Even in the early 1980s, there was wide understanding of the importance of grassroots innovation. That, after all, was the source of the enormously successful town and village enterprises that did so much to improve productivity in the agricultural sector. Now China’s leaders want to find a way of delivering a new model of growth, and the best place to look at this is in the localities that are experimenting and innovating. That, at least, is the plan. •

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