Davos Sanguine on Chinese Economy

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  AFTER three days of heated dis- cussions the World Economic Forum 2012 Summer Davos concluded in the coastal city of Tianjin. Themed “Creating the Future Economy,” the event was convened as angst continues to resonate worldwide about the languishing global economy, the evolving debt crisis in Europe, growing uncertainties in the financial markets and slowing international trade growth.
  Participants in Tianjin dedicated their speaking time to laying out their visions for optimal growth strategies in the future economy. China, now very much a world economic heavyweight, was a key focus of discussion.
  
  Confidence Still High
  The Chinese economy has been steadily cooling in recent months, and this trend shows no sign of reversing.
  In its Global Competitiveness Report 2012-2013 the Boston Consulting Group ranked China 29th among 144 economies, down from the 26th of last year. The business consulting firm asserted that on the back of the slowdown in domestic and foreign demand and intensifying global competition, China has bid farewell to an era in which high growth rates were the norm.
  However Zhu Min, deputy managing director of the International Monetary Fund, contended that the growth rate issue should be viewed from two perspectives. Maintaining growth at a certain level is critical for China’s overall economic health, he said, and thus it is common sense for the government to introduce policies to achieve such a growth rate. But the target rate itself should not be too high, Zhu stressed. It is unrealistic and unnecessary to strive for super-strong growth at any cost in a time when the wider world is suffering from a protracted economic slump and as international demand continues to taper off. He saw a growth rate of around eight percent as suitable.
  Justin Yifu Lin, former World Bank chief economist and senior vice presi-dent, cited two factors that have led to China’s growth easing up: lingering listlessness in its export markets, most prominently in Europe, and the slowly evaporating effect of the RMB 4 trillion stimulus package initiated in 2008. The package was designed to galvanize growth through government spending, and most planned government investment initiatives have already been completed. Still Mr. Lin expressed confidence about the country’s future: “There remain favorable conditions for economic growth; I expect a growth rate of around eight percent for another 20 years.”
  This optimism was shared by many participants at the forum who flew in from abroad. James S. Turley, chairman and chief executive officer of Ernst& Young, believed that with per capita GDP having surpassed the US $5,000 mark, China will see strong growth in the coming years and successfully steer its way through the “middle income trap.”He also suggested China needs to ensure close collaboration between the government, corporations and research bodies including universities in its efforts to continue structural economic adjustment.
  Turley confirmed China’s strong capacity for research and development, but cautioned that there is still room for improvement in the way the country transforms research results into commercially viable products.
  While China’s official statistics show a slowdown in growth, this deceleration affords the country the chance to ensure its future growth is based on high-quality industry and consumptiondriven demand, said Sir Martin Sorrell, chief executive of WPP, a world leader in advertising and marketing services. He added that China’s remarkable rise has been instrumental in helping hundreds of millions of people escape poverty.
  In response to doubt over the ability of China to continue to transform its model for economic growth, Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics and the Center for Global Development, said that all countries, not just China, need time to remodel their economies toward producing higher value-added goods and services.
  Hans-Paul Bürkner, CEO of the Boston Consulting Group, agreed with Subramanian. He expressed optimism in China’s long-run economic prospects, despite the recent slowdown. While the country faces short-run challenges in keeping its economy growing, he conveyed his confidence in the vitality of the nation’s businesses, particularly those in its private sector.
  The Boston Consulting Group released its latest report at the forum. It lists 50 Chinese companies that have outperformed the S&P 500 index by over eight-fold since the year 2000.
  
  Seeking Change Through Reform
  Every big leap taken by the Chinese economy has been closely linked to systematic reform programs, including land ownership reform, the establishment of the market economy and the country’s WTO membership. At the forum, both domestic and foreign experts expressed the view that a new round of reform would help realize China’ potential in terms of long-run economic development.
  “Against the backdrop of a slowing world economy, commentators are paying too much attention to China’s GDP figures. Reform is more important. The next three to five years will likely be the most important time in China’s economic development over the coming 20 years. Some existing systems have become bottlenecks in the country’s continued growth, and a new round of reforms is called for,” said Li Daokui, director of the Center for China in the World Economy.“With reform comes hope for the future. Measures that address the fundamentals should be implemented to kick off a new stage in China’s development and lay the foundation for the country’s future economy,” he added.
  From Li’s point of view, China should establish a concrete legal foundation for the socialist market economy. This should be done with a mind to solving problems in both social management and the economy, such as resettlement issues arising from land transactions, equity trading and cyber crimes.
  Zhang Weiying, a professor of economics at Peking University’s Guanghua School of Management, was frank in his assessment of China’s recent progress. The past decade may be the best period in recent times for China’s economy, but it was a terrible decade for Chinese society at large, and a lost chance in terms of the country’s reform process, remarked Zhang.
  Zhang indicated that in a time of sluggish economic growth, policy-makers should more than ever observe market rules and economic laws. Zhang held that China has to stick to the direction of its market-oriented reforms and move away from fueling growth through a reli-ance on monopolistic enterprises, such as those found in the banking industry and energy sector.
  In the coming decade, China’s economy will enter a new period of development, and the reforms it undertakes must promote structural adjustment of the domestic economy, encourage consumption and expand domestic demand. A slow-growth world economy means China’s export-oriented economy is unsustainable, said Arvind Subramanian.
  Subramanian, author of the bestselling Eclipse: Living in the Shadow of China’s Economic Dominance, did express optimism about China’s ability to tackle the challenges it faces. He made some bold predictions, also covered in his book, about the Chinese and U.S. economies. According to Subramanian, by 2030 China’s trade volume will be double America’s. China’s economy will account for one fourth of world GDP as measured by purchasing power parity. The U.S.’s proportion will be 12 percent. The U.S. will still be a world power in 2030, but it will be matched at every turn by China, he noted.
  China’s proposal in its 12th Five-year Plan to transform its economy to high value-added and environment-friendly production is far-sighted and commendable, remarked Klaus Kleinfeld, chairman and chief executive officer of Aluminum Company of America (ALCOA). He indicated that the world is waiting with anticipation for China to kick off this transformation, and will be watching to see its progress.
  Kleinfeld also pointed out that over 40 percent of global aluminum demand comes from the Chinese market. He said ALCOA was optimistic about China’s ability to continue its sustainable development and economic transformation, even if the results of this process take 30 years to realize. Nonetheless he stressed that the premise for his optimism was that China would unleash more entrepreneurial vitality and innovative spirit through reform.
  Kevin Rudd, former Australian Prime Minister, remarked that it was not only desirable but an absolute necessity for China to transform the structure of its economy. The outline presented in the nation’s recent five-year development plan was an indication of the government’s seriousness in this regard, he said.
  Rudd noted that economic transforma- tion would bring some uncertainty to the current economic climate, but that in the long run it will prove the right decision.
  Seeking New Sources of Growth
  China is looking for new, dynamic sources of strength to power its economy, and forum participants agreed that emerging industries are the prime candidates for the position.
  The Chinese government in its 12th Five-year Plan (2011-2015) outlined an initiative to promote seven emerging industries. These include energy conservation, new-generation information technology, biotech, high-end equipment manufacturing, new energy, new materials, and new-energy vehicles. It is these industries that will be looked to in the pillars of the nation’s 21st century economy.
  Liu Changle, chairman and chief executive officer of Phoenix Satellite Television Holdings Ltd., reiterated, “These seven key emerging industries will lead to new economic growth, and will guarantee the country a bright future. Our country needs to pay attention to the direction and speed of the investments and ensure they are measured, targeted and well planned. Over-investment should be avoided. Moving higher up the value chain means a sharp focus on quality and high-tech industry.”
  While promoting emerging industries, the country’s traditional manufacturing industry should not be abandoned. Man- ufacturing still plays an important role in China’ economic growth and employment. In the coming years, innovation in technology and branding should provide an impetus for the restructuring and upgrading of China’s manufacturing sector.
  On “The Next Manufacturing Forefront,” a TV debate at the forum on the future of China’s manufacturing industry, the five foreign and Chinese guest speakers all agreed that high-end manufacturing was the only way forward for the country.
  Carlos Ghosn, chairman and CEO of the Renault-Nissan Alliance, pointed out that a decrease in the size of the Chinese labor force brought about by an aging population will force Chinese manufacturing to move away from labor-heavy to machine-intensive production.
  Xu Heyi, president of the Beijing Automotive Industry Holding Group(BAIC), remarked that China’s manufacturing industry is facing a crisis caused by a lack of scientific and technological support and ineffective branding. Innovation is needed to ensure the smooth development of manufacturing.
  Companies also need to set up medium- to long-run branding development strategies. Branding is one component of producing higher value-added goods. Once companies build up a strong following in the domestic market, they need to turn to the international market to expand and promote their brands, Xu said.
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