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Economic upgrading must not be delayed
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2008-03-26 09:19:00 |
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Since 2002, there has been increasing international attention to global imbalance and China has become its focus. By 2004, global imbalance had been described at various international forums with excessive imports by the United States and excessive exports by China, though both countries were acknowledged as the two engines propelling the world's economy.
After spending some time studying the issue of economic imbalances, I found that the external imbalance in the Chinese economy was embodied in surplus payments, whose negative impact is now clear. The internal imbalance in China's economy is more fundamental and persistent and has caused more serious consequences.
Internal and external imbalances in China's economy are not independent of each other. Rather, they are closely linked and aggravate each other. Absolute balance means zero growth, while excessive imbalance will also result in stagnation.
In commenting on the global imbalance, people often point their fingers at China. The most common allegation is that China has gained unfair advantage in trade by manipulating the exchange rate.
Actually it was not possible for China to do so for more than 20 years, though it is true that China has paid a dear price for foreign trade expansion. In the past decade and more, China's trade has kept deteriorating, with growth of the export price index consistently lower than that of the import price index.
What has filled this big gap is, first and foremost, efficiency gains from technological progress and rising productivity thanks to reform and opening up. The gap is also partly filled by the "dividends" from undervalued factors of production, like low wages, extensive resource consumption and heavy pollution.
Furthermore, it should be noted that nearly 60 percent of China's exports are produced by foreign-invested ventures, and about half of China's exports are achieved by the assembling and processing trade. If surplus from such trade can bring benefits, it mainly benefits foreign investors and the world economy.
Another common criticism of China is that its domestic demand, particularly its consumption, is insufficient.
China has maintained an economic boom for nearly 30 years. Its retail sale of consumer goods has increased by about 15 percent every year, and its consumption of services, including housing, transportation, telecommunications and tourism, has grown at an annual rate of over 10 percent.
After 1998, the consumption of general consumer products has grown rapidly. Housing by about 12 percent annually, private automobiles by 30 percent, mobile phone subscribers by 50 percent, and university enrollment 20 percent.
Meanwhile, the incremental inventory has dropped. It shows that production has grown at a similar rate with that of investment and consumption. However, China's consumption structure is quite unbalanced while the production structure and the investment mix are unreasonable, a consequence of China's unique growth model.
The special environment for attracting foreign capital and the conditions for developing foreign trade have also played a role.
Investors from East Asia, particularly those from the Special Administrative Region of Hong Kong and Taiwan Province of China, established a large number of export-oriented processing factories in the coastal areas.
Following their examples, many Chinese entrepreneurs set their eyes on the overseas market. Thus, a huge export-oriented manufacturing industry emerged in China, supplying the world with low value added consumer goods and investment products.
The entire economic system became heavily dependent on the external environment. The domestic-oriented sectors lagged behind and the resources were allocated with poor efficiency. It became difficult to restructure the industries, transform the growth model, protect the environment or conserve resources.
The imbalance in international payments and trade surplus in China's case, is an early indication of the imbalance in the country's domestic economy. As a matter of fact, China has had surpluses in both current and capital accounts since the early 1990s.
Due to the long-term belief in hard currencies and the unique way of capital flight in China, the "twin surpluses" used to be very mild. Surplus is a double-edged sword, but people have tended to exaggerate its benefits and downplay its defects.
One of the most serious disadvantages of imbalanced international payment hampers economic adjustment and has long delayed upgrading of the industrial sectors.
We must change the excessively preferential treatments given to foreign investors, enforce the laws and regulations on labor protection, formulate and implement national and local plans for land use and increase the flexibility of the interest rate and foreign exchange rate.
The exchange rate of China has been and will continue to be a hot issue. There have been repeated calls from the international community for China to revalue or liberalize the renminbi exchange rate to achieve trade balance.
However, it is just a fantasy of idealistic liberalists to believe that a floating exchange rate regime will automatically balance the import and export of merchandise.
As a basic economic parameter in an open economy, the exchange rate has a huge impact on the efficient allocation of resources, industrial structure, product mix and even regional economic structure.
Quite a few people somehow believe that the appreciation of the renminbi will cause many factories to shut down and unemployment to soar. Actually, much of the impact of the exchange rate on imports and exports will cancel itself out. If some businesses are closed or reorganized, that would be exactly the industrial restructure we wish to see.
Given the potentials of its vast hinterland and underdeveloped industrial chain, China is in a position to embrace such readjustment and this will increase non-agricultural employment. Some low-end industries may move from China to less developed economies. This will not affect China's overall employment level and it will certainly help reduce resources consumption and improve protection to the environment.
In the long run, as economic growth continues, the market exchange rate will eventually get close to the purchasing power parity and fluctuate around it.
Under this premise, whether a domestic currency appreciates and the range of appreciation will hinge on the actual rise of consumer prices. In other words, the range of currency appreciation and the inflation rate have a relationship.
As it is now increasingly difficult to curb the expansion of investment, credit supply and excess liquidity, the threat of inflation and asset bubbles, which we were concerned about several years ago, is likely to resurface. Reducing the trade surplus and capital inflow is now a policy goal.
In 2006, the price index of all exports went up by over 4 percent, about one percentage point more than the price index for imports, registering improvement in terms of trade for the first time in years.
The textile industry is a good example. Its output grew by over 20 percent year on year, export prices rose by 10.4 percent and its productivity was 16 percent better. Its employment increased by 3.9 percent and its ratio of domestic sales rose by one percentage point, reaching 75 percent.
Many factors contributed to this change, the most important ones being the rising exchange rate, scrapping export tax rebate, higher wages, and higher energy and raw material prices.
The increase in manufacturing costs, especially rising wages, has always been a source of concern to economists. But in China's economy today, unreasonably low wages is a major cause of its economic structural problem. Before China's wage level can pose a real threat to domestic employment and export competitiveness, it has plenty room to maneuver.
Boosting domestic demand should undoubtedly be a long-term basic policy for China's economy. However, China should definitely not copy the consumption model of the United States, for it would put severe pressure on the global resource supply and worsen the global environment.
In short, although domestic and external imbalances in China's economy are interconnected in many ways, they are quite different in nature and should not be lumped together.
The so-called global imbalance will not produce catastrophic consequences as feared by many scholars and politicians. The view that the American economy has been weakened for good is too far-fetched. The US is still the largest manufacturing power, and more importantly, the strongest economy based upon knowledge and innovation.
China's imbalanced economy is a very serious problem. If the economic upgrading continues to be delayed, growth will eventually stall at some point and bear a major negative influence on the country and the world.
Economic historians are still debating what had caused China's decline and Europe's rise in the late 18th century and early 19th century. One view is that since the Renaissance, Europe had fully freed itself in terms of thinking, science and culture. Another view is that China had abundant labor supply and did not need to use machines.
No matter which view is more valid, we need to draw appropriate lessons from them. China simply cannot afford to miss another opportunity in its quest for modernization.(China Daily)
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Chinese (ÖÐÎÄ°æ)
