China’s Economy - Time for New Drivers of Change
My goal today is to highlight aspects of China’s economy that, though they may not at first be obvious, could be obstacles to its further development. I shall also endeavour to offer practical suggestions as to how these challenges might be addressed.
First, China needs to continue to look for new drivers of growth.
Much as China’s 2001 accession to the World Trade Organisation drove five years of economic reform and opening, a second round of reform and opening up could once again serve as a driver of change for China’s economy in the coming ten years. For it to be sustainable, though, further reform of state-owned enterprises and further opening of China’s market -- both to domestic private industry and foreign-invested enterprises -- are essential. That would also help to accelerate China’s move up the value chain and promote goods and services that are more technologically advanced.
What role should government play in this process? Of primary importance is to cultivate innovation and efficiency by encouraging healthy competition and facilitating transparency and predictability in the legal system. I believe that removing barriers for all players would foster such competition and bring benefits to the economy as a whole. It would, in particular, encourage development of the private sector and of small-and-medium-enterprises, providing a solid underpinning and added momentum to long-term economic development.
Premier Wen once remarked that “all enterprises registered in China according to Chinese laws are Chinese enterprises”. Similar statements have been made by other leaders to the effect that enterprises, big or small, foreign or domestic, should be treated the same. While there has been much progress in this direction, much remains to be done. In my mind, we should focus on the following:
- Increase market access. Better efforts should be made to remove long-standing market access barriers which come in many forms, such as licensing requirements, standardisation, unequal access to subsidies, ownership restrictions, and the exclusion of certain sectors from private investment.
- Enhance transparency and predictability in legislation. Transparency and predictability in rule-making are essential for a stable business environment. In an economy the size and complexity of China’s it is no easy task to ensure evenness and consistency in the way broadly-drafted laws are interpreted and applied, especially at local level. But it must be done. Industry “players” who feel they might stand to lose as the playing field is leveled should be given a reasonable grace period to adjust their business models and processes to this new reality.
- Improve regulatory efficiency. Different regulatory authorities should coordinate better to make it easier to do business. One contact point should be enough for licensing and approval. Presently, to cite just one example, four ministries have authority to reduce average fuel consumption and emissions levels in the auto industry. And four more are involved in granting approvals before a vehicle is allowed on the road.
- Encourage innovation through IPR protection. In pursuit of its demanding 12th five-year plan targets, the Government has already strengthened intellectual property protection. But, as we all know, innovation is a lengthy business with much risk along the way for those who invest time, talent and money. While anti-counterfeiting blitzes are welcome and may be effective in the short-term, IP protection should be a continuous commitment that is part of long-term government strategy.
With new drivers of growth in China will come a broader range of risks that need to be managed. I believe the following steps should be taken:
- Strengthen Corporate Social Responsibility (CSR). Problems with environmental protection, product quality - food safety in particular - workplace safety and corruption are constantly investigated. As one of the largest economies in the world, it behooves China to live up to its responsibilities better -- and to raise awareness among its people of the risks and consequences of not doing so.
Government should take the lead by setting clear standards for business reporting on labour-related, environmental and economic matters. Chinese companies should be more diligent as well as more transparent in upholding the spirit of the law, as well as the letter, and in adopting best international practices. This is especially pertinent for Chinese companies that wish to invest overseas, where they may face intense scrutiny of their CS performance by investors, stakeholders and regulators. All Chinese companies should embrace CSR as part of a broader agenda which to improve their governance, economic returns, corporate reputation and, last but not least, risk management.
- Manage environmental risk. Preserving the quality of water, soil and air, is a rapidly escalating area of risk for China. While tough environmental regulations have rightly been introduced, it is a matter of great concern that many violations remain uninvestigated or unpunished. To improve enforcement, better co-ordination is needed between ministries, municipal government agencies and the judiciary, and accountability needs to be strengthened. At the same time, incentives should be increased to reward those who use environmentally-friendly systems and technologies. Industries should recycle material through the entire supply chain. And last but not least, soil and ground water clean-up should be made part of the land development process.
- Address financial systemic risk. China’s biggest systemic credit risk for China’s financial system lies in restructuring industries or, worse, delaying such a move. In this respect, I have five recommendations:
- Provide banks with more capital and adequate cushioning. In tandem, a bankruptcy law is needed for financial institutions, along with a deposit insurance scheme that, in stressed times, will demonstrate the value of such measures.
- Align Chinese rules and laws to global regulatory requirements.
- Improve coordination and cooperation among regulators dealing with financial innovation and supervision.
- Enhance corporate governance and facilitate better due diligence by improving data quality and IT systems. It goes without saying that this implies the need for an accompanying shift in corporate values and culture.
- Streamline the capital flow monitoring process to ensure that market surveillance is fair and transparent
- Human resources constraints. China is experiencing a significant shortfall of skilled and qualified personnel – from senior executives to professionals, technical engineers and blue-collar workers –who are needed to satisfy current and future demand in the employment market. From my observation, few graduates at entry level have what it takes to help companies and financial institutions upgrade the service economy and to innovate. Many companies have to paper over these cracks by relying on internship programmes as a short-term solution. But the root of the problem goes deeper: it is the imbalance between China’s education system and its modern market requirements.
Much of China’s future progress will be at risk if we do not improve soft skills such as critical thinking, problem solving, innovation and communication. Professional and vocational education and training are helping to address the shortfall in specific skills. But we need to go further. China should create incentives, such as tax benefits, for companies that are willing to invest in education and training for current or future staff. We also need to form an industry and educational advisory body that focuses on improving the quality not the quantity of new entrants to the workforce. We also should monitor and assess the overall balance of China’s family planning policy vis-à-vis improvement in productivity.
Ladies and gentlemen, long ago Julius Caesar said, “as a rule, what is out of sight disturbs men’s minds more seriously than what they can see”. In looking for China’s new growth drivers, we would do well to remember these wise words. With warm hearts but cool heads, we need to look as boldly at our challenges as we do our unfolding opportunities. I am confident that we can. We will continue to enhance China’s competitiveness so long as we are objective about obstacles that need to be overcome and committed to building a level playing field where all can succeed.