REFORMS THAT WILL HELP CHINA MAINTAIN ITS GROWTH / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( HIGHLY RECOMMENDED READING )

Reforms that will help China maintain its growth

By Guo Shuqing

Published: December 17 2009 19:56

In principle, the rise of China is no different from the rise of the UK in the first half of the 19th century, when British production increased rapidly and the price of textiles fell by 80 per cent within 50 years. But China has as many people as the combined populations of all developed countries including the US, Europe, Japan, Australia and Russia. That makes a big difference to the impact of this transformation.

This impact is most evident in consumer goods and primary commodities. In the past 10 years, nearly half of China’s manufacturing output supplied other countries, lowering living costs everywhere. At the same time, China has become a most important source of demand for raw material producers. It is the largest buyer of iron ore and other nonferrous metals as well as one of the biggest buyers of cotton and soybeans. More than half the world’s steel and cement are produced and consumed in China.

China has also become the world’s largest net savings provider, exporting $400bn (€275bn, £245bn) in capital to the US and Europe each year. This does not mean China is richer than the US and Europe. While China has more than $2,000bn in foreign exchange reserves, the US and Europe each has about five times more fixed capital, maybe 10 times more ecology wealth and much more invaluable intellectual wealth and human capital. But no matter how strange it may seem, China is today the largest exporter of capital.

Now that China is so critical to the global economy the concern is whether it will follow the fate of other rapidly industrialised countries such as Japan and slip into stagnation after 20, 30 or even 40 years of fast growth. This possibility exists. To avoid it China needs to do the following. First, it needs to reform its artificial separation of rural and urban areas and narrow the disparity between them in purchasing power. Per capita consumption among rural Chinese is only one quarter or one fifth that of their urban cousins.

Second, China needs to improve its financial system, which accounts for a very low proportion of total gross domestic product and of employment compared with developed countries such as the UK. Access to financial services for many small and medium enterprises is limited.

Third, development of human capital is vital for China’s future, but it is far behind developed countries in education and training. Our education system is not conducive to encouraging innovation. This will hinder high-level and sustainable development.

Fourth, China needs to make its growth model greener. The energy outlook is not optimistic. If developing countries like China were all to follow the US example in energy consumption then the entire global oil supply should be sent to China – and it would still not be enough. The only way forward is to save energy and reduce waste.

Fifth, China needs to expand domestic demand. The consumption of services lags far behind commodities. One way to address this is to improve public services, which are very under­developed – 80 per cent of healthcare costs are in cities but that covers only 20 per cent of the population.

Finally, China needs to increase its overseas investment, especially in energy and raw materials, as this will boost world supplies and be vital for rebalancing the world economy. In recent years China has generated more than $400bn in trade surpluses, so it has the capital to invest. By the end of 2008, China’s total overseas assets reached $2,920bn, of which only 6 per cent, or $169.4bn, was overseas direct investments. Almost 70 per cent, or $2,000bn, was held in foreign exchange reserves, while 9 per cent was portfolio investments and 18 per cent was other investments such as trade finance and bank loans.

China can expand its overseas direct investments to address global imbalances. But the current attitude towards China’s investment is not friendly. Many western countries, including the UK, have labelled China’s investment in Africa as neo-colonialism. Many Chinese companies have invested overseas but face problems such as local government objections and trade union and labour law issues. These Chinese companies need more support and less politically motivated opposition from the external world at such an initial stage. After all, unlike the UK in the 19th century, China is not interested in imperial expansion.

The writer is chairman of China Construction Bank

Copyright The Financial Times Limited 2009