New leadership looking to revamp China’s economic growth model
BEIJING — For years China has fueled its booming growth with investments aggressively pushed by local officials, who have used their power to secure land and take other measures to boost government coffers and economic output.
But much of the government-led investments for exports and other products have been wasteful, leading to artificially high real estate prices, excess supplies, soaring debts and other market distortions that have contributed to a widening income gap and social unrest.
“In China, the most important productive factors — land, capital and natural resources — are allocated by government,” said Mao Yushi, co-founder of the Unirule Institute of Economics, an independent think tank in Beijing. “The efficiency is very low.”
Now, however, the new Chinese leadership under President Xi Jinping is giving indications that it wants to revamp China’s economic growth model, reducing the government’s heavy hand and replacing it with more market forces that would drive more innovation and sound development.
Among the possible change could be liberalizing interest rates, streamlining government regulation and fostering greater competition and private investment.
Such an overhaul would have significant implications for growth in the world’s second-largest economy and, by extension, for the U.S. economy and the many American companies that have staked their futures on the rapid rise of the Asian giant.
Thus far, Beijing has issued mostly generalities on proposed policy changes, something that President Obama is expected to probe when he meets Xi on Friday in Rancho Mirage for their informal summit.
“We see this as an opportunity to get a better understanding of the kind of domestic policies and reforms that President Xi and his new prime minister have spoken about,” a senior Obama administration official said in a briefing this week.
The summit, the first between the two leaders since Xi became president in March, comes against a backdrop in which the world’s two biggest economies are more closely linked than ever and when each is struggling in its own way.
The U.S., four years this month since emerging from the Great Recession, continues to grapple with modest growth, high unemployment and political paralysis in dealing with the country’s large debts and budgets.
Exports have been one of America’s bright spots, and a key objective in Obama’s so-called pivot-to-Asia strategy is to enhance U.S. economic opportunities in that fast-growing part of the world, of which the most important country is China.
China’s economy, after three decades of growth averaging about 10% a year, appears to be at a transition point. Much of the gains in foreign-produced technologies have been realized, and the days of an ever-expanding low-cost pool of young labor are gone.
Chinese economic growth slowed to 7.8% in last year, the lowest in 13 years, and it has yet to speed up this year.
All this has reinforced the need for change in Beijing and has prompted extensive debate about the timing and intensity of such reforms.
“They recognize they’ve gone off track,” said Derek Scissors, a China analyst for the Heritage Foundation, a conservative think tank.
It used to be easier for Chinese officials to justify their heavy-handed investment and export policies as the economy was expanding by double digits, he said, “but now they’re simultaneously getting slower growth and still getting more pollution and wealth imbalances. Something’s got to give.”
One big question for Obama is whether Xi’s plans will open up more business for American companies. In theory, Beijing’s proposals would suggest greater opportunities for the thousands of U.S.-invested plants, stores and offices throughout China.
But in the last few years, Americans have increasingly complained about barriers for foreign business and investments in China as Beijing has sought to strengthen domestic firms and home-grown innovation.
China’s currency policy, a perennial irritant in bilateral relations, could come up during the Obama-Xi summit, but its importance has diminished as the yuan has appreciated somewhat and the broad measure of China’s trade and investment imbalance with the rest of the world has eased sharply in recent years.
But there is growing American concern about market access in China and protection of intellectual property, making cyber security a particularly big topic of the Obama-Xi conversation.
“The core concern is actually an economic one, which is about commercial espionage and theft of trade secrets using cyber means,” said Matthew Goodman, former international economics director on Obama’s National Security Council and now at the Center for Strategic and International Studies.
Though no major announcements are expected from the summit, U.S. business leaders in China hope that the informal talks will generate greater rapport between the two leaders and pave the way for mutually beneficial agreements down the road.
“Our companies are doing reasonably well, and generally speaking, we have the view there’s tremendous potential in the domestic Chinese market,” said Christian Murck in Beijing, the president of the American Chamber of Commerce in China.
But Murck and other China hands wonder whether the central government can redirect the country’s economic path given the entrenched practices of local officials and the influence of powerful state-owned enterprises.
Chinese investments in land, buildings, machinery and other so-called fixed assets represented the equivalent of 71% of China’s total economy last year. Behind them were mostly government and state-controlled firms.
Consider the hotel overbuilding in Dalian, one small example of the sort of market distortions in China.
This second-tier city in China’s northeast already has a dozen five-star hotels, and their occupancy on average has been running at 50% or less, said Konno Teruo, sales director at Furama Hotel, the oldest of the hotels.
Room rates have fallen to as little as $80 a night at Furama, where the late North Korean leader Kim Jong Il stayed in 2010. Yet six more five-star hotels are going up in the city, including an MGM property down the street from Furama.
“They have no consideration of the market, supply and demand,” Teruo said. He doubted that any of the existing five-star hotels were making money.
But that doesn’t matter. Local officials are pushing the development. After all, the state owns all the urban land and can buy — in some cases grab — rural lands that are legally held by collectives.
Officials then auction these plots to developers at huge gains. Moreover, hotel construction boosts economic growth, which can help local cadres win promotions.
International hotel companies like Intercontinental and Hyatt don’t put up money for the development, instead collecting a fee or a guaranteed payment for their name use.
Meanwhile, the developers, state-owned or with connections to government, offset hotel operating losses by buying additional land and selling apartments and other commercial properties around the hotel at soaring prices.
“They have this big dream,” said Andy Xie, an MIT-trained independent economist in Shanghai. “Local government officials all know they’re selling a dream, so they’re going to milk this.”
