At the Crossroads: China’s Development

The Chinese stimulus package – 4,000 billion RMB to be spent within two years – was passed with the goal of maintaining economic growth at 8%.

An article by John Garnaut at the Sydney Morning Herald (“Don’t miss the first signs of China’s economic recovery”):

Construction and heavy industry are the third and most powerful engine of the Chinese economy. These developers and steelmakers can make and break the Australian economy, at least in the short term, and they were at the front of China’s economic train when it crashed.

To be fair, Garnaut is aware of the weaknesses, too. He also refers to consumption, the “weakest engine” of China’s economy, and to the cause of this weakness: The problem is not that Chinese households save too much, as is often asserted, but that they have too little income in the first place.

Construction and heavy industry may be the global corporations’ greatest business opportunities in China, and “Bao Ba” (保八), maintaining economic growth at 8%, is also the goal of Beijing’s 4,000 billion Yuan stimulus package. But there are misgivings among academics, and maybe also among China’s leaders.

After all, the 11th Five-year-plan, passed more than three years ago, states that change is needed in the relationship between economic structural adjustments and the ways of economic growth.

Two paragraphs, both from last year, referring to China’s small and medium-sized businesses, might illustrate the problems with growth and investment.

Paragraph One:
China’s small and medium businesses are quickly becoming China’s innovators of tomorrow. Internationally, innovation in many countries is taking place in garage workshops and factories of small to medium sized companies. In China, this is also fast becoming the rule., News 2008

Paragraph Two:
– SME [Small and medium-sized enterprises are] potentially the most dynamic sector of economy
– In China > 10 million SME representing 99% of total enterprises
Due to their small size and lean structures, SME are potentially more dynamic than big enterprises, which make them particularly important for job creation
— But SME are also more vulnerable, lacking often access to capital and to funding sources *)
OECD, Taiwan/Korea, October 2008
(Powerpoint presentation)

Professor Huang Yasheng (黄亚生) at Massachusetts Institute of Technology (MIT) argues that an assessment of China’s economic achievements and drawbacks needs to go beyond the superficial data on gross domestic product (GDP) and foreign direct investment that satisfy most researchers. His recent book, Capitalism with Chinese Characteristics, describes how peasants started to become business people – what looked collective was in fact private enterprise. That was before the Tiananmen massacre. In 1989, a generation of policymakers who had grown up in the countryside, led by Zhao Ziyang, were swept away by city boys, notably the president, Jiang Zemin, and Zhu Rongji, his premier, writes the Economist in a review of Professor Huang’s book. And the rural economy until 1989 was more capitalist than China is today, writes the magazine. I’m not sure if the book itself goes exactly that far.

In an interview with the BBC’s Chinese service on February 11, Huang pointed out that every additional percent in GDP added less to employment and family incomes in China. He is one of those who argue in favor of adjustments, rather than blind growth. And in an interview with Nanfang Daily (published online on February 15), he asks why the Chinese economy is unable to create more white-collar jobs, points out that China is still a low-technology country with little administrative efficiency, and comes back to the question of investment and growth. India’s investment only amounts to 50% of China’s, he says, but still creates still economic growth that amounts to 80% of China’s economic growth.

I should actually read the book. Professor Huang looks like a great iconoclast of Chinese economic orthodoxy – and probably more so, of Western economic orthodoxy. He stops at nothing:

Yes, India’s labor rules are rigid, but they can’t be changed because of political resistance, labor unions and so on. From an economist’s point of view, they would need change, but when I discussed this with human resource and technology development people, they said that this labor legislation actually advanced technological progress, because it limited exploitation of labor – so it has both advantages and disadvantages. Of course, in my view, the disadvantages outweigh the advantages, because what a country like India needs most is simple production work […..] At the high costs [for production factors] as they are in India, only people with a lot of confidence in their future, under circumstances where returns on investment are really high, will turn into developers.

(It should be mentioned that using India as an example for China – in whatever way – may count as a pretty thought-provoking… umm, yes, provocation.)


*) The presentation doesn’t mention corruption, which of course also hampers small business more than big business. This unpleasant issue is often politely left out in researchers’ discussions and therefore often catches new arrivals in China by surprise.

7 Responses to “At the Crossroads: China’s Development”

  1. well, at least China is justified in such actions … they at least adhere to an official socialist policy … rcent moves in the west are more dubious … what ever ahppened to survival of market forces? Ayn Rand would be turning in her grave.


  2. What works for ppl is what counts. No matter if it is socialism, capitalism, catholicism, bunnyism, or justrecentlyism.
    In more classical words: black or white cat – who cares, as long as she catches mice.



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: