China must resist 'miracle' of state-led growth
Hu Shuli says officials who are trying to rev up a sluggish economy with mega projects only take the nation further from its goal of sustainability
In the face of a lingering economic downturn, China has made steady growth its top policy goal. Notably, the thrust of the government's macroeconomic policy is entering a new phase: the question now isn't whether stimulus is necessary, but what kind of stimulus and how much is needed.
This policy stance is striking in two ways. First, many economists have warned about the adverse consequences of the last round of stimulus, and the government this time has rightly rolled out more restrained measures. Second, authorities have stressed that growth targets must go hand in hand with economic reforms. This is a sound, fact-based approach.
But what's worrying is that some local governments don't seem to have got the message. A significant number have put the focus of their economic plans on big-ticket development projects, apparently hoping to invest their way into a growth surge. To this end, they are building up the financing platforms that state-owned investment groups rely on.
Estimates of the total amount to be spent have ranged from 7trillion yuan (HK$8.6trillion) to a whopping 15trillion yuan, numbers far exceeding the 4-trillion-yuan stimulus package introduced in 2008 in the wake of the global financial crisis.
Using government-led investment to spur growth goes against the intent of market reforms; it isn't up to the government to shape the economic structure. In an exhibition for its project plans, one local government even used the image of a rocket, and likened itself to a launcher, the market to a booster and technology to an accelerator. This faith in government-led growth is typical of the outdated mindset favoured in the old model of development.
Today, the government has pledged to take a different, scientifically sound path to development. But the economic downturn has given some local governments an excuse to package old wine in new bottles.
While claiming to be exploring a new growth path by "increasing industry concentration", these governments are starving small and medium-sized enterprises so more resources can go to the big projects and big companies. And, in the name of improving regulatory control, the governments promote the mega projects of state-owned enterprises, leading to the formation of production chains that deter competition and bar private enterprise from getting a foot in the door.
This trend is spreading across the country. Unless checked, it will lead to more economic distortions and overinvestment, reviving the risks of empty buildings and soaring debt.
No doubt some officials think the new model of development looks good on paper but takes too long to work in practice. They agree that technology should drive economic growth, but lament that technological advances take too long; they agree that there should be more competition and less economic distortions, yet complain that profit margins in competitive industries are too low and expansion is limited.
Addicted to their fix of quick, spectacular growth, these officials cling to the old development model. They talk up support for a new growth path, but in practice follow the old formula of "three highs and one low" - high investment, heavy energy use, high levels of pollution and low returns. The result will only take China further away from its goal of a people-centred, co-ordinated, holistic and sustainable model of development.
That the old growth model can still do damage points to just how entrenched this thinking is among Chinese institutions. It cannot be changed simply by the issue of some orders or the chanting of some slogans. For too long, officials have enjoyed control of vast resources and they have become used to relying on mega development projects to drive growth. Moreover, interest groups work to consolidate the government's influence on economic decision-making.
In this system, government officials consider political priorities and their own career prospects first before making a decision; economic factors come last. If an official is expected to produce results - that is, visible growth - within three to five years, a government-led development path is the only way that can help him reach these short-term goals; market-led development takes too long. Officials know, of course, that their chosen way goes against economic principles and will distort the market. But from their own standpoint, it is the rational choice - it bears the lowest costs and brings the highest returns.
The costs are borne by the wider economy and society: growth will eventually fall; discrimination will become pervasive and rent-seeking and corruption rampant; our society and environment will be pushed to their limits; and development cannot be sustained. The mass protests, riots and environmental disasters we've seen are just some of the consequences of this distorting growth model. They are a warning we should heed.
A slowing economy gives us an opportunity to expedite the transformation of the growth model, so we may correct some of the systemic distortions that could exacerbate economic fluctuations. The key is to speed up political structural reforms and the reorganisation of government functions, so that the efforts on economic reforms can be sustained. If we continue to hanker for economic "miracles", we must be prepared to pay a high price in future.
This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caixin.com