Four 'battlefields' hold the key to China’s future economic success
China’s new leaders will have to wage war on four key “battlefields” if they are going to successfully reform her economy, writes Dr Shuaihua Cheng.
After three decades of rapid growth, China’s economy faces three major problems: it is “unbalanced”, “uncoordinated”, and “unsustainable”.
Hu Jintao and Wen Jiabao, the outgoing president and premier, have both publicly acknowledged that China, the world’s second largest economy, faces these challenges. Many business leaders and economists also believe China needs to re-adjust its economic model soon.
But how soon? Will the once-in-a-decade leadership transition put China on a more sustainable path for long-term economic development? What should the new leaders try to fix first? Some commentators argue there are four main “battlefields” the new leaders should focus on.
Firstly, China's use of old-fashioned Keynesian economics should be abandoned.
Over reliance on investment and exports is now viewed as a major reason for China’s unbalanced economy. Why do these problems persist when the causes have been diagnosed? Professor Zhang Weiying at Peking University blames Keynesian economics – long the main economic theory implemented in China. Zhang once noted that Keynesian theories – when governments spend money they don’t have – saved capitalism in the 1930s. But today, Keynesian economics has its limitations.
In China, policymakers have misinterpreted Keynesian theory, using it as a guideline for economic growth, assuming that growth always comes from investment, consumption, and net exports. Whenever the economic numbers drop, the first response of governments is to increase investment and stimulate GDP growth. But the role of exports in economic growth has been overemphasized. It seems that only net exports make a positive contribution to economic growth, while trade deficits do not contribute to growth.