China's economy must embrace what works, whether capitalist or socialist

Winston Mok says Beijing needs to liberalise markets and increase social investment

PUBLISHED : Monday, 09 September, 2013, 12:00am
UPDATED : Monday, 09 September, 2013, 2:47am

More than 30 years after China's reform and opening up, the nature of the mainland's economic system is still being debated. Yet, today, labels are not very meaningful.

The term "capitalist" may be used to describe the US or Singapore, while "socialist" now refers to a range of economies from North Korea to the Nordic nations. What to label a system is less important than what it delivers. Since the US financial crisis, economists have argued about the best way forward among the wide spectrum of "capitalist" models.

In the search, two problems were highlighted among the key causes of the crisis. First, market fundamentalism has led to wide income disparities. Second, the accumulation of debt has financed spending growth. As a result, high consumer leverage is starving private-sector growth.

For very different reasons, the mainland may face similar problems. Despite its stellar economic growth, the financial benefits have not trickled down to the masses.

China has a highly unequal distribution of income. The high per capita gross domestic product figures for many cities are misleading; disposable income for an average resident is much lower.

China is counting on consumption to be its next growth engine. But the actual size of the middle class is much smaller than those GDP figures may indicate, as private income as a proportion of the economy remains low.

Unlike in the US, China's consumer savings are strong. But local government debts are high. Financial innovation has resulted in the ballooning of local government debts to finance investments. Leveraged infrastructure and urban development have been the key driver behind China's growth for many years. But it is squeezing out productive private-sector growth that could provide a sustainable future for the country.

Both China and the US are in need of rebalancing. To avert an unpleasant reckoning down the track, the mainland may need to be more "capitalist" and "socialist" at the same time.

Fundamentally, local governments should re-orient their role - from being active, but often inefficient, players in the economy, to being providers of public goods. They have been generating deceptively attractive short-term results while leading the nation to an unsustainable long-term outcome.

In a liberalised financial market, capital may be more efficiently allocated to private enterprises, which can create jobs and lift people's incomes. From expanding GDP, China should refocus on increasing the size of its middle class.

The state could manage income distribution through taxation, social benefits, and education and training, to balance the rural-urban divide and those in transition. The mainland lags behind Hong Kong and Singapore, let alone the Nordic countries, in the provision of social services.

It has a far lower level of public housing than Hong Kong or Singapore, for example, while some of the resources needed for social services are channelled to other priorities (5.8 billion yuan, or about HK$7.3 billion, of social housing funds were misappropriated last year).

Education opportunities, particularly above the middle-school level, remain highly uneven, as Beijing leaves it largely to the regions to finance education.

Instead of often wasteful urban expansion, education and social housing are perhaps the best investments the government can make - to produce growth and equality at the same time - although the impact is more long term.

Debates about whether capitalism or socialism is best are less relevant today; successful states incorporate elements from both, as epitomised by Nordic countries and Singapore.

In their quest to adapt to global competition, states must continually evolve. Many Nordic countries have reduced taxes to retain global talent. Singapore is steering away from its statist model to promote greater private initiatives.

To quote Xi Zhongxun, the father of President Xi Jinping and an early architect of Shenzhen: " No matter how many, empty words are useless. The only way is to improve people's livelihood. Otherwise, they will just vote with their feet."

In 1978, Xi senior was moved by the stark contrast between the two sides of Shenzhen River. Today, the Shenzhen skyline is more impressive.

Whatever you call the Shenzhen model, replicated countless times throughout China, it has propelled China to become the world's second-largest economy.

For China to take one more step forward, it may have to face up to the need for more changes.

To Chinese citizens, arcane debates are not that meaningful. They are interested in a clean and efficient government that can foster fair economic opportunities and provide good public services. Now, as then, the words of Xi senior remain prescient.

Winston Mok is a private investor, a former private equity investor and McKinsey consultant. An MIT alumnus, he studied under three Nobel laureates in economics