Delay in China’s market reform is causing pain for the global economy

Although China’s meteoric rise through the global economic system, largely fuelled by manufacturing, has been nothing short of a modern wonder, Beijing currently finds itself in a delicate position at the tip of an arc where reliance upon traditional means of production can no longer guarantee future growth. Consequently, bigwigs are engaged in a painful struggle to steer the economy away from its reliance upon manufacturing by counterbalancing it with services and consumption.

As part of this rebalance, China is pursuing a multi-tiered strategy. On one hand, Beijing is attempting to address the structural imbalances that led to a bubble effect within several of its manufacturing industries. On the other, it is actively seeking a seat at the table where global norms and mechanisms are decided: achieving reserve status for the renminbi, for example. By lobbying to secure the all-important market economy status, China hopes to do just that.

However, will this strategy succeed or backfire spectacularly?

Witness the theatrics accompanying Beijing’s application for market economy status. If granted, it would reduce China’s barriers to trade and potentially force open the floodgates to Chinese exports. The US has been solidly opposed to granting the status from day one, but the issue has been more polarised in Europe. Certain northern European nations have been openly courting Chinese investment whereas nations in the south, especially Italy, have proven more reticent. However, the fact that China’s increased presence in Europe will challenge the local labour markets is something that north and south agree upon.

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Current issues go back to Beijing’s desire to postpone its economic rebalance away from manufacturing. In the wake of the 2008 global recession, the Chinese state embarked on a programme of easy loans and government subsidies as part of its US$586 billion stimulus. The programme churned out double-digit growth before turning into a surplus-creating bubble that subsequently caused painful problems for the global economy. Take steel, for example. Exports of the resulting surplus have caused global steel prices to plunge, forcing a number of plants in Europe to cease operations. And steel is by no means an isolated example: experts predict that Chinese dumping of goods resulting from overcapacity and enabled by awarding it market economy status could lead to European job cuts in the millions, a massive number for a continent battling with record levels of unemployment.

Now China wants to put a stop to the proliferation of these so-called “zombie companies” – state-owned enterprises struggling under the crushing weight of debt and overcapacity. The economic planners in Beijing have green-lit a plan that would see the number of state enterprises reduced through orchestrated mergers or by encouraging the purchase of foreign companies. Indeed, Chinese investment abroad in 2016 is set to smash all previous records, with US$102 billion already agreed in just the first quarter, compared to a total of US$106 billion in the whole of last year.

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However, this strategy is also facing mounting headwinds. Whereas the eastern side of the Atlantic has been more eager to accommodate Chinese investment, in the US it has been the very nature of this investment that has triggered alarm bells. A series of successful prosecutions over allegations of dumping aside, the Treasury-managed Committee on Foreign Investment in the US has also halted a number of deals initiated by Chinese firms over perceived security threats posed by the acquisition of critical US technology. These include the attempted acquisitions of shares in Philips, Fairchild and Western Digital. What’s more, the US$43 billion Syngenta/ChemChina acquisition, the largest Chinese outbound merger and acquisition ever, could also be stopped due to national security concerns.

Aside from trumped-up fears specific to the 2016 US presidential election season, lawmakers do have reasons for concern: more often than not, Chinese companies have engaged in questionable activities, such as industrial espionage or patent infringement.

China’s grand rebalancing is turning out to be fraught with existential problems. While on the face of it, the planners in Beijing have engineered a collective push to “soften the landing”, the near-exclusive reliance on outside actors has created a feedback loop that is causing more problems in the global economy than it solves. Saving the manufacturing sector has led to the emergence of zombie companies and overcapacity, which has, in turn, led to cratering commodity prices and economic misery for many countries that could have backed Chinese demands for obtaining the much-desired market economy status. Fixing the problems associated with overcapacity has spurred renewed scrutiny of China’s reliability as an economic partner.

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The bottom line is simple: the outside world cannot – and should not – be used by China as a means to delay much-needed internal reform. In the West, the means to streamline the economy and make the transition to non-manufacturing industries is clear – hand over their management to the private sector and allow market forces to work. But China is still very much resistant to handing the reins to apolitical individuals. As a direct result, the malaise is bound to continue and there is no doubt that factory closures, rising unemployment and unrest are imminent possibilities.

Already, strikes and walkouts are bubbling across the country, especially in Guangdong province. Clearly, Beijing’s strategies are falling far short of the mark needed to guarantee an easy transition to the next stage of its economic evolution.

Rob Edens is a London-based researcher and commentator