China needs to shift to a new growth model as its cost advantages begin to erode and overseas demand staggers, while cooperation with Japan in future-growth sectors will benefit both countries, Chinese officials and scholars said during a recent symposium in Tokyo.
Scholars from Shanghai Jiao Tong University, Chinese government officials and Japanese experts were taking part in a symposium on July 23 to discuss the prospect of bilateral cooperation to facilitate China’s transition to a new economic model. The event was jointly organized by Keidanren (Japan Business Federation), the Keizai Koho Center and Shanghai Jiao Tong University.
China’s success model driven by exports and inbound foreign investments will no longer be sustainable, and the country needs to establish a new growth strategy focusing on domestic demand and internationalization of its economy, said Zhang Yansheng, secretary general of the Academic Committee of the National Development and Reform Commission.
In the 2011-2015 period, the government has set an average gross domestic product (GDP) growth target of 7 percent — much lower than the 10.7 percent average growth in the previous decade and a 11.2 percent rise over the 2006-2010 period. Such moderate growth forecasts reflect a significant change in direction of the government’s economic policies, he said.
One major goal set by the government during the five-year period is increased urbanization — from 47.5 percent to 51.5 percent. But a key to achieving the goal is turning the massive number of migrant workers from rural farming areas into urban citizens, Zhang said.
Over the past 30 years, 240 million farmers have shifted to non-farming sectors, and 160 million people have moved from farmlands to cities. But these people are still considered as “migrant workers,” and various issues must be resolved before they become full-fledged urban residents, he said.
One issue is development of small and medium-size businesses to provide stable employment for these workers, Zhang said. Also essential are securing education, medical care, housing and social security for them, and unless steps are taken to provide them with basic public services, a huge number of the population will be left out of the benefits of urbanization, he said.
Urbanization, Zhang said, is seen as a major engine of future growth in China that will boost consumer spending, promote development of service industries and help build a new middle class in the country.
Behind the need to shift to a new growth model is the rapid erosion of China’s traditional cost advantages.
“For the past 30 years, China’s major competitive advantage has been its low costs. With minimum wages rising fast in the eastern coastal regions, and the yuan’s exchange rate and land prices going up, our economy has entered a new phase where production costs will increase,” Zhang said. Business operations sensitive to labor costs may go to countries where costs are lower, and it will be a major challenge for China to improve its labor productivity on a sustainable basis, he noted.
Changes are already taking place in foreign direct investments in China, Zhang said. In the wake of the 2008-2009 global financial crisis, the focus of investments into China has begun to shift from manufacturing to non-manufacturing sectors, and the foreign investors are now looking more toward the Chinese market than at manufacturing and exporting to other countries, he said.
The growth of the domestic market has also accelerated the acquisition by Chinese firms of overseas companies, which see a bigger potential in the Chinese market than in their own home markets, Zhang said. Partnering with European, American and Japanese firms helps the Chinese firms move up the value chain, he added.
Over the past five years, inbound foreign investments in China grew by 9.6 percent annually, but outbound investments by Chinese firms increased by 40.8 percent each year, Zhang said, adding that the government is trying to promote international brand recognition of Chinese companies through these overseas investments.
Consumers themselves are also changing rapidly, which poses major challenges for the Chinese companies, said Yu Mingyang, a professor of marketing at the Antai College of Economics and Management at Shanghai Jiao Tong University.
People born in the 1980s and ’90s will be the new driving force behind China’s domestic consumption, creating demand for upscale products and generating new business opportunities, Yu said. New market segments such as male cosmetics are driven by those in their 20s and 30s who have totally different spending habits than the older generations, he said.
Store sales and online business operations are closely linked in a market that has 500 million Internet users, he said. People born in the ’80s may read news on the Internet but are not as deeply immersed in the Web world as their younger peers, many of whom are seen as Net citizens, Yu said.
Industry realignments and alliances across sectors are also accelerating as competition intensifies, he said. The number of washing machine brands in China, which numbered as many as 80 in the late 1980s to the ’90s, has been reduced to seven today, he noted, adding that market monopoly by a few major suppliers is also taking place in the refrigerator and TV sectors.
Generational changes also await private sector firms, which account for 60 percent of China’s GDP and generate 70 percent of new jobs today, Yu said. Founders of these companies are set to hit retirement age in the coming five to 10 years, and the emergence of the second-generation corporate leaders — who have different education and ways of thinking from the first generation — is expected to bring major changes to the way Chinese companies operate, he said.
Changing global economic conditions also requires China to seek new models of growth, said Shi Zhanzhong, another professor of marketing at the university.
Traditional measures like fiscal stimulus will not enable China to weather the impact of ongoing turbulence in the global economy, including the European sovereign debt crisis, he said.
While the 4 trillion yuan spending introduced right after the 2008 crisis was effective in supporting the Chinese economy in the past few years, the effects of the stimulus are temporary, he said. Over the long term, China has to explore growth through technological innovations and development of new business sectors, he added.
And this is where increased cooperation is needed between Japan and China, which face a host of common challenges ranging from energy shortage to aging population, Shi said.
Cooperation between the world’s second- and third-largest economies is also important to promote further integration of East Asian economies, he said.
The Chinese government has set seven priority sectors that it will heavily support during the current five-year economic plan through 2015 — information and communications, new energy, new materials, energy-saving and environment, biotech, new-energy vehicles and high-end equipment manufacturing, Shi said.
China, with its 1.35 billion population, has vast market potential for each of these sectors, while Japan has the technological advantage in such new-growth industries, he said, adding that the two countries can pursue complementary tieups in such areas.
Today, China has entered a new phase in its economic development, which means that the growth model that supported its rapid ascent over the past decades does not work any longer, said Toshiya Tsugami, a China expert and business consultant.
Overseas demand is likely to stagnate as European economies remain under pressure from the debt woes, while China’s own competitiveness is gradually waning with the rapid increase in wages, said the former official in the trade ministry. Further export-driven growth is in doubt because it is questionable whether the global market can continue to accommodate a double-digit increase in the already large amount of Chinese exports, he said.
Tsugami said he believes that China, after the rapid growth of 8 to 10 percent each year, will likely face a period of moderate growth. What holds the key in such a phase is the increase in productivity, he said.
In the late 1960s, Japan reached a stage similar to where China stands now — when a nearly full employment of the workforce led to a rapid increase in wages and prices. Japan managed to evade the so-called middle-income trap to keep growing for two more decades because the onslaught of economic shocks including the two oil crises and the yen’s rise forced its businesses to streamline and improve productivity, he said.
The path for China in the coming decades will depend on whether it will do what it must do now, including promotion of domestic competition, cuts to the state-owned sectors and greater transfer of the benefits of growth to the private sector and households, Tsugami said.
China should also brace for the impact of population aging, he said.
While the first of Japan’s two “lost decades” was the result of post-bubble deleveraging, many of the problems in the second decade can be attributed to the nation’s demographic woes, Tsugami said.
China’s working-age population is expected to hit a peak and start declining soon, and there are lots of jobs that need to be done, including securing resources for social security programs, he said.
Pan Yingli, a professor of finance at the Antai College of Economics and Management at Shanghai Jiao Tong University, discussed the prospect of the internationalization of China’s yuan in relation to the stability of the international monetary system.
Noting that two-thirds of China’s foreign currency reserves today are held in the form of U.S. treasury bonds, global currency instability raises the risk of these assets losing their value, she said.
Pan said the experience of the United States and the dollar shows that China should not internationalize its own currency too quickly.
She said reform of the international currency regime should start in Asia, where a mechanism should be put in place to tame wild fluctuations in exchange rates and tighten control over short-term movements in capital. The yuan’s internationalization should proceed gradually and start first in Asia through creation of an offshore market for the currency, she noted.