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Reforming China PDF Print E-mail
Tuesday, 19 November 2013 01:31
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It may not work, but it’s a good start

China will get old before it gets rich, China will never invest right as long as input pricing, such as on electricity and petroleum, is distorted, it is only when the currency is not manipulated that we will get to know how globally competitive China really is … for more than a decade, as China has continued to power ahead, though at a slowing pace, the doubts over the sustainability of its economic model have only increased. When the Chinese government acknowledged its investment problem and started emphasising consumption, especially in the interior areas, critics argued this would never happen till the incentive structure was fixed. And, apart from the criticism of the chokehold the hukou system imposed, the largest question has been over the lack of democracy in the country.

It is possible that, as China grows economically—it is still growing at over 7% over the last few years after growing in double digits for a couple of decades—the pressure will mount for greater democracy and, if the political system crumbles, it is impossible to predict what will happen to the economic one. But, while not having enough of a detailed roadmap makes the new reforms surge somewhat dodgy, the Communist Party’s 60-point document last week is a promising start, an attempt by the ruling elite to ensure the country avoids the middle-income-trap where, while incomes rise, productivity doesn’t keep pace and that ensures the country loses its global competitiveness. The hukou system that keeps wages in check by restricting work permits is to be done away with gradually in medium-sized cities and, in a belated attempt to prevent the labour force from shrinking, the one-child policy is to be relaxed—given it will be relaxed only for parents who are themselves single children, though, ensures the impact will be limited at best. More important are slashing by half the amount state-owned enterprises can hold back of their profits—that ensures investment levels taper off while giving the government more to spend on consumption— and the plan to give rural folk trading rights for the farm land that they were given title rights to some years ago, accelerating the convertibility of the yuan, freeing up of interest rates and even allowing the setting up of small- to medium-sized banks by the private sector. Shanghai’s new free trade zone where foreigners can invest in any area apart from those specifically prohibited is to be the new template. How it is to be done is not clear, but the idea is to find ways to bring in market pricing for various inputs like electricity, water and so on.

For India, that poses both a huge problem as well as an opportunity. As the yuan gets more expensive, as do input prices, there is an opportunity to seize markets. If equity investors still remain bullish on India, it is because there is no certainty as to just where the Chinese model will end up. India needs to get its act together to make the most of the Chinese opportunity, not to mess it up the way it did the textile opportunity China afforded when its wage rates began to rise along with the currency some years ago.

 

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