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Staying the Course
Ways to convert China's challenges into opportunities
By Josef Gregory Mahoney  ·  2019-03-25  ·   Source: NO. 13 MARCH 28, 2019

Workers at a production line for bullet trains at CRRC Tangshan Co. Ltd. on March 23, 2018. After decades of reform, the company has been transformed from a traditional manufacturing factory to a technology-and-innovation-driven modern company (XINHUA)

The annual sessions of the 13th National People's Congress and the 13th National Committee of the Chinese People's Political Consultative Conference, or Two Sessions, that concluded in mid March reflected a general acknowledgement in Beijing that some of the great challenges expected to emerge in the new era have already surfaced, not necessarily sooner than anticipated, but in a difficult combination.

These challenges can be understood as a number of competing tensions, including economic restructuring in an unsettling international environment, especially vis-à-vis trade relations with the U.S. and concerns related to the Belt and Road Initiative; the continuing need to reform state-owned enterprises (SOEs) and alleviate the dependence of the Chinese economy on easy money and foreign direct investment (FDI) while maintaining growth rates sufficient for outpacing unemployment; and the need to improve governance, such as macro controls and the rule of law, while simultaneously reforming government services to save costs. With these points in mind, a number of observations can be made.

Macro economy

China has set its target range for GDP growth for this year between 6 and 6.5 percent, which is lower than 2018, according to the government work report delivered by Premier Li Keqiang during the Two Sessions. Although a slower growth rate, economic restructuring and a complicated external environment pose many challenges for China, they can also offer opportunities to innovate new industries and services.

The major question remains the same: how to reform SOEs and government bureaucracies while limiting unemployment that some fear will follow. The government needs to inspire more consumer confidence while managing unemployment both economically and socially. From a macro perspective, who should bear the brunt of unemployment? Should it be older workers at a time when the retirement age needs to be increased to alleviate as much as possible the burden on younger workers who support so many older ones? Or should it be women who have been encouraged to have more children? Or should it be young people, many of whom grew up in a fast-paced economy and have inflated expectations defined by their upbringing? In fact, all of these three groups are already facing difficulties, and putting too much pressure on any group will not only be unfair, but also may create even bigger problems.

The youth are the most vulnerable group, but in many respects, given their education, training and mobility, they are about as well positioned as one could hope to meet these challenges. The key is to inspire them to take risks, give them the freedom to do so and support them when they fail.

Young women above all should be encouraged. Chinese leader Mao Zedong famously said, "Women hold up half the sky," but over the course of reform and opening up, it can be argued that many women have held up much more than half. So they shouldn't be used as a reserve labor army. A relatively modest proposal—however radical it may appear—is to direct talent cultivation systems to prepare women for an appropriate quota of state and Party positions. A target of 40 percent by 2049, when the first centenary of the founding of the People's Republic of China comes, would be a nice start.

If the Chinese Government is both willing and able to institute this or other like-minded, progressive policies while simultaneously guiding restructuring at the macro level, then China will experience a watershed moment of new national development that will reverberate globally.

It should be obvious, given the challenges facing China's old economy, that the new economy will not be built by old people. Although Premier Li mentioned young people only a couple of times in his report, how to both empower and guide young people should be foremost in the minds of Chinese policymakers today.

Restructuring and reform

The premier mentioned promoting fair competition in his government work report several times but primarily in two different areas, which are worth mentioning. He asserted the need to promote fair competition for all businesses in the Chinese economy. It's clear that the premier meant fair competition as a general principle, one that applies to competition between domestic businesses and the regulation of foreign investment and international firms.

At a later point in the report, the premier commented further on international investment specifically. Although he did not say that domestic and international businesses would operate on a completely level playing field, he did say that the negative list would be shortened and that wholly-funded foreign ventures would be allowed to operate in more sectors, including the financial sector and the bond market. To place these statements in a broader context, Premier Li was responding to three concerns in the international community. The first is whether China's reform remains oriented toward a free market, particularly as its rebalancing plans have appeared to deemphasize the role of FDI and promote domestic consumption instead. The second is whether China would increase discrimination against foreign businesses in favor of domestic ones. And the third is how to respond to the negative discourse about international trade that U.S. President Donald Trump has encouraged and directed against China in particular, and which has no doubt fed the perception that doing business in China is too risky.

On this point, the premier said, in one of the most boldly positive statements of the entire speech:

"China's investment environment is all set to get better and better, which means more and more business opportunities for foreign companies in China are a sure thing."

Government role

Premier Li also said the government must set an example in acting in good faith and honoring contracts; new officials must not be allowed to get away with ignoring obligations undertaken by predecessors. Over 50 percent of overdue payments to enterprises must be made by the end of the year, while new arrears are impermissible.

Quite simply, he asserted that the government must honor its legal debts and set an example in accordance with the rule of law. Government contracts in any economy, but especially in China, are the lifeblood of many businesses. In fact, in addition to normal procurements, these contracts have expanded exponentially in recent years as the government has outsourced more and more of its work in order to lower costs and promote flexibility. However, failing to pay on time or at all is not just unfair, it also undermines the economy. Given the fact that the government is by far the largest customer and the legal authority, failing to pay undermines the government's capacity to offer services and sets a bad example with respect to promoting the rule of law.

Not only will such practices be fatal to an outsourcing strategy which aims to save money, it will also destroy an important and growing sector of the economy at a time when economic growth must be encouraged, government savings must be realized, while the need for government services is increasing.

Belt and Road

The Belt and Road Initiative is a bold vision that carries financial risks both for China and its partners. For some collaborators, there are concerns about potential downsides associated with an asymmetric relationship of power given China's relative size and rising global position. But these can be shared and mitigated institutionally through the Shanghai Cooperation Organization, the Asian Infrastructure Investment Bank and other organizations, as well as bilaterally.

The initiative represents a historic opportunity and China's leaders are right to pursue it. There are more reasons to continue it rather than stop. In fact, done well, it can be a win-win for all involved.

For China, it can contribute to efforts to transform its domestic economy while creating avenues for future growth and security, which can also serve well those along these routes. The biggest challenges are associated with public relations, both at home and abroad. Assuming these are handled well, then the biggest real danger is the potential impact on the local and global environment. Given China's commitment to the Paris Agreement and its expressed concern for climate change in other quarters, we should expect the Chinese Government to shepherd Belt and Road projects in the same manner.

The fact is that there has never been a project of this size before. We should expect some messiness and unease, but they can be managed effectively.

China must compete globally within a system that sometimes privileges the large over the small. Nevertheless, I don't think it has either the intention or capacity to become a regional hegemon or, as some assert, to replace the U.S. as a global superpower. In the end, while some concerns about the initiative are understandable, most in the international community appear to recognize that the tangible benefits for all participants far exceed the potential costs.

The author is executive director and professor of politics at the International Center for Advance Political Studies of East China Normal University in Shanghai

Copyedited by Rebeca Toledo

Comments to zanjifang@bjreview.com

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